Election Day 2016: Voters to Decide Key Business Tax Matters

As Election Day 2016 approaches (Nov. 8), much of the country's attention will likely be focused on the selection of the nation's next commander in chief. Voters will also be asked to make many decisions on key state policy issues, such as legalizing marijuana, increasing the minimum wage, and regulating firearms. In some states, voters will be asked to decide issues of first impression that are unique to the particular jurisdiction. Other pending initiatives address state tax issues and, as discussed below, could seriously affect state tax business climates.

Backers of a controversial corporate tax proposal in Oregon recently gathered enough signatures to qualify the initiative petition (IP) for the November ballot. If approved by voters, IP 28 would impose a gross receipts tax on Oregon entities with more than $25 million in Oregon sales (as determined under the state's statutory sales-factor sourcing rules). Currently, Oregon's minimum tax is based on Oregon-sourced sales and is limited to a maximum of $100,000 annually for corporations with total Oregon sales of $100 million and above. Under IP 28, corporations with over $25 million in Oregon sales would pay the minimum tax ($30,001) plus a 2.5% gross receipts tax on all additional sales above $25 million. The gross receipts tax excepts any corporation legally formed and registered as a "benefit company" as defined in Ore. Rev. Stat. Section 60.750 (companies that consider their effect on society and the environment in their decision-making, as well as make a profit). These benefit companies will continue to pay minimum tax under the current regime. If approved by voters, the new minimum gross receipts tax would apply for tax years beginning on or after Jan. 1, 2017.

According to Oregon's Legislative Revenue Office, IP 28 would generate $548 million of new revenue in the 2015-2017 biennium (ending June 30, 2017) and $6.1 billion in the 2017-2019 biennium. Proponents of the tax increase say the measure is needed to help Oregon provide necessary social and other services.¹ The revenue raised would be used for public early-childhood and kindergarten-through-12th-grade education, health care, and senior services. Opponents of the measure argue that it is akin to a hidden sales tax and will impair Oregon's private sector.²

Louisiana is one of only a handful of states that allow businesses and individuals to deduct federal taxes paid in computing state taxable income. Earlier this year, Gov. John Bel Edwards called a special session to address the Bayou State's fiscal difficulties. During that special session (the first of two in Louisiana this year), proposals were introduced to have voters consider a constitutional amendment repealing this deduction for both corporate and personal taxes. Act 31 from the first special session of 2016 establishes a constitutional amendment to be submitted to voters that, if approved, would eliminate the deduction for federal income taxes paid when computing Louisiana corporate income tax. Individual taxpayers are not affected and will continue to be allowed the deduction.

If Louisiana voters pass the constitutional amendment at the statewide election on Nov. 8, the change will be effective on Jan. 1, 2017. Thus, for tax years beginning on or after that date, corporate taxpayers will no longer be allowed to deduct federal income taxes paid in computing state taxable income. A subsequent bill, Act 30, makes the requisite changes to Louisiana's tax statutes should the constitutional amendment be approved. Furthermore, Act 8 approved in the first special session adopts a flat 6.5% corporate income tax rate that is effective only if the federal tax deduction for corporations is repealed. Current corporate tax rates are graduated up to 8%.

If approved by Oklahoma voters, State Question 779 would increase the state sales and use tax rate by 1 percentage point, effective July 1, 2017. All of the revenues from the increase would be earmarked for investments in early-childhood and higher education and to provide pay raises for Oklahoma teachers. The measure is projected to generate an additional $615 million annually.

The measure faces a challenge from the lobbying arm of the policy group Oklahoma Council of Public Affairs.³ On June 23, 2016, the group filed a lawsuit arguing that the ballot title and the explanatory statement on the signature petitions were misleading and omitted pertinent information, including that the new tax would be in addition to existing sales and use taxes. The legal challenge also claimed that the measure inadequately explains that the sales tax would increase by 1 percentage point instead of one penny. In other words, the group is arguing that the language did not make clear the new 1% tax would apply to all purchases, as opposed to each purchase simply increasing by a penny.

