OregonLive.com's Printer-Friendly Page http://www.oregonlive.com/printer/printer.ssf?/base/news/11450791756... Feeling taxed? Not big business Revenue - Two decades of cuts have slashed Oregon's corporate tax burden, and households are footing the bill Sunday, April 16, 2006 BETSY HAMMOND The Oregonian When Oregonians file their state income tax returns Monday, they will be on track to pay $10.6 billion over two years -- nearly 90 percent of the tab for state government -- while corporations that do business in Oregon will pay $705 million. The disparity results from two decades of decisions by state lawmakers to recast tax policy to favor corporate interests, particularly big manufacturers and large out-of-state companies. Despite election-year rhetoric that businesses are overtaxed, no state asks businesses to pay a lighter share of its state budget than Oregon does, according to the Council on State Taxation, which represents big business. Instead, Oregon households shoulder the tax burden for schools, health care, public safety and other state services. The trend comes into stark relief this year when: A middle-income family in the Portland suburbs pays more in state taxes than they would pay in the typical Western state but gets below-average services, including bigger class sizes and less college financial aid for children. Intel -- Oregon's largest employer and a company that paid $50 million a year in Oregon corporate taxes a few years ago -- will see its 2006 tax bill fall to a fraction of that amount, potentially as low as $10. Businesses in Oregon benefit from $40 million in corporate tax breaks, more than $100 million in corporate kicker credits and the final phase-in of a $40 million tax cut from a new tax formula. Most of the key policy changes that moved Oregon's corporate tax burden to the bottom of national rankings drew wide support from both Democratic and Republican lawmakers. Some key votes occurred in the waning days and hours of legislative sessions, garnering little public attention. Governors and legislators have trimmed corporate taxes in the name of one thing: jobs. "These have been conscious decisions to try to incent these corporations to come to Oregon," says House Revenue Chairman Tom Butler, R-Ontario. Many economists, however, say most business tax cuts don't create enough jobs to justify the costs. Oregon economic development officials point to hundreds of new jobs they say came from lower state taxes -- at Genentech, Keen Footwear and Intel. But there is no hard evidence that Oregon generated more jobs overall by cutting corporate taxes. Paul Warner, legislative revenue officer, says the most recent corporate tax cuts, costing the state nearly $40 million in lost tax revenue each year, will boost wages a little but add negligible jobs. Elliott Dubin, policy research director for the Multistate Tax Commission, which represents 45 states, says, 1 of 4 4/20/2006 5:04 PM OregonLive.com's Printer-Friendly Page http://www.oregonlive.com/printer/printer.ssf?/base/news/11450791756... "In the total economy of business, state and local taxes only account for about 5 percent or less of costs. That's not really going to influence the decisions all that much." Some experts say corporate tax cuts hurt Oregon's economy because lower corporate payments dimmed state spending on universities, schools and other services that would have attracted business. "There isn't a strong correlation between business taxes and growth. There is a strong correlation between the health of your infrastructure and education system and the growth of the economy," says Margaret Hallock, an economist who directs the University of Oregon's Wayne Morse Center for Law and Politics. "This shift away from corporate taxes has had perverse effects on our economy." Oregon business and political leaders showed rare unanimity at an economic summit in January: Improving education is the single crucial step to make Oregon competitive. Intel's chairman, Craig Barrett, speaks out about the urgent need to upgrade math and science education in the United States. That infuriates Charles Sheketoff, who tracks tax policy for the Oregon Center for Public Policy, which advocates for middle- and low-income Oregonians. He sees corporations lobbying for tax cuts that undermine the education improvements they clamor for. "If corporate Oregon wants to see better investments in schools and higher education, they ought to start paying what they used to pay," Sheketoff says. In the 1980s, corporate income taxes accounted for 11 percent of Oregon's general fund, twice the current share. Three significant changes Three changes in the past two decades helped chip away at Oregon corporate taxes: The Legislature has granted more than $40 million a year in new and expanded corporate tax breaks. The corporate