Statesman Journal: Why Do Oregon Business Owners Earn Less Than Average?

Statesman Journal | Jan. 30, 2014 11 a.m. | Updated: Jan. 31, 2014 9:58 a.m.

Contributed By:

Anna Staver

Oregon’s small-business owners have reported earning less money than the national average every year since 1995.

I’m not kidding.

In 2012, per capita proprietors’ income (which is the total amount divided by the number of people) in Oregon was 74 percent of the national average.

It’s a statistic that surprised me the first time I heard it. So, I decided to try to find out why Oregon lags behind the nation by talking to state economist Mark McMullen.

First things first: what is proprietors’ income anyway?

The U.S. Bureau of Economic Analysis, which calculates collected data for the national numbers, defines it as the “current-production income of sole proprietorships, partnerships, and tax-exempt cooperatives.”

Now that we know what it is, why it is lower in Oregon?

One reason is because of the steep decline in logging.

Oregon’s timber counties have struggled for two decades because federal protections for the spotted owl and salmon curtailed 90 percent of logging on federal forest lands. The drop in available lumber for logging and milling decimated the incomes of hundreds of small businesses.

Another reason is Oregonians work a slightly shorter week than the national average, McMullen said.

But one of the main reasons the state falls short of the national average is how we tax and measure business income in Oregon.

Most small businesses pay personal, not corporate income taxes. That means owners pay the same tax rates on profit from their businesses as they do on the money they earn in salary and through other means.

“It didn’t really matter what line you put it on in your tax return; all those lines were taxed at the same rate,” McMullen said. “Oregonians have traditionally reported less of this pass-through income on their personal income tax returns.”

And because federal economists use the proprietary number for their calculations, Oregon appears to lag behind.

McMullen is not sure whether the state would surpass the national average if tax incentives changed, but he thinks Oregon’s ranking would rise significantly.

So, how do we know whether McMullen is right?

Patience.

Lawmakers lowered tax rates for businesses that are S corporations and partnerships during the special legislative session in October. Starting in January 2015, businesses will be taxed at lower rates depending on how much they earn.

For companies whose profits are more than $5 million, the rate stays at 9.9 percent, but companies earning less than $250,000 will see rates fall to 7 percent.

That means a business with $100,000 in annual profits would save $2,900 on its taxes.

“It gives people incentives to report it on another line,” McMullen said. “We expect to see a whole lot more reporting of this.”

The Legislative Revenue Office’s preliminary estimate on how much money the state will lose from the credit even included an estimate for the “behavioral impact” of people reporting more income at the lower rate.

“Tax professionals will figure out avenues and ways to do it that we haven’t thought about yet,” McMullen said.

McMullen’s office will get the first returns using the lower rates in 2016, so we’re going to have to wait and see whether Oregon businesses really earn less than the national average.

astaver@StatesmanJournal.com, (503) 399-6610, or on Twitter @AnnaStaver

 

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