Oregon business backs ‘Grand Tax Bargain’

By  J.L. Wilson
Associated Oregon Industries

“Grand Bargain” Reduces PERS Liabilities by $4.6 Billion & Delivers Significant Small Business Tax Relief

Last week, Governor Kitzhaber and legislative leaders negotiated a final agreement on a package of bills that would reduce the state’s public employee retirement liabilities; reform the tax code to give small business a significant tax rate reduction; and preempt local governments from enacting local regulations on genetically modified crops.

AOI will support the negotiated agreement. In fact, it is expected that many, if not most, of Oregon’s business associations will also support the agreement. You can see the statement from the state’s largest business associations here.

Here are the elements of the agreement:

PERS REFORM

• Improves the financial viability of PERS by reducing the system’s $15+ billion unfunded actuarial liability (UAL) by $4.6 billion. This is achieved by further limiting the cost of living adjustments in a graduated way. The previously automatic annual 2% increase will be limited to 1.25% for pensioners with pension incomes below $60,000. For pensioners with incomes above $60,000, the annual increase will be limited to $750 plus 0.15% of pension income above $60,000;
• Prevents final average salary “spiking” by excluding health insurance payments;
• Removes legislators from PERS prospectively;
• Limits PERS benefits for public employees convicted of on-the-job felonies;
• Eliminates the “collaring” gimmick of SB 822 which delayed $350 million in PERS payments until the next budget cycle.

Total PERS savings due to this reform is estimated at $828 million per biennium. Of this amount, state government will save $236 million. Oregon’s school districts will save $275 million. Local governments across Oregon will save $316 million.

TAX REFORM

• Reduces the tax rate down to 7% (down from current 9.9%) on the income of small businesses (S-Corps, LLC, LLPs, and partnerships) who employ non-owners and report “active” business income (Schedule E filers). This is projected to be a $239 million tax cut for small business;
• C-Corp tax rate will stay at 7.6% for companies with income above $1 million. The C-Corp tax rate was scheduled to drop in 2013 to 6.6% for companies with income below $10 million. This scheduled reduction will not occur under this deal. The 7.6% corporate rate will continue to apply, which is tantamount to a $75 million tax increase;
• Reforms Senior Medical Deduction to shift benefits to seniors earning less than $100K (single)/$200K (household). Oregon’s Senior Medical Deduction is currently the largest in the U.S. In four years, this reform will produce budget savings of over $150 million per biennium;
• Eliminates $183 “personal exemption” for $100k + (single)/$200K + (household) tax filers.

All told, the C-Corp tax increase, along with the elimination of the personal exemption credit, raises about $135 million this biennium. The budget savings from reforming the Senior Medical Deduction is $82 million this biennium.

Because the small business tax cut does not take effect until 1/1/2015, this package represents an increase of $189 million into the General Fund this biennium. The small business tax cut cancels out this increase starting in 2015.

WHERE THE $189 MILLION GOES

• $100 million in 2013-15 biennium for K-12 education to restore school days and teachers;
• $25 million to state University System to eliminate tuition increases;
• $15 million to Community Colleges which eliminates tuition increases;
• $41 million for senior program.

STATEWIDE CERTAINTY FOR OREGON AGRICULTURE

• Requires any Oregon policy regarding genetically modified crops to be implemented statewide, not on a county-by-county basis. This would exempt Jackson County, which already has a ballot measure that has qualified for the November election. But if the Jackson County measure fails, Jackson County would be subject to the local preemption.

AOI’s objective has always been to support the Oregon Business Plan’s objective of significantly reducing the costs and unfunded liabilities of PERS. This plan does that.

In fact, a very strong argument can be made that all three components to this comprehensive agreement are pro-growth and good for business, but there are certainly concerns.

First, AOI is disappointed that the PERS number is $4.6 billion and not the stronger reforms we saw in previous proposals. AOI is also concerned about the C-Corp tax rate increase to 7.6% that is contained in the overall tax package and how the proposal might appear to pit C-Corps against S-Corps, LLCs and other business entities. Finally, AOI is concerned that there is no “poison pill” that would repeal that tax proposal in the event the PERS reforms are invalidated by the Oregon Supreme Court.

But overall, the negotiated agreement advances the policy objectives of the Oregon business community and will be supported by AOI and its partner business and trade associations.

For a more detailed look at the framework of the negotiated deal, click here.