SALEM, Ore. -- Oregon’s Democratic lawmakers came up with the most detailed plan yet on Thursday for fixing the state’s wobbly budget by tapping business coffers.
House Speaker Tina Kotek would place a 0.95 percent tax on annual business sales in excess of $5 million. About 5,000 businesses would pay the new tax.
The tax — to start in 2018 — would produce $2 billion in new state revenue in the 2017-2019 budget cycle. The revenue would increase over time to as much as $3.6 billion in subsequent biennia.
The revenue is needed to shore up schools and stabilize the state budget, which, fed by personal and corporate income taxes, is highly susceptible to shifts in the state’s economy.
“To think that fiscal discipline and cost containment — and just tightening our belt — is going to solve this problem is not supported by the numbers,” Kotek told the 14-member Joint Committee on Tax Reform.
Kotek and other top Democrats described a three-decade old chronic, structural revenue problem that leaves the state budget short of funds, and they argued that now, when the economy is in good shape, is time to fix the problem.
But Republicans said the problem is chronic overspending and ask why — when the state is expecting $1.4 billion more in revenue than the state had to spend for its last budget — do lawmakers need to raise taxes?
The Democrats’ gross receipts tax proposal would replace the existing corporate income tax, which produces about $1 billion in revenues a year. The new tax would take effect Jan. 1, 2018. Businesses with sales under the $5 million threshold would pay a flat $250 annual filing fee. Businesses with less than $150,000 in sales would pay nothing, according to the lawmakers.
Lawmakers said they would bring the state school fund up to as much as $8.8 billion, up from the proposed $7.7 billion — and that would allow schools to add two weeks to the school year and reduce class size in the elementary grades. Lawmakers would also add $250 million to the higher education budget, which could pave the way for some tuition reductions.
“We hear a lot from people wanting new investments, particularly in education,” Kotek said.
The new tax would be paired with $400 million in cost containment maneuvers and $250 million in outright budget cuts for the next biennium, Kotek said. The state, for example, can save an estimated $100 million on the cost of the Public Employees Retirement System and $20 million by putting off construction of a new prison for seven years, she said.
Rep. Mike McLane, R-Powell Butte, called the proposal a wolf in sheep’s clothing.
“It is a massive, multi-billion dollar tax on Oregon sales akin to Measure 97 that was rejected by voters less than six months ago,” he said in a prepared statement. “It is an admission of the fact that Democrats can’t balance the budget despite record revenues. And once again Democrats claim, ‘it’s for the kids,’ even as they continue to drag their feet on what would truly secure lower class sizes and more school days — addressing PERS, health benefits and other cost drivers.”
Rep. Phil Barnhart, D-Eugene, took umbrage at the idea that what he helped Kotek propose amounted to a sales tax or to Measure 97.
By comparison, the proposed tax charges a much broader base of businesses a much lower rate, he said.
It allows businesses with two or more related entities to exclude intercompany transactions so the tax doesn’t accumulate or “pyramid.”
Businesses can be expected to pass some of the costs onto consumers — research predicts about 42 percent of the cost — so the lawmakers are proposing certain provisions to protect low income and middle income Oregonians, including possibly reducing individual income tax rates, increasing the standard deduction, increasing the personal exemption credit or expanding the earned income tax credit.
Earlier, the tax reform committee was considering a tax on business sales of over $1 million, which would affect 13,000 additional businesses, but at a rate that could be as low as 0.25 percent.
Barnhart directly addressed business owners who were certain to be streaming the tax discussion on the web, saying that if the state doesn’t act to improve its education, it will have to depend entirely on the importation of people with good educations to fill the state’s good jobs.
“If you look only at your income and expense statement this year it may not look so good,” he said, “but if you look out into the future and see what this kind of proposal can do for the economy and your business, you’ll have a different opinion.”
The Main Street Alliance of Oregon, a coalition of 3,500 small businesses, seems to agree with that logic.
“For small businesses, when the economy is healthy and families have access to good schools and services, they can afford to shop locally at the tens of thousands of small businesses that make Oregon great. Our success relies on the success of our communities, and investments in schools and family services make us all successful,” the group said in a statement.
Rep. Cliff Bentz, R-Ontario, a member of the tax reform committee, said he doesn’t see a justification for increasing business taxes given that voters so recently turned down a business tax proposal. Opponents, he predicted, would force the question onto next fall’s ballot, where it would fail again.
“Explain to us how we don’t charge up this hill for nothing,” Bentz said to Kotek.
“I always think it’s worth it charging up the hill for our kids,” she replied.