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Self-employed income below national average

February 8, 2017

Look Both Ways Before You Tax
By Anthony K. Smith

As of February 1, the Oregon Legislative Assembly is back in session. Among the most talked about issues for the Legislature to tackle will be the 2017-2019 state budget and funding a major transportation package. At the heart of both discussions will be taxes.

Most people would rather not think about taxes, or at the very least just once per year, usually on a grim, gloomy day in April when all other efforts to procrastinate have failed. Few people bring up taxes in casual conversations, and not on a regular basis.

Taxes are painful to think about because regardless of one’s income level, a portion of something earned is taken away – and no matter how well the money is spent by government, those earnings are gone forever from the taxpayer’s bank account.

Still, the Legislature has the authority to impose taxes on individuals and businesses. Its task in the coming months will be to judiciously weigh the cost of state expenditures with the ability of taxpayers to meet those needs. When your job is to spend taxpayer money (for the benefit of the state and its people), it’s easy to focus on these needs and to forget about the burden tax increases have on those who are paying them.

Consider the U.S. Small Business Administration’s most recent Oregon Small Business Profile report: The median income for individuals who were self-employed at their own incorporated business was $44,147. That same year, the U.S. average was $49,804.

How a business is taxed is determined by how the business structures itself for tax purposes, i.e., C corps, S corps, partnerships, sole proprietorships, etc. There are pros and cons for each, but regardless of how a business structures itself, there are real-life people impacted by the taxes owed by the business entity itself, its investors, or its owners.

Approximately 75 percent of small businesses structure themselves as “pass-through entities,” i.e., the income they generate from their business passes through the business itself and becomes personal income, so the taxes they pay are calculated based on personal income tax rates and brackets, both at the state and federal level.

Knowing that half of Oregon entrepreneurs are bringing in less than $45,000 per year, and acknowledging that this is well under the national average, Oregon needs to recognize something important: Tax policy that starts with small business is one of the keys to unleashing a strong economy. Raising taxes on small businesses might help balance the budget, but taking a larger portion of the earnings of small businesses will not help grow the economy.

When politicians say that businesses should “pay their fair share,” which always means they need to pay more in taxes, what they are really saying is that government should take more from the people who earn their incomes from business. But even when there is broad agreement about how the state should spend our tax dollars, e.g., education, infrastructure, public safety, etc., the fact remains that Oregon has never had more revenue to spend than what is projected to come in over the next two years. In fact, in the next budget cycle, Oregon is expected to bring in about $1.5 billion more than the 2015-17 biennium. Yet here we are, at the beginning of another legislative session, having conversations about tax hikes and budget cuts, and spending even more.

Clearly, the cost of government to Oregon taxpayers is increasing at a rate that is out-pacing economic growth. For those who find no fault in this scenario, the answer will always be to raise taxes, to take more from the earnings of taxpayers. This sends a dangerous message to both businesses and individuals – taxpayers must always meet the financial needs of government.

But for those who recognize that the role of government is to serve rather than to be served, that elected officials ought to take action in ways that emphasize the “service” part of “public service,” the answer will always be to contain the cost of government, to live within our means, and to take from others only when good stewardship is assured – and for the benefit of every taxpayer, not just the few.

– Anthony K. Smith is Oregon state director for the National Federation of Independent Business.

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