IP 28: Taxing Oregon Agriculture (Measure 97)
IP 28 isn’t just about making sure “big out-of-state corporations” pay their fair share, it will also hit the pocket books of Oregon farmers. As drafted, IP 28 reflects a major change in the way Oregon taxes its businesses, by taxing based on sales rather than profits. In 2009 the Legislature increased the corporate minimum tax (HB 3405 and confirmed by voters in 2010 via Ballot Measure 67). The current corporate minimum tax structure established a graduated scale for C-Corporations with sales between $500,000 and $100 million. The minimum tax is capped at $100,000 for C-Corporations with Oregon sales above $100 million.
It’s important to note that Oregon corporations do not simply pay a corporate minimum tax and close their accounting books until the next tax year. Today, and under IP 28, a corporation would calculate their taxes under both the net income tax rates and the corporate minimum schedule and pay the higher of the two. This is important to note because many would have you believe that there are hundreds of corporations slipping by, only paying $100,000 or less in Oregon taxes. In fact, according the “Initiative Petition 28 Description and Analysis”
Research Report dated May 2016 prepared by the non-partisan Legislative Revenue Office (LRO Report), about 91% of corporations pay via the income tax rates with the remaining 9% from the corporate minimum. While IP 28 increases the corporate minimum tax, it does not change the current tax rates based on net corporate income. These rates are 6.6% for income below $1 million and 7.6% for income above $1 million. IP 28 applies only to C-Corporations with sales greater than $25 million and would apply to tax years beginning January 1, 2017. In addition to the corporate minimum, IP 28 would add a 2.5% tax on all gross annual sales in Oregon above $25 million.
Oregon Agricultural Impact
$25 million seems like a big number. That is until you look down the street to your local grain cooperative. One example we’ve analyzed shows an average annual gross sales figure of $114 million, with an average net taxable income of $600,000. IP 28 would increase their annual taxes an average of $2.8 million a year. An increase of nearly $3 million in taxes a year when their average taxable income is only $600,000!
Seems the “large, out-of-state corporations” who need “to pay their fair share” are far closer to home then the initiative supporters claim. And our agricultural and grain co-operatives are not alone. As noted in the LRO Report, IP 28 “is expected to largely act as a consumption tax on the state economy. Taxes initially born by the retail trade, wholesale trade and utility sectors are expected to result in higher prices for Oregon residents.” Meaning Oregon farmers (really all Oregonians) will pay more for everything we purchase, from equipment and seeds to electricity and gas.
Pacific Power estimates a $40 million a year tax increase if IP 28 was in effect– likely resulting in a 3%-4% increase in electricity rates. Mt. Angel based ag co-op, Wilco, estimates a 10-fold increase in corporate taxes from $250,000 to $2.5M. The LRO report also estimates that households earning less than $21,000 will pay a higher percentage of their income in direct and indirect taxes (10.09%) under IP 28 than households earning over $206,000 (9.38%).
Oregon Agriculture Cooperatives It is important to note one specific distinction about agricultural cooperatives and other C-Corporations, as you will likely hear more about how this tax doesn’t really impact Oregon agriculture. ORS 62.720(5) defines an agricultural cooperate as “any cooperative in which farmers act together in producing, processing, preparing for market, handling or marketing the agricultural products of such farmers, and any cooperative in which farmers act together in purchasing, testing, grading, processing, distributing and furnishing farm supplies or farm business services.”
Only agricultural producers may be members of an agricultural cooperative. All net proceeds from business done with, or for, members is paid to cooperative members in the form of dividends, retained as permanent equity capital or used to fund company growth. However, many cooperatives also operate retail stores that are open to members and the general public, selling farm goods and equipment, gasoline, building supplies and lawn and garden supplies.
It is true that current law, and the law retained in IP 28, exempts a portion of sales from agricultural cooperatives from the corporate minimum tax. Essentially this means that any Oregon sales done “with or for members” of the agricultural cooperative are exempt from the tax. Sounds simple, but of course tax law is never simple.
What does sales done “with or for members” mean?
The Department of Revenue believes that the Legislature “did not intend to create a broad minimum corporate tax exemption for Oregon agricultural cooperatives.” Another policy opinion we have received states that the policy intent behind the exemption is largely to account for a kind of ‘intermediate’ sale that these cooperatives make to other Oregon corporations before the products are ultimately sold outside of Oregon. As such, they are effectively not Oregon sales, but would have been considered Oregon sales without the exemption language.
Cooperative sales “with or for” members do not include all sales of the agricultural cooperative that would directly benefit cooperative members…. which means a lot of grey area and likely litigation or legislation in our future if IP 28 passes. While the issue of what does and doesn’t constitute a member sale is not new, the stakes under IP 28 are significantly higher.
If you think IP 28 will have too big an impact on your farms or you just think it is poor tax policy, you can get engaged in the IP 28 campaign by joining the coalition of businesses and farmers at www.DefeatTheTaxOnOregonSales.com [no longer active]. You can also make a big impact by sharing our Oregon agriculture story and correcting the political rhetoric that this tax will only impact “large, out-of-state corporations.” IP 28 presents the largest tax increase on Oregon farmers and our agricultural cooperatives that we’ve seen in recent decades.
The campaign is expected to be very expensive and contentious. Consider some of the statements from the initiative supporters:
“It’s no surprise that large corporations are opposing A Better Oregon, the campaign to invest in Oregon’s underfunded schools, health care, and senior services by holding large and out-of-state corporations accountable. The opposition would like you to believe that they are representing a group of small businesses, families, and Oregon-based organizations, but they aren’t. The forces who oppose this modest increase in the corporate minimum tax are in fact large and out-of-state corporations — including some of the largest and most well-known corporations in the world — that would be subject to a higher tax. Some of these corporations are known tax dodgers, and others have paid fines for polluting, discrimination, and deceptive consumer practices.” “…it’s clear Wilco is not just the small farmer co-op that big business is peddling. But this is the new normal, as our opposition tries to paint huge corporations as small businesses. The truth is that the A Better Oregon initiative targets large, out-of state corporations, while it protects family farms and other local businesses.”
After thoroughly reviewing the terms of initiative, the Oregon Wheat Growers League Board of Directors took an official ‘OPPOSE’ position on IP 28 at its most recent board meeting. We urge our growers to carefully consider IP 28 and its consequences for themselves, their farms, and Oregon agriculture as the election nears. Then make sure your voice is heard by voting in November!
**As of print, IP 28 has not been assigned a ballot measure number, however will be identified differently on your November 2016 ballot.
IP 28 has been assigned a ballot measure number and will appear as Measure 97 on your ballot.