tax rate was lowered to 6.6 percent of profits, effective in 1987. Households, by contrast, pay state income taxes of 9 percent on most of their income. Beginning this year, large manufacturers can avoid state taxes on nearly all of their profits. Under a little-known policy known as "single sales," Oregon became one of six states, and the first in the West, to tax firms solely by where they sell goods and services. Most states calculate what share of a corporation's profits they can tax using three factors of their in-state operations: payroll, property and sales. Sales count for half the decision, while payroll and property count for 25 percent each. From 1989 to 2002, Oregon billed corporations that way, too. Single sales eliminate in-state payroll and property holdings as a factor. The percentage of corporate profits taxed in a state is based solely on in-state sales. It sounds arcane, but it can translate into huge tax savings. A company that sells its products at a uniform per-person rate nationwide would make 1 percent of its sales in Oregon. Under single sales, a company that has a quarter of its payroll and property in Oregon but sells nationwide would pay Oregon tax on 1 percent of its profits, cutting its state tax bill 90 percent. Intel, Nike and companies that provide thousands of high-wage, high-skill jobs are highly coveted by states, so Oregon has to lower their taxes or risk losing them, says Senate Revenue Chairman Ryan Deckert, D-Beaverton. Oregon's switch to single sales takes full effect this year. That means the state tax bills for Intel, Nike, Monaco Coach, Columbia Sportswear and other manufacturers fall sharply. It also raises taxes modestly for a larger group of firms that have their primary operations elsewhere but sell a lot in Oregon, such as oil companies or nationwide retailers. Overall, the switch cuts Oregon's total corporate tax collections by nearly $40 million a year. The three policy shifts come on top of two other corporate-friendly laws. Oregon's one-of-a-kind kicker refund grants big tax credits to corporations when their profits soar beyond state projections. Oregon also has the nation's lowest minimum corporate tax -- $10 -- which has not been changed since 1931. Under the kicker law, corporations got an automatic 36 percent discount on their 2005 Oregon tax bills, saving them $130 million. And they're on track to get a 54 percent discount for 2007, saving them $205 million more. State economist Tom Potiowsky says the kicker rebates do little to boost Oregon's economy, largely 2 of 4 4/20/2006 5:04 PM OregonLive.com's Printer-Friendly Page http://www.oregonlive.com/printer/printer.ssf?/base/news/11450791756... because two-thirds of the money is sent to companies based outside Oregon. "I don't believe firms come here because we have a corporate kicker, and if it were to go away, I don't think they'd leave. There is a real question how much of it gets reinvested here," he says. Observers say one reason Oregon lawmakers have reduced business taxes is their fear of recession. "We have one of the most volatile economies in the nation, and that makes us desperate," says Hallock, the UO economist. "If you have Intel in your office telling you you have to have this single-sales factor or they're not going to invest in Oregon any longer, that gets your attention." Governor, GOP rivals differ The Republican candidates for governor -- Kevin Mannix, Ron Saxton and Jason Atkinson -- oppose raising business taxes and call for cutting capital gains taxes. Gov. Ted Kulongoski, a Democrat seeking re-election, pledges to raise Oregon's corporate minimum tax to a sliding scale of $250 to $5,000. And a Kulongoski spokeswoman says he wants to end the corporate kicker, diverting unanticipated corporate taxes to schools, community colleges and universities. He got corporate tax increases through the 2003 Legislature as part of a statewide tax increase, but the package was repealed by voters in 2004. Intel, which used to boast that it paid the most corporate taxes of any firm in Oregon, has since decided to keep such information confidential. Bill MacKenzie, communications manager for Intel Oregon, says the company pays its fair share of taxes, including $26 million in annual property taxes. The firm provides 16,700 good-paying jobs, and those employees pay Oregon income taxes. The company also donated $6.6 million last year to Oregon schools, universities and nonprofits, he says. The company, which earned $10 billion in U.S. profits last year, will not reveal anything about its sales or taxes in Oregon, and state law keeps corporate tax information confidential. But Intel does not appear to sell much directly to buyers in Oregon -- and as long as it sells less than $100 million in the state, it would owe only the $10 corporate minimum tax for 2006.