In 2010, under Measure 67, Oregon adopted a minimum-tax
scheme whereby C-corporations are taxed on profits (income) or on turnover
(gross revenue), whichever tax liability is greater.
Economists don’t like turnover taxes. The Diamond-Mirrlees production-efficiency
theorem is hostile to taxes on intermediate inputs, a predisposition I
appreciate and generally embrace. However, Diamond-Mirrlees presumes the
absence of widespread tax avoidance/evasion, an assumption that is clearly
violated so far as state corporate income taxes are concerned. In contrast, turnover taxes are hard to avoid and
relatively cheap to enforce, much more so on both counts than state
corporate-income taxes. Consequently, I found it fairly easy to support
Measure 67’s alternative minimum turnover tax, as an
effective complement to the corporate income tax, and would not rule out
further incremental increases in the turnover tax rate. Massive SCIT
avoidance/evasion provides ample justification for alternative minimum turnover
taxes.
But there’s more: Oregonians pay
high taxes, partly because we face fairly high tax rates, but a lot of the
taxes that we pay are actually paid to
other states (and to jurisdictions in other states). On a per-capita basis,
Oregon is one of the nation’s leading net tax exporters. Consequently, Oregon’s
per capita state and local tax collections
are actually below the average of the US as a whole. It’s only when one adds in
fees paid to state and local governments that Oregon’s collections come up to the
US average. One of the neat things about supplementary turnover taxes is
that they implicitly raise the cost of jurisdiction shopping, by making it
cheaper for multi-state businesses to pay the higher Oregon CIT than for them to
pay turnover taxes in Oregon and pay
CITs in other states, even where those CIT rates are lower. Minimum alternative
turnover taxes tend, thereby, to reduce tax exports.
Moreover, it looks the minimum turnover taxes work the way
they are supposed to: under Measure 67, business tax revenues (the sum of
alternative minimum turnover tax and CIT revenues) increased from 1.9 percent
of total state cash inflows in the decade prior to its passage to 2.3 percent today.
Interestingly, most Oregonians, even those who pay attention to state fiscal
policy matters, are unaware of the apparent success of this experiment.
Nevertheless, there are a variety of proposals to increase
or extend Oregon’s turnover tax. The group, A
Better Oregon, is seeking to put an initiative on the ballot that would leave its structure pretty
much unchanged, but increase the marginal tax rate on the Oregon sales of
C-corps in excess of $25 million from .1 percent to 2.5 percent, or 25 times (2500 percent!). That’s a huge increase, so much so that, if
enacted, the turnover tax might no longer represent a supplement to the
corporate income tax, but would very likely behave more like a sales tax
(averaging about 4 percent on roughly half of all goods and services sold in
Oregon) than an income tax (i.e., a higher portion of it would be shifted to
final consumers rather than stick with shareholders). It would also probably have the effect of
shifting even more business activities from C-corps to pass-through entities,
encourage vertical integration, and advantage high mark-up businesses relative
to their high-turnover counterparts – in other words, do all the bad things
Diamond-Mirrlees warned us against. It is hard to say how much damage to
Oregon’s economy these things would do. It could be a lot; it could just as easily
be minimal. But whether the damage would be a lot or only a little, I seriously
doubt that it would strengthen
Oregon’s economy. Personally, I’d prefer it if experiments like this were
performed in some other laboratory
of democracy.
The Oregon
Legislative Revenue Office recently assessed
the consequences of adopting a comprehensive turnover tax (called a commercial
activity tax or CAT) that would apply to nearly all business transactions
and not just to the sales of large C-corps, as under the status quo. Its
analysis considered an array of rates from .4 percent to .65 percent of sales
and various uses of CAT revenue, most notably, repealing Oregon’s corporate
income tax, increasing the standard deduction on Oregon’s personal income taxes,
and creating a property-tax exemption for owner-occupied, primary residences. The
revenue office assumed that the CAT would behave pretty much like a consumption
tax (albeit on gross rather than final output). If so, relative to repeal of the corporate income tax, it should reduce
the progressivity of Oregon’s state and local tax system and, thereby, reduce
its short-term volatility somewhat, as well as its long-term growth rate; relative to increasing the standard
deduction or creating a homestead exemption, its effects should pretty much
be a wash. Seems like a lot of back and forth for not much practical payoff,
which is an extremely informative insight (although oddly, it’s not the finding
that has gotten the most attention).
Me? I’d like to increase the PIT standard exemption, but
otherwise my tastes run to the incremental: increasing the alternative minimum
turnover tax rate (to .4 or .5 percent) and, maybe, since I am a fan of tax
harmonization, finding a way to extend it to all businesses, partnerships
included, with revenues exceeding $500 thousand (as
in the proposals assessed by the LRO, but retaining the offset provision
for C-corps and creating one for other businesses) and, perhaps, not so
incrementally, to all non-governmental corporations and some special-service
districts as well (which is consistent with the logic of tax harmonization).
At a minimum, it is hard to see why pass-through entities
should be advantaged relative to C-corps. The owners of C-corps tend to be well
to do, but the owners of large pass-through entities are apparently even more
so. According to the NBER paper cited above, “over 66 percent of
pass-through business income received by individuals goes to the top 1 percent.
The concentration of partnership and S corporation income is much greater than
the concentration of dividend income (45 percent to the top 1 percent) which
proxies for income from C corporations (traditional corporations). While
taxpayers in the top 1 percent are eight times as likely to receive dividends
as taxpayers in the bottom 50 percent, the ratio for partnerships is more than
50 to 1.”
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