How will Oregon’s new gross receipts tax impact small businesses and rural Oregon?

In rural communities, sometimes even well-intentioned policies decided from afar can have particularly devastating and often unforeseen impact. The domino effect from ill-conceived laws can have an exaggerated influence where there is less “cushion” than in larger markets. This is true of Oregon’s new “gross receipts tax” law, which has the potential to cripple local businesses, which, by extension, will harm all of us who rely upon those businesses, whether as employees or consumers.

On May 16, 2019, Gov. Kate Brown signed House Bill 3427 into law, which imposed a new Corporate Activity Tax (CAT) on companies with annual in-state revenues of more than $1 million. The new law is set to take effect on Jan. 1, 2020, unless a special election halts its implementation. This new tax applies to virtually all forms of business, including C and S corporations, individuals, joint ventures, partnerships, trusts, estates and any entity that is disregarded for income tax purposes, such as certain LLCs.

Sound familiar? Oregon voters rejected a similar “gross receipts tax” just three years ago, when they overwhelmingly voted down Measure 97. Experts on both sides of this issue agree this new tax is likely to be put back before voters in a special election, which is likely to occur in early 2020. Despite a strikingly clear mandate from the people with the defeat of Measure 97, lawmakers made a dramatic end-run around the express will of the people. Aside from misjudgment in doing so, the practical effects of pursuing such a course of action will be long felt.

So just what is a gross receipts tax? Historically (and uniformly elsewhere), businesses are taxed on their actual/net income, after business expenses. Under the new law, a business will be taxed on its gross receipts (yes, you read that right). Many small- and medium-sized businesses carry a significant proportion of overhead (e.g., payroll, licensure, etc.). To tax these businesses on their gross revenues — rather than their income — will have a dramatically disproportionate effect when compared to large corporations, as their margins are smaller and there is less “cushion” to absorb such a significant burden. This equates to downsizing and lost jobs and would be a significant deterrent to growing the economy by expanding and succeeding in increasing revenue and tax base.

Proponents of this new tax emphasize that it “only” applies to businesses with gross revenues over $1 million annually. Because the new measure looks at gross revenue, it casts a net that captures a significant portion of the local businesses you and I frequent on a daily basis in Union County. Moreover, if a small business owner is working hard, doing well and growing to add jobs for a small community, this bill would kill any motivation to continue to grow and add benefit to the community, knowing that this leviathan of a tax lurks just around the corner once he or she hits the smaller-than-it-sounds $1 million gross revenue mark. What’s more, a medium-sized business that is newly past that threshold would likely be gutted by this burden.

If you burden or extinguish local businesses, you also kill local jobs and the tax base for our communities. This law will have a direct impact on our local businesses; thinking that this is a nebulous revenue source far removed from home is perilous. “Businesses” are your neighbors, your family members, your employers or even you. This law has the potential to cripple employers, manufacturers, suppliers and service providers in our community in myriad ways. 

I think we can all agree that funding education is vitally important. However, the issue here is not whether education is a deserving recipient of state funds; the issue is the cost and casualty of jobs and revenues in attempting to chase a solution that cannot be sustained. Experience tells us that eviscerating the economic building blocks of a community can be hard, if not impossible, to come back from. Eliminating even more jobs by burdening small- and medium-sized businesses is very likely to actually harm the schoolchildren we are trying to help, who may find there are no jobs for them available here when they are ready to fill them. Let’s not make our qualified students and children our greatest export. May we learn this lesson before it is too late.