New year, new tax, new education possibilities
An untested Oregon tax goes into effect Jan. 1. Schools counting on the Student Success Act are banking on it.
Legislators designed the corporate activity tax to provide a reliable $1 billion a year dedicated to preK-12 public education. Districts have been promised $473 million in July, but a lot of unknowns remain.
As state agencies and the Legislature work out the details, here are answers to some frequently asked questions.
What is the corporate activity tax?
Although called the “Corporate Activity Tax” in statute, it is more commonly referred to as a commercial activities tax because it applies to more than just corporations. (People who talk about it a lot just call it the CAT.) Any business or individual with more than $1 million in revenue in a calendar year must pay the tax. The tax is $250 plus 0.57% of gross receipts over $1 million.
The law applies to all business income, not just profits. Businesses, however, can subtract 35% of the greater amount of inputs or labor costs. There are also exemptions for fuel and grocery sales and items that face special taxes.
The tax applies to all businesses with sales activity in Oregon, meaning Oregon can tap businesses based outside the state.
Why a business tax?
Why not? Nearly everyone agrees Oregon needs more money for schools.
Oregonians have capped off their property taxes and said no to a sales tax. A receipts tax offers more stability than cyclical personal income taxes.
Business advocates, however, objected to the tax, with Republican senators walking off the job last legislative session to stall a vote on the bill. Chief among the concerns was the CAT being passed on in consumer prices and the impact on businesses with high revenues but slim profit margins.
The Tax Foundation’s “State Business Tax Climate Index” still ranked Oregon eighth best in the country, primarily because it doesn’t have a sales tax.
“In some ways, this rights the ship from those tax cuts of the 1990s, where benefits mostly accrued to businesses, rather than people,” said Sen. Mark Hass, who co-chaired the subcommittee that created the CAT.
But how does this affect me?
If you are a business, you must register with the Department of Revenue if your sales exceed $750,000 a year. If you expect to have receipts exceeding $1 million, you must make quarterly estimated payments, starting in April.
If you are an individual, you may see some of the tax passed on to you through higher prices. Legislators, however, created the 35% deduction to blunt the business need to raise prices, and the act cut most personal income taxes a quarter percentage point to put more money in your pocket.
If you work in public education, you will see a significant increase in available funds. The Student Success Act has narrowed the gap between what Oregon spends on schools and what it needs to spend for a high-quality education, according to the latest legislative report.
How much of an increase?
In 2020-21, Oregon school districts will split about $473 million in direct grants based on enrollment, with an extra weight for students in poverty. The CAT is also expected to create $189 million for early learning programs and $284 million for statewide initiatives, including fully funding the High School Success Fund (Measure 98).
The Legislative Revenue Office estimated the CAT will produce $2.1 billion for education for 2021-23, with about half for district grants.
Can the CAT be used for things other than education?
Anything’s possible with the Legislature, but the act’s creators put up as many guardrails as they could.
All CAT money must be deposited in the Fund for Student Success, a separate account from the General Fund. From there, the money is allocated to the Student Success Account, the Early Learning Account, the Statewide Education Initiatives Account and the State School Fund.
The act directs just enough money to the State School Fund to cover the lost state revenue from the income tax cut. That shift is baked into the act’s formula so that the Student Success Fund will still receive about $1 billion a year going forward.
The act’s language as well as the Legislature’s intentions make clear the Student Success Fund is to be additional money for schools, not a replacement for State School Fund money. The act lays out how schools must use the money to increase student achievement.
It would take a bill, a legislative vote and a governor’s signature to redirect the money.
OK, but I heard there have already been changes to the tax and more are coming. Should I be worried/excited?
Any new tax law requires tinkering once the lawyers and the agency professionals get ahold of it. House Bill 2164 (2019) made mostly technical fixes to address niche industry issues that cropped up almost immediately. It cut the amount to be collected about $2 million.
The Department of Revenue has identified at least three dozen issues that must be addressed, and eight administrative rule changes have already been drafted, with more to come in February and March. The bulk of the changes are clarifications on who must pay and procedures for paying.
Will it face challenges?
This is Oregon, right? But so far, the signs are good.
Oregon Business & Industry, the state’s leading business association, announced during session it would not oppose the act. Without major business backing, a threatened initiative challenge didn’t materialize.
“That didn’t happen by accident,” Hass said. Committee members worked closely with businesses to create a tax sensitive to their concerns, he said. The committee was adjusting language right up to the last minute to respond to industries such as car sales, banking and insurance.
Even so, legislators continue to grumble about the CAT, and business lobbyists are looking for ways to nibble away at it to help their interests.
When will we know if it’s working?
The first quarterly tax collection is due in April, but the Department of Revenue won’t know if businesses are over- or underestimating their revenue. The first true look will come in 2021 after a year of collections.
What if it doesn’t perform as expected?
The CAT creates allocations, not appropriations, according to Doug Wilson, Legislative Fiscal Office principal legislative analyst. Districts will divvy up whatever is produced, but there are no guarantees. If the CAT overproduces, there will likely be some additional steps because districts must have plans for how they will spend the money.
Legislative number-crunchers have lots of practice calculating long-standing taxes in good times and bad, but the CAT is a whole new ballgame. There is a lot of guesswork in play.
Wilson said his office would be watching the tax carefully, ready to make adjustments if needed.
- Jake Arnold, OSBA