SAN FRANCISCO — Oregon voters will decide two measures next month that, if defeated, could blow a $733 million hole in the state's general fund budget for the 2009-11 biennium.
"If voters overturn the state's balanced budget in January, it could jeopardize Oregon's credit rating," Treasurer Ben Westlund wrote in an op-ed article published in the Portland Business Journal last month.
Two tax measures face voters on Jan. 26: Measure 66 would raise personal income taxes on individuals who earn $125,000 or more and households that earn $250,000 or more, and Measure 67 would raise the corporate minimum tax and corporate income tax.
The tax hikes were passed by the Democrat-controlled Legislative Assembly last year, as the state faced a $3.8 billion budget gap. In addition to raising taxes, the state cut more than $2 billion in spending, used federal stimulus dollars and tapped its reserves to balance the budget. The balancing act helped Oregon maintain its double-A credit ratings, as neighboring California was facing downgrades and legislative stalemate.
In October, Standard & Poor's and Fitch Ratings affirmed their AA ratings on the state's general obligation bonds, while Moody's Investors Service affirmed its equivalent Aa2 rating.
Business groups organized to collect signatures and force state officials to put the measures before voters, saying Democrats used a temporary downturn in revenue to push through largely permanent tax increases that will slow job creation in a state with the nation's seventh highest unemployment rate at 11.3% in October.
"In the midst of the worst post-war recession our state has faced, we're increasing state business taxes by 40%, and the corporations that are carrying the largest burden of that increase are corporations that have no taxable income," said Pat McCormick, a spokesman for Oregonians Against Job-Killing Taxes, a coalition of business groups that oppose tax hikes.
Proponents of the tax increases say they don't amount to a 40% hike in corporate income taxes. The measures increase the minimum tax a business pays to $150 from $10 for partnerships, limited liability companies and S-corporations.
"They've been paying $10 since the 1930s," Joseph Cortright, an economist who chairs the governor's council of economic advisers, said in a recent debate. "One hundred and fifty dollars for the typical business in Oregon is not an onerous amount, and it's certainly not an amount that's going to influence their behavior."
The part of the measure that's drawn the most ire from businesses is the calculation for larger C-corporations. The measure increases the tax rate on corporate income above $250,000 by 1.3 percentage points. It also creates formulas that would charge a corporate minimum tax based on gross receipts. The tax ranges from $150 for companies with less than $500,000 in sales to as much as $100,000 for companies with $100 million in sales.
"Because it taxes gross income rather than net income, the tax easily may exceed a company's net income and can be tantamount to a net income tax of more than 100%," Randall Posdena, an economist at the Cascade Policy Institute, a libertarian think tank in Portland, said in a recent analysis.
McCormick said that's the kind of tax that hits newly formed businesses particularly hard and stymies job growth.
Proponents of the tax hikes say the vast majority of companies — 95% — will pay the $150 minimum tax. He says cutting education, health care and public safety spending by $733 million would hurt the economy more than tax increases that hit a small number of high-income Oregonians.
"These measures are part of keeping the state's finances intact," said Scott Moore, a spokesman for Vote Yes for Oregon, a coalition of unions, environmental organizations and liberal interest groups that support the tax increases. He said they will protect the state's bond rating and essential services, adding that the personal income tax hike would hit just the highest 2.5% of personal incomes in the state
McCormick countered that increasing that top marginal personal income tax rate would increase the volatility of the state's income- and capital gains tax-dependent revenue streams, exacerbating booms and busts. He said lawmakers should not have passed permanent tax hikes to offset a temporary drop in revenue caused by the recession.
"I think the business community was prepared to support temporary taxes during the last session," McCormick said. "They certainly objected to the fact that there is a permanent rate change" in the corporate income tax and the creation of a gross receipts tax.
While he admitted that his side is behind in the polls, McCormick said Oregonians have a long history of voting down tax increases. He said only two out of 20 revenue measures put to voters have been approved. The successful measures passed in 1972 and 1930.
McCormick pointed to recent polls by the Lindholm Co. that showed large numbers of undecided voters. The company's Web site said its poll found that Measure 66 — the personal income tax hike — was ahead by 4% with a quarter of voters undecided, while Measure 67 on corporate taxes was leading by 13% with 21% of voters undecided.
Moore, of the yes campaign, said the polls exaggerate the number of undecided voters. He said most voters are willing to impose what he described as modest, mostly temporary tax increases on corporations and high-income earners to protect services.
"These tax packages do not resemble the previous tax packages that voters have rejected," Moore said. "These increases are highly targeted."