If you believe this video, then you might be part of the uninformed masses.
If you believe this video, there is a good chance you know very little about Oregon taxation but love cheering for the grocery-laden middle class mother…clearly oppressed by the evil corporations.
If you believe this video, can I interest in some oil that never needs to be changed?
I get it…political ads on both sides of the political spectrum are always extreme and exaggerated; however, this ad is borderline deliberate mis-information. They are banking on the fact that the masses are misinformed about Oregon corporate taxation and will buy into this idea that big corporations with activity in Oregon only pay $10. They are banking on the fact that you will not do any homework and vote based on your emotion for the “underdog”.
I am hoping you desire to be an informed voter and actually do your homework regarding this issue as it is very important. I understand that corporate taxation is not as exciting as the Civil War game, but I will try to make it easy and painless for you…
- There are two different types of corporations – S and C
- S – net income is “passed through” to the shareholders and reported on their personal returns and an excise tax is paid regardless of net income. This is basically another annual fee for doing business in the State on top of the fee paid for registration each year.
- C – net income is taxed at the corporate level at 6.6% and a minimum tax if the corporation has a net loss. The net earnings distributed in the form of dividends are then taxable to the shareholders, which is commonly referred to a “double tax” or “second level” of tax.
- For tax years 2008 and prior, this minimum tax was $10. No one denies this, but only C Corps that had net losses paid this amount. Any corporation with income was paying 6.6% and not the $10 excise tax.
- Most large corporations mentioned in this ad (“Wall Street”, banks, and credit card companies) have a large amount of net income from doing business in Oregon, so they would would be paying the 6.6% tax.
The who is only paying $10?
1. C Corporations with net losses due to the economy or poor performance.
2. C Corporations that pay the net earnings out to the shareholders in the form of wages, which is not an attempt to avoid tax because they have to pay significant payroll tax on these wages.
3. C Corporations that are in the process of converting to an S corporation and have to pay wages and reduce net income to zero for ten consecutive years.
All three situations are 9 times out of 10 going to be small businesses and not these large corporations targeted in the ad. Large corporations are going to have net income and rarely have net losses.
In 2009 the Oregon legislature passed a tax increase that completely changes this structure. The minimum tax increases to $150, and then for C Corporations it increases progressively in relation to gross receipts and not net income. The tax is calculated based on this table on ODR’s site. The changes are dramatic – not for the “large corporations”, but small businesses in the previously mentioned examples. Here are some examples…
- Assume “Evil Wall Street Traders, Inc.” (a C Corp) does business in Oregon from one office in PDX and has gross receipts of $3 million and net income of $150,000. The 6.6% tax on their net income is $9,900. The minimum tax at $3 million is $2,000 – so there is no tax increase on the Evil Wall Street Traders from the 2009 tax changes.
- Meanwhile, assume “Plumbers PDX”, a 4th generation family C Corp, does business in Portland and has gross receipts of $3 million as well, but has a net loss of $20,o00 due to the recession. Normally, they would pay the minimum tax of $10; however, due to the new minimum tax they would have to pay $2,000.
- It only gets worse for larger small businesses – now assume a family-owned, multi-location, wholesale distributor with gross receipts of $11 million has a net income of $90,000 due to slim margins, the recession, and the fact that they pay their employees well and have a good profit sharing plan. At $90,000, the tax at 6.6% would be $5,940; however, the new minimum tax based on the gross receipts would increase the tax to $15,000!
As you can see, the new minimum tax has some serious negative effects on small businesses – especially those struggling due to the economy or in unique industries. Most business owners have no problem with raising the minimum to $150 – in fact, many believed it to be too small for many years. The problem is the progressive minimum tax assessed on C Corporations based on gross receipts. Many family businesses that are on to there 3rd or 4th generation are still organized as C corporations as the Federal built-in gains tax makes it very hard to convert to an S corporation. This means they have to pay set minimum tax based on gross receipts while new companies organized as S corporations only pay $150 regardless of gross receipts. Taxing certain entity structures more than others is not about paying a “fair share” – it is simply a bad bill that became law because the legislature did not want to take on the hard task of fixing Oregon’s budget or spend time on a fair tax increase that does not punish certain entities.
Small business – not large corporations – will pay the increase in a time when most small businesses are already struggling to survive as is. The large corporations that the democrats have demonized will continue to pay the same amount of Oregon tax and and our real budget problems once again ignored.
Hi Brian,
Interesting read. I was wondering if you have any data regarding the number of businesses in those 3 categories? It seems like a “small” business with $11M in revenue but only $90K in net income would be exceedingly rare.
An across-the-board corporate tax increase is a reasonable response to a growing state deficit, but obviously that headline is far too dull to be used in advertising. I’m sympathetic to the argument that some small businesses will have increased taxes, but it’s difficult to create tax policy based on the exceptions.
Out of curiousity, if I wanted to increase taxes on the “Evil Wall Street Traders, Inc.” without affecting these small businesses how would I do it?
I based the examples on a number of actual returns. Plus, I have been working on S and C Corp returns for almost 10 years, so I have a good idea of what businesses in different industries gross and net. The IRS has decent stats dispatches they release to the public, but ODR does not have stats available to my knowledge. I have been thinking about emailing them to inquire about it. It would be interesting to review and breakdown.
Actually, the relation of gross receipts to net income/loss is dependent on the type of business. The example is used was a wholesale distributor, which means they buy and re-sell inventory, so their gross profit percentage is much smaller than a service business. They show $11 million is gross receipts, which seems really high, but you have to realize that they had to buy the inventory at $7.5 million. Their gross profit percentage is only 35%, and they have to cover their fixed costs and overhead.
A distributor has to have lots of warehouse space at multiple locations; pay a good size staff of sales employees, buyers, office employees, and warehouse employees; and all the other costs to operating expenses necessary to run the operating and move the inventory. Finally, adjust net income for current economic conditions, and $90,000 is very realistic and maybe a little generous. In a good economy, they could be close to $350k in net income or more.
Contrast that with a medical practice grossing only $3 million, but also netting $90,000 (assuming shareholders do not take additional wages to zero net income to minimize Federal corporate tax). It is a service business that does not sell inventory, so gross receipts are much lower but net income is a much higher percentage of gross receipts because the costs incurred to make the gross figure are much less. Beyond payroll for the doctors & staff, rent, and equipment costs, there are really not many big expenses like we see with the distributor.
As you can see, to base a minimum tax based on gross receipts rather than net income is flawed in design. The distributor gets hit with a minimum tax of $15,000 and the medical practice making the same net income only pays $5,940! In the make believe world that congress lives in where all businesses are the same, this might make sense.
I have no problem with a minimum tax, but the amount they picked simply get too high. I did a return for company in 17 states and the highest minimum tax was California at $800, which even though it is high, I think it reasonable. $15,000 is not reasonable – especially when it based on gross receipts rather than net.
What would I do? Here is the simple Brian Germer plan that would have fixed the budget with much less administrative work needed:
- Increase the corporate tax rates based on net taxable income. Make the progressive like the Federal tax with max rates around 9%
- Add a minimum tax increase, but a fixed amount for both C and S Corporations.
The changes that would have been needed would have been minimal compared to the massive changes they made for 2009, and the large, “evil” companies would actually be paying increased taxes rather than small business. All would be happy, and they would rename 42nd Avenue after me in 10 years.