New Revenue Bill is a Good Start

Introduced this week, House Bill 3176 would generate about $210 million in new tax revenues this year, mostly by closing loopholes and repealing costly exemptions.    This is good start.  But much more revenue is needed if we are to preserve essential public services like education, the basic health plan, and child care assistance for working families – all of which face severe cuts or outright elimination due to the national recession.  

Proposed Tax Actions

House Bill 3176 includes a number of tax measures proposed by Governor Gregoire and some other revenue enhancements not included in the Governor’s proposal.  Tax measures found in both the Governor’s proposal and in HB 3176 include:

• Adopting the “Economic Nexus” standard for certain service businesses and businesses that receive income from royalties ($73 million in FY2011).  For more information on economic nexus see the schmudget post “What is ‘Economic Nexus’ and Why Do I Care."
• Closing tax loopholes by establishing penalties for abusive tax avoidance transactions.  The measure would also give DOR greater authority to challenge abusive avoidance schemes ($12 million in FY2011). 
• A number of smaller tax actions – including limiting B&O tax preferences for manufacturers of certain agricultural products;eliminating tax preferences for bullion; repealing a sales tax exemption for livestock nutrient equipment; and ending preferential B&O tax treatment for fees paid to directors of corporations ($8.2 million in FY2011). 

Tax measures found only in HB 3176 include:

• Repealing a B&O tax deduction available to banks and mortgage companies on interest from first home mortgages ($62 million in FY2011).  (Governor Gregoire proposed a similar, but more limited measure that would have reduced the scope of companies eligible for this deduction.)
• Eliminating a sales tax exemption available to Oregonians and shoppers from others states and Canadian provinces with sales tax rates lower than three percent ($33 million in FY2011).
• Several smaller revenue actions that would amount to $21 million in current year.  These include: Repealing a public utility tax (PUT) deduction claimed by out-of-state trucking companies that use Washington roads; changing the aircraft excise tax from a flat fee to an ad valorem (value-based) tax set at 0.5 percent, which is the rate applied to private boats and other watercraft; extending the real estate excise tax (REET) to banks that sell foreclosed homes; and holding business owners liable of delinquent B&O taxes.

Policymakers in Olympia are also waiting for a final verdict from the State Supreme Court regarding the “Dot Foods decision.” In a previous ruling, the Court greatly expanded a B&O tax exemption that was originally intended only for businesses that sell products through door-to-door sales persons – i.e. Avon, Mary Kay, and others.  If the decision is ultimately upheld, that state would lose about $157 million this year.  Both the Governor’s proposal and HB 3761 include measures that would repeal the Dot Foods exemption, saving the state $95 million in FY2011.

Update: The Court rejected a motion to review the Dot Foods decision.  As a result the expanded direct sellers exemption is now law and the state will loose up to $157 million if the legislature does not act.