Economic Downturn Comes On The Heels Of One Western State’s Multi-Year Tax & Regulatory Onslaught

Employer income across the U.S., along with state and local tax collections, are plunging amid an economic downturn that no politician or analyst predicted at the start of 2020. It’s evident that no state was fully prepared for the unprecedented challenges 2020 would bring. That said, Oregon stands out as the state where lawmakers did perhaps the most unnecessary harm to taxpayers, both individuals and businesses, in the months leading up to this partial economic shutdown. 

The first blow came last spring, with Governor Kate Brown’s (D-Oregon) enactment of a new income tax on business gross receipts. With this imposition of what is referred to as the corporate activity tax (CAT), Oregon became only the sixth state in the nation to levy a gross receipts tax on employers, a form of revenue collection reviled by economists across the political and ideological spectrum. Even businesses that are not profitable in a given year still face a gross receipts tax liability. 

“The flaws of gross receipts taxes are well documented,” explains Nicole Kaeding, vice president at the National Taxpayers Union. “Gross receipts taxes lead to higher consumer prices, lower wages, and fewer job opportunities, as the tax pyramids throughout the production cycle. Unlike a retail sales tax that is assessed only on the final consumer purchase of a product, a gross receipts tax is assessed at every stage of production.” 

Unlike most of the other outlier states that impose a gross receipts tax, Oregon’s is levied on top of a traditional corporate income tax. Oregon’s new CAT and the associated administrative costs disproportionately harm smaller businesses. 

“This pyramiding effect is especially severe for businesses not large enough to bring more of their business activities in-house to limit exposure to the tax,” Tax Foundation’s Jared Walczak told The Oregonian last fall. “Oregon will be one of only two states to impose a gross receipts tax on top of the state corporate income tax.”

Oregon’s ranking on the Tax Foundation’s annual Business Tax Climate Index will also be harmed by enactment of the CAT. Thanks to the CAT, which took effect on January 1, Oregon will go from having the nation’s 8th best business tax climate to the 15th best. 

A coalition of industry associations representing a large swath of the Oregon economy sent a letter to Governor Brown and state lawmakers last month asking for a delay in the first CAT payment due on April 30.  

“Requiring CAT tax payments in April will be the absolute worst timing possible for struggling businesses during this crisis,” the letter stated. “Companies will be forced to pay this tax instead of paying employees, meaning potential layoffs across a broad spectrum of industries.”

Along with calls to delay the first state CAT payments, many industry groups and organizations are urging that local tax hike proposals be pulled from the May primary ballot. In some instances, government officials are standing down from efforts to raise taxes. 

“In Salem, city officials abandoned a proposed payroll tax for local services,” Oregon Public Radio reports. The Oregon town of Madras cancelled a proposed 5% prepared meals tax and a number of other jurisdictions across the state have withdrawn bond proposals. 

Supporters of a gas tax hike that will appear on the May ballot in the town of Pendleton, Oregon, though they missed the deadline to have the measure removed, have ceased advocacy. 

“We need to be a little more sensitive to the plight of our citizens,” Pendleton Mayor John Turner said of the decision to stop seeking a gas tax hike. Though that gas tax hike will still appear on the ballot, Mayor Turner said he will seek a delay in implementation if it passes. 

Not all campaigns for local tax hikes in Oregon have stopped. A tax hike will still appear on the May ballot in Metro Portland (Washington, Multnomah, and Clackamas Counties) that would impose an income tax on individuals earning more than $125,000 annually and joint filers earning more than $200,000. The Metro Portland tax proposal that’s moving forward as planned would also levy as a gross receipts tax on businesses with more than $5 million in annual sales, to be levied on top of the new state gross receipts tax. 

Altogether the tax proposal would raise $250 million annually. Critics of the Metro Portland tax proposal contend that it will harm businesses at a time when many employers can least afford it. 

“I think that the people are going to be shocked that the politicians want to raise taxes at a time when the economy is teetering towards catastrophe,” said Jason Williams, president of the Taxpayers Association of Oregon. Williams and his organization are working to defeat both the income tax hikes and the measure to extend the 10 cent per gallon “temporary” gas tax hike first approved in 2016.  

A coalition of local chambers of commerce sent Metro Portland officials a letter in March urging that the gross receipts and other tax hikes be pulled from the May primary ballot. 

“Now is not the time to stack new taxes on local businesses and residents,” the letter stated. “Instead, Metro should work with the local business community to protect working families and small businesses in the months ahead.”

If Oregon voters are in mood similar to that of their neighbors across the border in California, it does not bode well for the fate of the tax hikes that will still appear on the May ballot. A new Public Policy Polling survey recently conducted in California found that 80% oppose raising taxes right now, to pay either for relief efforts or to shore up state finances. 

“My guess is this is going to be a very hard sell when unemployment is skyrocketing, businesses are failing,” John Horvick, a Portland-based pollster, said of the tax hikes that will appear on Oregon’s May 19 primary ballot. “It’s hard to go to the voters at that time and ask for money.”

In addition to the CAT that took effect this year and the local tax hikes still pending for the May primary, another recent policy development that will do economic harm to Oregonians is the carbon emissions cap imposed by executive fiat earlier this year. This new cap, which was imposed via executive order by Governor Brown in March, seeks to accomplish the same goals as the cap and trade legislation that state lawmakers have been unable to pass for the past two years. 

“The Governor’s timing for trying to ram Cap and Trade down our throats couldn’t be worse,” said former Oregon Representative Jeff Kropf. “Can you imagine the economic destruction if you add in the Coronavirus impact on top of the CAT and Cap and Trade? Thank God Republicans walked out the last two sessions and stopped this madness.”

Governor Brown’s carbon cap order came two days after she declared a state of emergency on account of the coronavirus pandemic. The carbon cap order affects 19 different areas of government, the Oregon Catalyst reported, and is expected to raise gas prices, housing prices, and inflate the overall cost of living in Oregon. 

The new cap calls for carbon emissions reductions of 45% by 2035 and 80% by 2050 relative to 1990 levels. As the failed cap and trade bill would’ve done, Governor Brown’s carbon cap will have the same effect as a regressive tax hike, disproportionately punishing low and middle income households across the state with higher utility bills and other inflated energy costs. As with the CAT imposed by Governor Brown, her emissions cap will do much more harm to small businesses than their large multinational corporate competitors. 

Governors, legislators, and other public officials can be forgiven for not being 100% prepared for what 2020 was to bring. What can’t be dismissed is the contrast between government leaders who took action to put their states in a strong position to weather the pandemic-driven downturn – such as with healthy rainy day and unemployment insurance reserves – and those, like Governor Brown and Oregon legislators, who recently inflicted unnecessary economic harm on taxpayers and employers who are now facing historic setbacks.