September 18, 2012
September 18, 2012
Patrick Emerson PhD ,
Oregon Economics Blog
I am following with some interest the latest foray in to state ‘tax reform’ by the governor. I think it is a good time to repeat what I have said and documented in these pages many times: A sales tax will not provide revenue stability in any significant way. This is not hard to see, just look across the Columbia and you will see a sales tax dependent state that is struggling with revenues as much or more than is Oregon. No surprise this as income and consumption are very highly correlated.
But Oregon is much less tax friendly to small business. The gap arises in large part because of the way small businesses are structured and the way Oregon taxes the two most common types of corporate structure.
Traditional corporations pay corporate income or excise taxes. Those rates top out at 7.6 percent. Many small businesses are structured as what the Internal Revenue Service calls S corporations. These businesses do not pay corporate tax, but owners, whether a sole proprietor or shareholders, pay taxes at the personal income tax rate. Owners of sole proprietorships and partnerships also pay at the individual rate. In Oregon that rate tops out at 9.9 percent.
Um, what? If I am a small businessperson and my income comes from the revenues of my business, why should that income be taxed at a lower rate than someone who works for a third party? They say earlier that:
The amount of taxes paid by businesses varies widely, according to circumstances. For example, Oregon’s lack of a sales tax improves its score in tax rankings, but sales taxes are a relatively small expense for many businesses.
But this is nonsense – if I am a small businessperson, I pay an income tax on the income I earn from my business, just like everyone else, but then I don’t have to pay a consumption tax so my overall tax burden is quite modest, just like everyone else. Comparing the individual income tax rates to those of C class corporations makes little sense. Those corporations pay lower taxes, but their employees pay income taxes.
Which is really all to say that don’t fall into the trap of thinking of a sales tax as that much different from an income tax, you have to think of these two together when thinking of the overall tax burden on individuals.