On May 23, 2016, the Oregon Legislative Revenue Office (LRO released Research Report #3-16 (the Report) on the impact passage of Initiative Petition 28 (IP 28) would have on Oregon's revenue system which is a major milestone for the initiative to appear on this November's ballot.

IP 28, if approved by voters, would significantly increase Oregon's minimum corporate excise tax on corporations with $25 million or more in Oregon sales. Although IP 28 has yet to be certified to appear on the November 8, 2016 Oregon ballot, given that its supporters submitted 120,473 signatures for verification when only 88,184 were needed in order to qualify for the ballot, it appears increasingly likely that IP 28 will be on the November ballot and corporate taxpayers that do business in Oregon should be familiar with its implications.

Under current law, the minimum corporate excise tax rate ranges from $150 on corporations with less than $500,000 in Oregon sales up to $100,000 on corporations with $100 million or more in Oregon sales. If approved by the voters, for tax years beginning on or after January 1, 2017, IP 28 would increase the minimum tax paid by corporations with more than $25 million in Oregon sales to $30,001, plus 2.5% of the excess over $25 million in Oregon sales. The amount of Oregon gross receipts will be determined by multiplying total gross receipts by the Oregon sales factor used under the Oregon corporate income tax.  This revised minimum tax would only apply to C-corporations - LLC's, partnerships and other taxpayers would still be subject to only a $150 minimum fee.

The LRO is a nonpartisan research organization of state government. The Report contains a summary of key findings, includes examples on IP 28's effect on various businesses, analyzes how the new minimum tax would be spread across corporations by size and industry, provides an estimate on IP 28's effect on Oregon's overall tax burden, the implications of moving to a gross receipts tax base, and the results of a simulation of the economic and distribution impacts of IP 28. Some of the key findings of the Report include:

— IP 28 is based on Oregon sales and heavily concentrates on domestic consumer sectors and as such is expected to act like a consumption tax on the state economy.

— Taxes on the retail and wholesale trades as well as the utility sector likely will result in higher prices for Oregon residents.

— Shifting the state's tax base towards a gross receipts tax while reducing the proportional reliance on the personal income tax and nearly eliminating the state's reliance on the corporate net income tax will reduce the instability of state revenue over the course of the business cycle.

— IP 28's significant revenue increase and its concentrated impact on a small group of large corporations would add considerable uncertainty to the estimates. IP 28 is expected to increase total state taxes by approximately 25% and combined state and local taxes by 15%.

— If IP 28 becomes law, it would dampen income, employment and population growth in Oregon over the next five years.

— Higher gross receipts taxes triggered by IP 28 are expected to lead to higher consumer prices and wages.

The report includes an example of how IP 28's proposed minimum tax would impact hypothetical businesses. Table 1, reproduced below, shows no change in the minimum tax for C- corporations with Oregon sales of $20 million or less, but shows  significant increases for corporations with Oregon sales of $70 million or more.

Table 1: Impact of Proposed Minimum Tax on Hypothetical Businesses

Source: LRO Calculations in the Report

Implications

If IP 28 qualifies to appear on the November ballot and is approved by Oregon's voters, proponents estimate that the revised minimum corporate excise tax provisions would generate $5.48 billion in the 2015-17 biennium and over $6 billion during each of the 2017-19 and 2019-21 budget cycles. It would also constitute the highest general corporate gross receipts tax rate in the US at 2.5% (which is nearly ten times the rate imposed by Ohio under its Commercial Activities Tax (levied at the rate of 0.26%)

The changes to the minimum tax would mostly affect low margin businesses (i.e. those with high gross sales and low profits.) The Report noted that all industry sectors will experience a tax increase under IP 28 as compared to current law, with the largest increases occurring in the wholesale and retail trade sectors, which would rise 37.2% and 45.2%, respectively. Other sectors that would experience an increase in their share of corporate taxes include management of companies and enterprises, finance and insurance, grocery stores, pharmacies, utilities, and other retail businesses.

Corporate excise tax filers should examine their Oregon returns and estimate the potential impact this new minimum gross receipts tax could have on their business if it is approved by Oregon's voters this November.

Further, taxpayers should begin considering the implications for financial accounting purpose and whether the requirements of ASC 450 apply.

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