A Double Dose of Double Taxation for Metro's Regional Income Taxes

Oregon’s Metro Council, the tri-county regional land-use planning government for Portland, has referred to voters an ordinance for the primary election in May imposing an income and business profits tax to finance new services for the homeless. The council only had limited deliberations on the ordinance as it rushed to place it on the ballot before a crucial deadline to refer measures to voters, leaving little time to review and comment on the taxing mechanisms.

The ordinance imposes the personal income tax and business profits tax as separate taxes. The personal income tax is a tax of one percent on taxable income above $125,000 for single filers ($200,000 for joint filers). The business profits tax is a tax of one percent imposed on each “person doing business within Metro” with total gross sales exceeding $5 million. “Person” is broadly defined in Section 24 as any individual, corporation, or any other form of organization for doing business.

Significant policy concerns have been raised regarding the interaction of these taxes, especially as it relates to taxpayers reporting their business income on the individual tax returns of owners and shareholders. The income of s-corporations, partnerships, limited liability companies, sole proprietors, and other forms of pass-through entities with sales exceeding $5 million would be subject to both taxes.

Some are also raising concerns about the ordinance overlooking the intent of the state legislature in allowing regional governments to impose an income tax. ORS 268.505 says, “the ordinance shall be consistent with any state law relating to the same subject and with rules and regulations of the Department of Revenue.” The ordinance may be generally consistent with state law by imposing a tax on net income, as compared to a tax on business gross receipts, but the operation of the business profits tax is a significant deviation from the state income tax. In fact, the ordinance specifies the tax would rely on Multnomah County’s Business Income Tax for rules and guidance since there is no comparable tax in state law.

Metro has estimated the taxes would raise approximately $250 million each year with $169 million generated from the personal income tax and $79 million from the business profits tax. The amount for the business profits tax is suspicious because the state corporate income tax (a significantly larger tax base) raises roughly $75 million for each percentage point. The most likely explanation is the double counting of business income for pass-through entities, which make up roughly 93 percent of the statewide composition of businesses. Without an appropriate remedy for the multiple taxation, however, the eventual revenue generated by the tax may be questionable until the issue is settled by the courts.

During the Council’s work session on the referral, the Portland Business Alliance briefly referenced double taxation as an issue the regional government would need to address before implementing these taxes if approved by the voters. Council members acknowledged the issue and suggested staff would take it under advisement as part of its promulgation of rules and regulations.