In my last blog I suggested that tax shifting caused by the 1986 federal tax reform act accounts for two well-noted recent phenomena: the increasing concentration of personal income and the declining rates of corporate profitability. At the federal level, this means that households in the top percentile of the income distribution, especially "small business" owners (a majority of the folks in this income group), pay more federal income taxes than they once would have, a lot less corporate income taxes, and, consequently, end up with a whole lot more money in their pockets.
What the feds did also affected state-level fiscal outcomes in Oregon. Because Oregon’s statutory tax rates were unchanged at 6.6 percent for corporations and 9 percent for individuals, tax shifting in response to changes in the federal tax code probably caused the owners of its 6,000 or so biggest small businesses to increase their personal income tax payments by more than they reduced their corporate income tax payments. This is probably the main reason Oregon’s corporate income tax revenues have dropped relative to its personal income tax revenues, as has happened all over the country.
Of course, the state corporate income tax hits big publicly owned corporations as well as smaller closely held corporations. The reported profits of big publicly owned corporations have boomed in recent decades. But, while they must pay state income taxes somewhere, they aren’t paying higher corporate income taxes in Oregon. The reason for this is somewhat counterintuitive. Corporations that operate in several states can often find ways to have their income taxed in low-tax states rather than in high-tax states. And, if they can, they do, and have for years. Oregon’s statutory corporate income tax rate is among the highest in the US and this has long given big corporations an incentive to go tax shopping.
There’s more: we recently made tax shopping easier for big businesses. Once, the proportion of a firm’s profits that Oregon taxed depended the average of its employees, its assets, and its final sales located within the state relative to the total number of its employees, assets, and final sales. Now we look only at sales. This approach works fairly well for retailers, hotel and restaurant chains, utilities, and the like. But it allows most other big corporations, especially those selling goods and services to other businesses, to pay state taxes wherever they want to and that’s not here. This is the second reason for the drop in Oregon’s corporate income tax revenues relative to its personal income tax revenues: we have sent the revenues to other states.
So, if what we want is to increase Oregon’s tax take, why don’t we just cut the corporate income tax rate and go back to the old tripartite system of tax apportionment? (To be frank, it is by no means clear to me that Oregon’s revenues are inadequate. True, the state has had to borrow $3-4 billion to deal with revenue shortfalls. But over the last two business cycles (1994-present) the state has also rebated $6-7 billion to personal and corporate income taxpayers.)
Lane Shetterly’s Revenue Restructuring Task Force seems to want to increase Oregon’s tax take or, at least, its potential to do so. They have looked at a variety of tax swaps intended to do lots of things, but the one big thing they seem to be working toward is increasing the state’s capacity to raise revenue when it is needed.
Here, I want to look at their most attractive option: swapping the state’s corporate income tax for a transactions tax. To draw precise conclusions about the benefits and costs of a transactions tax one would need to look closely at the details of its administration. Nevertheless, one can make some broad claims about transactions taxes in general with reasonable accuracy.
First, transactions taxes are no more paid by businesses than are corporate income taxes. People pay taxes. The important question is, "which people?" (Economists refer to this as tax incidence question.)
Who bears the burden of Oregon’s corporate income tax? The owners, mostly.
Who would bear the burden of a transactions tax? Customers, ultimately consumers, mostly.
A transactions tax is basically a tax on receipts or sales. Indeed, if the only entities covered were suppliers selling to consumers, then a transactions tax would be identical to a retail sales tax. If it included all goods and service providers regardless of their customers, as in Washington State, for example, it would still probably be like a sales tax in its incidence, but it would have several perverse consequences. For example, it would provide an incentive to businesses to buy their supplies from out of state firms and encourage vertical integration of supply chains. However, these effects would likely be insignificant as long as the transaction-tax rate remained low.
So, as a first approximation, this swap would increase revenues a little bit by shifting taxes from mostly rich owners to mostly not rich consumers.
One could maintain the overall progressivity of Oregon’s tax structure by simultaneously increasing the top bracket of the state’s personal income tax from 9 percent to about 9.5 percent and dropping the bottom two brackets altogether (full disclosure: I think this is a good idea, in any case). But as noted above, one can get an almost identical result to that contemplated by the tax swap plus the change in personal income rates merely by cutting the state’s corporate tax rate to ≥ 5 percent and reverting to the old system of apportionment. Why do something difficult and complicated when something far easier and much simpler will suffice?
What my discussion to this point omits is the option value of a transactions tax. Increasing state income tax revenues is not easy now; it will be practically impossible in the future when the federal government increases personal income and payroll tax rates. Establishing a well-designed transactions tax would, therefore, give the state the potential capacity (or option) to:
· Generate large amounts of revenue.
· Extract payment from individuals with high capacity to pay taxes, but low current income, including those successfully evading the personal income tax, and
· Diversify the revenue base (reduce the volatility of the state revenue stream).
All of these things imply tax rates that would be high enough to bite, however. In that case, the perverse incentives associated with a gross receipts tax would become a serious matter.
The conclusion I draw from this is that, if the balancing factor is the transactions tax’s option value, we ought to adopt a design that would avoid its perverse effects, if that option were struck and the program expanded. That is, the tax should apply only to the increment in value contributed by tax unit at each stage in the process of production, distribution, and delivery, so that an entity’s taxable transactions would be equal to the difference between its sales or gross receipts and its purchases of inputs from other entities, i.e., the tax unit’s earnings before interest, depreciation, and taxes, plus employee compensation.
By the way, we call what I have described a value-added tax.
You can track the Comprehensive Revenue Restructuring TaskForce's agendas at the state legislature's web site:<http://www.leg.state.or.us/07reg/agenda/webagendas.htm>
The Legislative Revenue Committee is staffing the task force. Paul Warner is the main staff contact. Documents, etc. can be gotten from Anna Grimes 986-1271. Exhibits can also be retrieved on the Legislative Revenue web page <http://www.leg.state.or.us/comm/lro/> at: <http://www.leg.state.or.us/comm/lro/task_force_exhibits.htm>