The term single sales factor doesn’t come up often in everyday conversation -- not unless you’re Gov. John Kitzhaber or the tax folks over at Nike. So, as the governor was testifying on a bill that would allow him to guarantee Nike up to three decades of a single sales tax factor, he tried to be very clear about what it represented.
"This is not a tax break," he said during a committee meeting. "This does not lower the taxes that Nike will pay nor does it prevent the Legislature from raising those taxes in the future."
In fact, the bill legislators debated allows the governor to guarantee a business that its tax structure will not change for a given period of time in exchange for a promise that the business will make a certain level of investment in the state.
So, on paper, the bill does not represent a tax break -- it doesn’t actually change the tax code in any way. That said, much of the discussion regarding the legislation revolved around the state’s single sales factor. That’s because it was clear all along that the governor was going to use the new bill to guarantee Nike decades of that tax apportionment system.
Let’s back up, though, and offer a little context. Companies can generally be taxed, to varying degrees, on three fronts: property, payroll and sales. Before 1991, Oregon weighted all three of those areas equally, but over the past 20 years or so, the state has inched toward taxing certain corporations on just their Oregon sales. That system is called single sales factor apportionment.
This method can be advantageous for certain companies, reducing the amount of money they owe to the state in a given year. In theory, that reduced tax burden then attracts them to Oregon.
Though there were no signs that Oregon’s apportionment system would be changing anytime soon, Nike wanted an assurance before committing to expanding further in Oregon. That’s why the governor asked the Legislature to pass a bill that would allow him to guarantee the structure for companies poised to make a certain level of investment in the state. (You can read more of those details here.)
We called University of Oregon economist Tim Duy to get his take. There were two issues here, he said.
The single sales factor isn’t a break in the strictest sense, but it certainly reduces the amount a company pays in taxes. The 2013-15 Oregon Expenditure Report, the document that tallies up all of the state’s tax giveaways for a biennium, estimates the state will forgo $165 million over the next two years as a result of this tax structure. Now, to be clear, this estimate is a bit squishy, if only because there’s no accounting for behavioral changes that might occur if the single sales factor didn’t exist. Certain companies, like Nike, might invest elsewhere, for instance. There’s no way of knowing for sure.
The specific break that Nike gets from this system isn’t public information, but a few years back the Oregon Center for Public Policy made an estimate. Using some publicly available information, they estimated that under the single sales factor Nike shaved more than 90 percent (about $17 million at the time) off its tax bill.
Obviously, that’s a considerable savings for any company. So what about the governor’s claim that this new law doesn’t represent a tax break?
Well, as Duy pointed out, this is already the method by which the company was being taxed and there was no talk of changing that. "We're not actually giving up a dollar we're going to get somehow else," he said. "It's not a tax incentive or a rebate of the type we're usually thinking about it."
The governor said the bill he was asking the Legislature to pass was not a tax break. That’s true, the bill does not reduce Nike’s tax burden. But it’s been clear all along that the governor would use the legislation to ensure the continuance of a sizable tax giveaway for Nike. That is an important clarification.
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