For several years, the discussion at Oregon’s capitol has focused on how to find funding for education, public services, roadways and the growing PERS and Medicaid gaps. As legislators and the governor have scrambled to resource these growing needs, they have looked to business to fill the gap. There are challenges with this approach, as the proportion of tax burden rises for businesses while COVID and the recession are eating at revenues.
Most businesses in Oregon, and certainly in Central Oregon, are small. Bend is consistently rated as a top city for small businesses in a variety of national studies and media outlets. Big business corporations (hundreds or thousands of employees) make up a small fraction of our economic ecosystem. In fact, most businesses in our region are incorporated or limited liability status and have fewer than 50 employees. As the state raises business tax to help fill funding gaps, our region’s small businesses carry most of the burden.
Oregon Business & Industry (OBI) recently chartered a study on the state and local business tax burden. It was conducted by Ernst & Young LLP and the State Tax Research Institute to look at the overall burden Oregon businesses are carrying as new taxes come into effect between 2020 and 2022. It focused on statewide taxes as well as a closer look at local tax.
In total, Oregon businesses pay about 44% of all state tax revenue. The study shows how this number is calculated from a variety of sources. It includes property and payroll tax, funding new employee initiatives and benefit tax, and the newly enacted Corporate Activities Tax (CAT), which was used to fund the Student Success Act. The study added property taxes paid by businesses and taxes on income-generating rental property. Excise tax was tallied as well, as was taxes on health insurance premiums, utility gross receipts, individual taxes on pass-through business income, unemployment insurance, social insurance program taxes, business licenses and severance taxes. These are all types of taxes businesses and employers pay in Oregon that contribute to their full tax burden.
Long story short, the study showed that Oregon businesses will experience a 41% increase in the overall tax burden by 2022.
It increased the Total Effective Business Tax Rate from 2% to 2.8%, surpassing the national average of 2.4%. The impacts of this increase will become clearer to businesses in the coming year. But it’s safe to say if employees and citizens were to experience this significant increase, hardship for many would ensue. The same will be true with business, especially those struggling to make it through the impacts of COVID.
And while the study took into consideration the increased tax burden to businesses, it did not include the economic impact to the state, consumers, and labor as the trickledown effect of higher taxes. New business tax is absorbed in a variety of ways. It could mean higher prices to consumers, lower wages, layoffs, fewer employee benefits, lower revenue and solvency for business owners. Each industry sector and business has to make the call on how to absorb the impact as well as how much to pass on to consumers and the workforce. In other words, there are consequences to people and consumers when business taxes are raised.
Absorbing tax increases in good times is hard enough, but the state’s expectations of collecting this new revenue have been impacted by COVID and the recession. Projections are that overall state tax revenue from businesses in 2022 will be similar to 2019 as they struggle to regain what they lost during the pandemic. This will lower expected funding for the Student Success Act, which means we must find other ways to pay for schools in the interim. Not to mention other state priorities that will suffer due to the recession.
The 2021 legislature will be taking on this task. This will be on top of the already growing tax burden from past sessions. Businesses are invested in the state and our future. They are willing to help pay for schools, roads, their employees’ wellbeing and support our community. But they need to survive, and with more new business tax being considered, including a brewery tax that will significantly burden Bend’s brewers, and continuing impacts of the pandemic, this may mean the end for many businesses. We must take a break from new taxes to allow businesses the ability to recover.