Zero excuses for raising taxes on small businesses

By Anthony K. Smith

Lawmakers are characterizing the latest state revenue forecast as “stunning” and “unbelievable.” State economists are now predicting a $1.4 billion kicker refund for Oregon taxpayers and more than $1 billion in additional revenue for the Legislature to spend in each of the next several biennia, including the current biennium that ends June 30.

This revenue boon comes on top of the $2.6 billion that has been allocated to the state from the federal American Rescue Plan Act (ARPA). Long story short, Oregon has more financial resources available than ever before – and that would be true even without the infusion of one-time federal funds from ARPA.

Simply put, there is absolutely no justification for tax increases this year. In fact, according to one report coauthored by Ernst & Young and the State Tax Research Institute, business taxes in Oregon will have already increased by 41% by 2022, when taxes passed by the Legislature over the last several years are fully phased in.

Nevertheless, numerous proposals have emerged this year to raise taxes on businesses. Back in December, Gov. Kate Brown released her Governor’s Recommended Budget (GRB) for the 2021-2023 biennium, a 500-page document that lays out the governor’s spending priorities for pretty much anything you can think of that’s funded by taxpayer dollars. The GRB proposes to eliminate the small business tax rates that were created in 2013, took effect in 2015, and were expanded in 2018.

These tax rates help keep a level playing field between C corporations, which tend to be larger businesses, and pass-through businesses, which tend to be smaller (there are exceptions, of course, but this is how businesses are structured as a general rule). Pass-through entities include S corporations, partnerships, LLC’s and sole proprietorships. Eliminating these tax rates would cost Oregon businesses more than $100 million per year.

Another major tax increase proposed in the GRB relates to Oregon’s connection to the federal tax code, specifically provisions created by the overwhelmingly bipartisan federal CARES Act. Thousands of Oregon businesses suffered significant financial losses in 2020. Two of the three CARES Act provisions under consideration allow business owners to immediately monetize their business losses, rather than having to carry those losses forward to future tax years. A third provision allows businesses that were previously limited by the Tax Cuts and Jobs Act to deduct an increased amount of the interest they pay on their debts, freeing up precious dollars for other business expenses, like keeping Oregonians employed.

Disconnecting Oregon from these three provisions of the CARES Act will cost Oregon businesses over $100 million in the short term but could also end up jeopardizing future state budgets when the revenue outlook might be less optimistic.

The most egregious (and expensive) tax increase proposal of this session is one that would treat forgiven Paycheck Protection Program loans as Oregon taxable income. The CARES Act authorized the creation of the Paycheck Protection Program (PPP), a federal lifeline for both employers and employees that provided temporary and limited funding to businesses in the form of loans that would be fully forgiven if used for authorized purposes like payroll, rent, and utilities.

PPP funds were intended to keep as many employees on payroll as possible when states were experiencing massive spikes in unemployment benefit claims due to the pandemic. Congress was clear that these funds should not be considered income. Requiring forgiven PPP loan amounts to be added back as Oregon taxable income would be an unfair, retroactive tax increase on businesses at time when Oregon is already projected to bring in more revenue than ever before. This change is estimated to cost Oregon businesses $450-$600 million.

All these proposed tax increases should be off the table now that Oregon’s revenue outlook is so incredibly strong. However, we’ve been down this road before – and even in prior years when a kicker was in play, the Legislature couldn’t resist taking advantage of its supermajority to raise taxes. Let’s hope the financial circumstances we find ourselves in today are so overwhelmingly self-evident that even the most fervent tax-and-spend politicians will show some restraint. Anything less would just be punitive to Oregon’s small businesses.