Raising tax rates of any kind risks impairing the private sector’s motivation to invest in activities that support job and income growth. However, the taxation of corporate income is particularly injurious to growth.

One reason is that taxation of corporate income is implicitly double taxation. After being taxed at the corporate level, the earnings of corporations ultimately are received by individuals as dividends and/or capital gains, where they are taxed again as personal income. In addition, corporate income taxes make retention of earnings difficult. This is especially hard on start-up and other companies that finance their growth through retained earnings. The tax effectively handicaps the ability of the corporation to bootstrap new growth.

Currently, the Federal tax rate on corporate income is 35 percent, and Oregon taxes that same income at 6.6 percent. The integrated, combined rate is 39.3 percent. But the Oregon legislature just voted for HB 3405 which will, among other provisions, raise the top corporate tax rate to 7.9 percent for 2009 and 2010, for a combined rate of 40.1 percent, with slightly lower rates in subsequent years.

This represents an increase in the rate by almost one percentage point and will put Oregon on par with Japan, which has the highest national rate in the world at 39.5 percent. Even tax-happy Sweden taxes corporations only at a 28 percent total rate.

The effects of such an increase in corporate tax rates have been well established by comparisons of the effects of differential tax rates across countries:

• Oregon’s growth rate will slip by 0.1 to 0.2 percentage points per year for as long as the tax increase is in place.*

• Over a ten-year period, Oregon will lose between 22,000 and 43,000 jobs, and $1.6 and $3.2 billion in personal income.*

Both estimates likely understate the negative impact of the policies. These estimates are derived using studies based on country comparisons. Tax competition among states is likely higher than that among countries, resulting in greater leakage of jobs to the states that tax corporate incomes at lower rates. It would not be unreasonable to see losses at least 50 percent higher than the figures above.

In addition, the projected job losses associated with the net income tax rate increases in this legislation do not take into account the other major provision of the bill, namely the increase in the corporate minimum tax from the current $10 a year to between $150 and $100,000 depending on gross Oregon sales. This provision is clearly damaging to the economy and hard to quantify without detailed tax return data. Ominously, 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 percent. Some business owners may not have sufficient net income to pay the gross sales tax. This provision hits especially hard those businesses that use subcontractors and thus may eliminate even more jobs and inefficiently distort business practices.

* These estimates use as a baseline the May 2008 Office of Economic Analysis Oregon Economic Review and Forecast.

The responses of economic activity to corporate tax rates are derived from: “Tax and economic growth,” OECD Economics Department Working paper No. 620, 11 July 2008; and Lee, Young & Gordon, Roger H., “Tax structure and economic growth,” Journal of Public Economics, Elsevier, vol. 89 (5-6), pages 1027-1043, June 2005.

Randall Pozdena is a consulting economist who received his BA with Honors in Economics from Dartmouth College and his Ph.D. from the University of California, Berkeley. He is also a member of the CFA Institute. Dr. Pozdena is a former professor of economics and finance, former research vice president for the Federal Reserve Bank of San Francisco, and senior economist at the Stanford Research Institute. He has been a practicing consultant in Portland for 18 years and has served on numerous gubernatorial, academic, and non-profit boards, investment committees and commissions, including serving as an Academic Advisor to Cascade Policy Institute. The opinions expressed herein are those of the author and should not be attributed to any other individual or to any other organization with which the author is affiliated.