With the announcement this week from business group Oregon Manufacturers and Commerce that they are no longer attempting to refer the state’s new commercial activities tax to the ballot, the tax is likely to go into effect on Jan. 1, 2020.
For companies doing business in Oregon, that could mean having to register and pay a new tax. For public school teachers and students, it means a big investment in education.
Here’s a quick primer on this tax:
1.) In general, how does it work?
Oregon’s new business tax, created by the Legislature this year, is not a sales tax. Instead, it’s a commercial activities tax on business transactions that take place in the state. It’s up to businesses to track their business activity and if their Oregon sales — not profits, but overall commercial sales, minus a few allowed deductions — go beyond a certain threshold, they’ll have a tax to pay. That money will go to the Oregon Department of Education, which will supervise how the new revenue flows to schools and preschool programs.
2.) When does it go into effect?
Businesses should start tracking their sales in January. Companies are expected to make quarterly tax payments.
3.) Who has to pay and how much?
Businesses with at least $750,000 in 2020 sales are required to register with the state. That step is free. Companies doing at least $1 million in commercial activity will have to pay the tax or at least a $250 fee. The tax rate is 0.57% for sales over $1 million, but that’s only after deductions. So a business could drop below that $1 million revenue threshold after it deducts 35% of its labor costs or cost inputs.
4.) What’s it taxing?
There’s a long list in the legislation of things that are not taxed. Many are already taxed in some other way, such as cigarettes, gasoline or cannabis. Or they’re things that most Oregonians don’t think about at all — for example, “moneys passed to a utility by the Bonneville Power Administration for the purpose of effectuating the Regional Power Act Exchange credits.” Phew on that one, right?
5.) Will this tax raise prices?
As a brand new tax, it’s hard to tell what impact consumers will feel, but it’s probably safe to assume it will raise prices of some things. How much prices will rise, and which costs will go up, may not be clear until the tax has been around a while. That said, legislators were concerned enough about the impact on consumers – particularly people who don’t earn a lot – that the bill included a simultaneous cut to personal income taxes of about 0.25%.
6.) So this is supposed to help schools. How much money will schools get?
When it’s fully kicked in, legislators and staff estimate the new tax will generate close to $1 billion in revenue per year. (You sometimes hear people mention $2 billion; that’s the figure used when lawmakers talk about their two-year budget cycles.)
7.) How soon will schools see the money?
If you’re a high school senior in the Class of 2020, this tax won’t change your education this school year. But if you’re in say, the Class of 2025, you’ll have five years worth of the tax going toward your public school experience. The Oregon Department of Education says the money will start making an impact in the 2020-21 school year, though fiscal experts say school districts will only enjoy a fraction of the tax’s full financial impact that year.
The reason for the smaller revenue boost in the 2020-21 school year is that the Department of Revenue will only have estimated payments from businesses through the first two quarters of 2020 when school boards adopt their budgets.
8.) What will the money go toward, specifically?
The Student Success Act money goes to three pots. The largest is a grant pool called the Student Investment Account. School districts can invest in a menu of priorities, such as supporting student mental health or reducing achievement disparities for students of color. They can spend it on multiple things. That’s half the money.
About 20%, or $200 million per year when the tax kicks in fully, will go to expand and improve preschool opportunities.
Finally, about 30% of the tax money goes to a statewide initiatives account, aimed at more than a dozen state priorities, including full funding for the career technical education initiative Measure 98.
9.) How do we know it won’t just all go to state Public Employee Retirement System pensions?
Republican lawmakers repeatedly said that will happen, and that’s one reason they voted against the Student Success Act. GOP senators even walked out in protest of it. Democrats argued that the law makes clear that the new tax is supposed to pay for preschool, investment account grants and state education priorities — not the state’s financially troubled pension system. Republicans argue back that, yes, that’s what the law says, but in practical terms, when school districts get this money, they’ll inevitably siphon off much of it to pay rising pension costs. Democrats say they passed laws in 2019 to help rein in the pension obligation, and that the business tax wasn’t meant to solve that. Republicans pushed for walling off the tax money through a constitutional amendment, and a ballot measure along those lines is still a possibility.
10.) Is it still possible the tax won’t happen?
With Oregon Manufacturers and Commerce backing away from a referral, it looks like the path is clear for the tax to go into effect at the start of 2020. But that group, or others, could still collect signatures for an initiative, which would go on the November 2020 ballot.
From a political standpoint, that could cut any number of ways. Fall 2020 will be a presidential campaign year, and there will be other high-profile measures on the ballot.
By then, the business tax will have been in effect for almost a year. Will businesses and consumers be feeling a tiny pinch or some real pain? And what about teachers, parents and students — will they notice the money making a big difference in the classroom? We won’t have those answers to those questions for a while.
Editor’s note: This story has been updated to clarify how the 35% deductions work. It has also been updated to clarify the threshold for paying the tax. The original language came from an expert’s legal interpretation of an earlier bill.