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Oregon Lawmakers Send Gross Receipts Tax to Governor

Posted on May 16, 2019

Oregon state lawmakers have approved a gross receipts tax, a major victory for proponents who have long sought such a levy.

H.B. 3427 would impose a 0.57 percent "corporate activity tax" on businesses' Oregon gross receipts over $1 million and use the revenue to fund state education programs. The Senate passed the bill on an 18-11 party-line vote May 13; the bill passed the House May 1. It now goes to Gov. Kate Brown (D), who is expected to sign it into law.

The policy, drafted by the Joint Committee on Student Success, is the result of months of work by Democratic lawmakers, education advocates, and unions.

After Senate Republicans walked out of the chamber in protest of the bill for over a week, Democratic lawmakers had to agree to kill controversial gun control legislation and a bill to strengthen state vaccination requirements before the minority party would return and provide the quorum necessary to vote on the bill. Democrats also committed to an existing effort to rein in the cost of the state’s troubled public pension system partly to placate Republicans.

H.B. 3427, which is intended to raise roughly $1 billion annually for education, was introduced in April. The bill is "a targeted investment in our schools and our kids that this state has never seen before,” according to a statement by committee co-chair Sen. Arnie Roblan (D). “Every dollar that we collect will go into the classroom, and we have written that into the legislation. The bill requires that all funding goes to hiring teachers and staff and purchasing supplies to serve our students; not for covering [pension] liabilities or any other costs.”

Republicans, however, called the tax a stealth sales tax — a third rail of Oregon politics. During their walkout, they said the money generated from the new tax could be used to free up general fund dollars currently allocated to education, arguing that a constitutional amendment was necessary to ensure the revenue would only go to benefit schools.

The bill contains carveouts for groceries, hospitals and health insurers, and motor vehicle fuel, and also contains provisions designed to counter tax pyramiding. It would allow businesses to subtract 35 percent of their labor or cost inputs, and lower- to medium-income taxpayers would receive a state income tax cut to help blunt the regressive impact of that tax.

Democrats argue that the legislation will impact roughly 40,000 of the state’s 460,000 businesses and noted that it will also apply to out-of-state businesses selling in Oregon. Republicans and some businesses argued in recent weeks that many smaller businesses and agricultural businesses would be negatively affected by the tax. Anthony Smith, Oregon state director for the National Federation of Independent Business, said in a May 14 press statement that customers “will pay it when a product is taxed at each stage of the supply chain” and that businesses will be hit with the tax “whether they make a profit or not.”

But Democrats won an important concession from Oregon Business & Industry, a key business advocacy organization in the state: a neutral position on the tax provisions of the bill.

“Oregon Business & Industry has long voiced concern about gross receipts taxes, and therefore did not [initially] support this bill,” according to a statement by the group May 13. “However, after working with other business organizations to negotiate language enabling businesses to deduct a portion of their input costs or labor . . . as well as agreements on other pending legislative proposals that would have been costly to business, [Oregon Business & Industry] signaled it would be neutral on the tax provisions of the bill.”

The organization also indicated that it intends to hold lawmakers to their commitment to approve a plan to curb the state’s pension costs.

Notably, a proposed levy to require businesses to spend a specific amount on employee healthcare or pay an assessment to the state was withdrawn by the Brown administration, apparently in part to placate business interests and secure the passage of H.B. 3427.

Sen. Mark Hass (D), a key backer of the bill and of the larger effort to create a gross receipts tax to fund education, told Tax Notes on May 13 that the approval of the legislation was “a pivotal moment” for the state and “is a pretty spectacular moment for education policy in Oregon.” He said he’s spoken with Brown and the governor is “very supportive” of the bill.

“She’s thrilled, I’m overjoyed,” Hass said. “I’ve been working for an education package like this since I’ve been in the legislature.”

The legislation comes several years after education advocates and unions sought approval for a gross receipts-style tax on businesses via Measure 97, a 2016 ballot measure defeated at the polls. Hass attempted at the time to work out a legislative compromise, and subsequently sought to develop a gross receipts tax proposal following the measure’s failure. At the start of 2019, he and other lawmakers on the Committee on Student Success were exploring a gross receipts tax and a VAT, ultimately opting for the former.

The tax could still face obstacles. Republican senators announced May 15 that they’d unsuccessfully sought to recall the legislation to the floor, arguing that the state is looking at a $5 billion surplus — and a projected $1.4 billion “kicker” tax rebate — and that the tax is unnecessary. A business group, Oregon Manufacturers and Commerce, is exploring the possibility of securing a referendum on the new tax.

“It was just over two years ago that Oregon voters overwhelmingly rejected a similar hidden sales tax,” according to a May 13 press statement by the group’s executive director, Shaun Jillions, referencing the defeat of Measure 97. “We are currently evaluating the path to ensure that voters have an opportunity to once again weigh in.”

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