Controversial Oregon Taxes May Spur Corporate Exodus
Business + Economy

Controversial Oregon Taxes May Spur Corporate Exodus

SISTERS, Ore. -- For years, Tara O’Keeffe, 55, sold a hand and foot cream for laborers called Working Hands, and employed 20 locals in sales and marketing. But this spring, she sold her company to a Cincinnati-based firm, and in the process O’Keeffe became a minor celebrity in Oregon. The reason she bailed out, she said, was a new state tax recently levied on companies and high income earners. While declining to explain precisely how the tax had adversely impacted her business, which has sales of roughly $2 million a year, O’Keeffe told The Fiscal Times: “It’s the direction that I see the state moving. What I see is not pro-business.”

Last January, Oregon voters approved ballot Measures 66 and 67, which raised the state income tax by 1.8 percentage points on families making more than $250,000, to a high of 11 percent. The increase tied Oregon with Hawaii for the highest state income taxes in the country. Corporations faced a 1.3 percent increase to 7.9 percent on profits over $250,000, giving Oregon the second-lowest corporate tax burden.

The tax hike immediately touched off an uproar in the business community.  Critics warned that the new tax would drive businesses away and predicted that it would generate far less revenue than state officials hoped for. Phil Knight, the founder of Nike, Oregon’s signature company, described the tax hike as “assisted suicide” for the state economy.

No Exodus, Yet
The debate over tax increases on high earners and high-profit companies pitted business against public sector unions and other groups who see tax hikes as key to solving fiscal problems created by the economic downturn and underfunded state pensions. But so far there is no sign of a massive corporate exodus from Oregon. While a few businesses like O’Keeffe’s have left — and a few officials from other states have extended invitations to Oregon businesses — the vast majority of companies appear to be staying put.

“The impacts are so minor that businesses would pay more to load up the moving vans than what they are paying,” said Scott Moore, a spokesman for Our Oregon, a group that lobbies for fairness in the tax code. Greg Leo, a spokesman for the Oregon Republican Party, conceded that critics of the tax increases lack “specific examples of who is actually moving,” though he argued they are still bad for the state’s image.

Part of a Larger Debate
Oregon’s experiment with a tax increase amid one of the worst recessions in modern times coincides with a growing debate in Washington, D.C., about whether to raise taxes on the wealthiest 2 percent of Americans.  President Obama made it clear yesterday that he supports extending the Bush era tax cuts to all but high income earners,  despite growing concerns among some Democrats that a tax hike on the wealthy might hurt the recovery. 

Critics apparently were initially right about one thing: The tax increase did not raise nearly as much revenue as proponents predicted. The original projection of $1.3 billion over a two-year budget cycle has been revised by $577 million. That change forced Gov. Ted Kulongoski, a Democrat, to slash state spending across the board by 9 percent in June in order to meet the constitutional budget-balancing requirement.

Supporters of the Oregon tax increase contend they held off an even worse situation. “We hoped the economy would improve faster, but we are by far better off with these two measures than without them,” said Sen. Richard Devlin, the Democratic majority leader in the Oregon state Senate.

With the U.S. economy dangerously close to a double-dip recession, the dip in the projected Oregon tax take was probably inevitable, economists said. But the Oregon state economist, Tom Potiowsky, in late August projected that corporate income tax revenue will rise to $874 million, $23 million more than he forecast in June. 

Even Associated Oregon Industries, a business group that opposed the levies, was willing to give the revenue-generating potential of the tax increase the benefit of the doubt, noting that the lackluster performance so far could be a function of a weak national economy. “It is hard to differentiate,” said J.L. Wilson, the group’s lobbyist.

Other States Luring Companies
Still, officials from other states are on the prowl. C.L. “Butch” Otter, the Republican governor of neighboring Idaho, had already courted Oregon businesses in an open letter, and Idaho state officials say they have fielded a number of inquiries from Oregon businessmen. Richard Daley, the mayor of Chicago, brashly attempted to lure away Columbia Sportswear, a major Oregon company, from Portland, its largest city. Columbia Sportswear declined the offer.

In the southern Oregon town of Medford, Bruce Hough is in the process of moving ComNet Marketing, which provides marketing and fundraising services for nonprofits, to Nevada. Hough declined to provide specifics about how much the new law increased his taxes, though he said his business clears a little over $5 million in sales. Hough does not dispute that the additional tax might outstrip the cost of his move, which will take three years, but said that since Nevada has no corporate income tax, the step will eventually pay off.

Our Oregon has no doubt that Hough intends to move, but the group questions his real goals. Hough also co-finances Taxpayers Union, a new group devoted to fiscally conservative causes. “His grand statements are more motivated by advancing a conservative political agenda,” Moore said.

Asked why he hadn’t moved to Nevada sooner, Hough said, “It was purely a business decision,” predicting that Oregon’s corporate tax revenues will gradually fall as more businesses see the light and move elsewhere. “This was the straw that broke the camel’s back.”

    Measure 66 raised taxes on incomes above $250,000 for households, and $125,000 for individuals. The tax rate increased 1.8 percentage points to 10.8 percent on taxable income between $250,000 and $500,000 and 2 percentage points, to 11 percent, above $500,000.

    Measure 67 raised rates on taxable income above $250,000 for S-Corps and C-Corps by 1.3 percent, to 7.9 percent. It also created a minimum tax for corporations, up to $100,000, based on sales in Oregon. The tax increase expires in 2013.
    The Oregon tax increases leave the state either far ahead, or far behind its peers, depending on what is being measured.

    According to the Tax Foundation, a research group in Washington, D.C., the tax increases on high earners put Oregon in a tie with Hawaii for the heaviest burden. High taxes in upper brackets can deter companies from creating good-paying jobs.

    Oregon tumbled six places in the Tax Foundation’s annual State Business Tax Climate Index as a result of the new taxes, but still ranks 14th among the 50 states.