The Washington (state) Carbon Emission Tax Initiative 732 has garnered enough signatures to be placed on the Nov. 8 ballot. If enough people vote "yes," Initiative 732 would create a new carbon pollution tax administered by the Department of Revenue. The tax would be levied on (1) the carbon content of fossil fuels sold or used in Washington state, and (2) the carbon content inherent in electricity consumed within Washington, including electricity generated within Washington. Carbon content is generally determined by measuring the carbon dioxide emitted from fossil fuels. The tax rate would be equal to $15 per metric ton of carbon dioxide as of July 1, 2017. The tax would increase to $25 per metric ton of carbon dioxide as of July 1, 2018. After that, the tax would be increased annually by 3.5% with adjustments for inflation. The rate would ultimately be capped at $100 per metric ton in 2016 dollars.

A key element of the proposal is that it is revenue neutral. Revenues raised from the tax would be offset by reducing the state's sales tax from 6.5% to 5.5% over a two-year period, tax rebates for low-income families, and a reduction in the business and occupancy tax rate applicable to manufacturers. Initiative 732 is modeled after a 2008 carbon tax implemented in British Columbia, Canada, that likewise increased costs of gas and electricity but offset those tax increases with personal income tax cuts and other reductions. Proponents argue that Initiative 732, if approved, could become a model for other states interested in considering similar measures.4

While not an initiative directly affecting business taxpayers, The Tax Extension to Fund Education and Healthcare Initiative would arguably affect California's tax climate in general. If approved, the measure would extend the temporary personal income tax increases on incomes over $250,000. Proposition 30, which was approved by voters in 2012, created four additional income tax brackets for taxpayers with taxable incomes exceeding $250,000, $300,000, $500,000, and $1,000,000. The increased tax rates were set to be in effect for seven years—ending in tax years beginning on or after Jan. 1, 2019. Under Proposition 30, the highest individual income tax rate for taxpayers with taxable income over $1 million is 13.3%, which is the highest of any state in the nation. The initiative would extend the higher rates through 2030—an additional 12 years.

The revenue from extending the personal income tax increases would be earmarked to fund education with any excess going to fund health care programs. Of the funds allocated to education, about 89% would go to elementary and secondary schools, and 11% would be distributed to state community colleges. What is potentially significant for business taxpayers is that an extension of the personal income tax increases may alleviate the need for other revenue-raising measures that have been considered in the past, such as expanding California's sales tax base to a broad array of services or adopting a severance tax.

Almost as soon as the legislation adopting the Nevada commerce tax was signed into law in 2015, anti-tax lawmakers and various business groups began calling for its repeal. A political action committee, RIP Commerce Tax, quickly formed to promote repeal of the tax by ballot initiative. Shortly thereafter, supporters of the tax from the Coalition for Nevada's Future filed a lawsuit asserting that the repeal petition filed with the secretary of state was invalid for several reasons. One of the coalition's arguments was that repealing the commerce tax would throw the state's budget out of balance and that the petition's description of its effect did not clearly specify the budgetary consequences of repealing the tax.

After a trial court judge ruled in favor of RIP Commerce Tax, the Coalition for Nevada's Future appealed the decision to the Nevada Supreme Court. On May 11, 2016, the Nevada Supreme Court ruled that the petition itself was valid. However, in the court's view, the referendum's description was deceptive for failing to accurately identify the practical ramifications of the commerce tax's repeal. As such, any signatures obtained on petitions with this misleading description were declared invalid. The court recognized that the description of effect cannot exceed 200 words but observed that it is imperative that signers understand the effects and ramifications of their signature and later vote. Following the court's decision, opponents of the commerce tax were unable to gather the required signatures under the revised petitions in time to qualify for the 2016 ballot.⁵ As such, the commerce tax lives on, at least for now.

Footnotes

¹Brandt, "Somebody Has to Pay," Bend Source Weekly (June 8, 2016).

²Pierce, "IP 28, A Hidden Sales Tax, Would Damage Oregon Economy," The Register-Guard (June 18, 2016).

³Hoberock, "Legal Challenge Filed on Boren Proposal to Increase Sales Tax for Education," Tulsa World (June 24, 2016).

⁴Ross-Brown, "Will Washington Pass Nation's First State-Level Carbon Tax?" The American Prospect (Jan. 28, 2016).

⁵Messerly, "Group Drops Effort to Repeal Commerce Tax on Ballot," Las Vegas Sun (May 26, 2016).