• 2017 Tax Policy and the Governor’s Budget

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    There are a couple of items we wanted to bring to your attention this week — 2017 Tax Policy and the Governor’s Budget.

    There has been a lot chatter in the Oregon business community about what to expect from the Oregon Legislature on the heels of the massive defeat of Measure 97. These are the tax issues that OSCC be paying attention to in 2017:

    Tax reform.  Senator Mark Hass (D-Beaverton) has been steadfast in his support for a 0.4% Commercial Activities Tax (CAT) in exchange for eliminating corporate income taxes and lowering personal income taxes.  2017 may be the year this proposal gains traction.

    Property taxes.  Senator Hass has also proposed eliminating the 3% annual growth cap on assessed value in exchange for moving to market-value based assessments coupled with a significant homestead exemption.  This would translate into an increase in business property taxes and would likely be part of a comprehensive tax overhaul proposal.

    Corporate Tax Disclosure.  For the past several years, the legislature has flirted with legislation to require C corporations to disclose business and tax information to the Secretary of State so it can be posted on a public website.  We expect a full-throated effort to pass this type of legislation in 2017.

    Creative tax increases.  For the past several years, the legislature has exploited a loophole that allows it to both extend existing tax credits (revenue deduction) and raise taxes (revenue increase) in the same legislation in order to avoid the 3/5 supermajority requirement for raising taxes.  Significant emerging threat to the business community

    What can be passed with a simple majority vote?  The Oregon Supreme Court handed legislative tax-raisers a victory in the past year by ruling that it no longer takes a 3/5 supermajority vote of the legislature to raise revenue through the elimination of tax credits or deductions.  For years, certain legislators have salivated over the prospect of scaling back or eliminating tax deductions such as the mortgage interest deduction.  2017 will be the first session where this will be possible with a simple majority vote.  Huge implications for Oregon businesses.

    Tax Havens.  Since 2014, Oregon has enacted an aggressive state policy of taxing foreign source income based on the premise that the state is losing significant tax revenue due to profit shifting to foreign “tax haven” nations.  Oregon now requires corporate taxpayers to include in consolidated tax returns any unitary affiliate incorporated in a “tax haven” jurisdiction.  What constitutes a “tax haven,” of course, is a political decision.  We fully anticipate that the Oregon Department of Revenue will recommend new additions to the “tax haven” list that will include major Oregon trading partners and significant sources of foreign direct investment (FDI).

    Shift from Cost of Performance to Market-Based Sourcing.  More and more states are moving from the traditional cost-of-performance method and adopting market-based sourcing rules to apportion sales of services. Under a market-based approach, business income is assigned to the state in which the services or benefits of the services are received or where the customer or marketplace is located.  This is a way for states to export their tax burden.  Oregon is still of “Cost of Performance” state.  Many of Oregon’s high tech and software companies would have been seriously hurt by this should Measure 97 have passed.

    On Thursday, Governor Kate Brown released an outline of her 2017-19 budget.  Very few specifics other than the Governor’s general funding priorities at this point, but this is what we do know:

    Total Proposed Budget: $20.8 billion.  Budget includes a combination of tax increases and budget cuts to accommodate state expenses that are outpacing revenues.

    Total Budget Shortfall:  $1.7 Billion
    Budget shortfall driven by increases in state responsibility for Medicaid costs ($1 billion), increased PERS payments ($350
    million), passage of ballot measures that re-direct state spending ($350 million)

    New Taxes: $897 million.
    Increases in tobacco and liquor taxes.  Increases in hospital and insurance taxes.  Elimination of the “small business tax cut” passed by the 2013 legislature.

    K-12 held harmless
    Governor Brown proposes no reductions in K-12 spending and allocates $8 billion in K-12 funding.

    New investments in CTE.
    Career & Technical Education will see new dedicated funding of $141 million due to passage of Measure 96 in the November election.

    $55 million for Children’s health insurance.
    New funding will extend coverage to 15,000 children.

    $70 million bonding for 15,000 low income housing units

    $300 million bonding for first-time homebuyer loans

    Environmental Initiatives:
    $10 million for Portland Harbor cleanup,  $2.5 million for ‘Cleaner Air Oregon’ regulations, $10 million for diesel emission reduction initiatives.

    $200 million bonding for seismic rehab of schools.

    OSCC will keep you apprised of budget issues as more details are released.  Please remember this is just the very first step in the budget process.  The Legislature will significantly amend this budget throughout the course of the 2017 session.  The Legislature will also determine whether or not it can pass the tax increases necessary to make the Governor’s proposed budget balance.

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