The "Small Business Shuffle"
Steve Novick
Predictably, as the Legislature votes on a proposal to raise revenue from the wealthiest Oregonian, the Republicans are babbling that it will all be paid by 'small business.' Here's a link to a CBPP paper, and a Tax Policy Center paper and excerpts from them, explaining that Treasury's definition of 'small business' (which I assume the R's are using) includes a whole mess of people whose 'business' income just comes from passive investments. And only a tiny percentage of 'small business' people are in the top bracket. Finally, many high-income 'small business' people get most of their income from other
sources. See below.
http://www.taxpolicycenter.org/UploadedPDF/1000651_taxfacts042604.pdf
Tax policy center:
Second, business income is not the dominant form
of income in any positive tax bracket. It totals one-third
of income in the top bracket, less than one-quarter in
the second bracket, and smaller shares at every other
positive tax rate. (The high share in the zero bracket
occurs because business losses are substantial, but their
absolute value is used to determine the ratio of business
income to AGI.)
Third, although many returns in the top two brackets
have at least some business income, few returns
have most of their income from small businesses. For
only about one-third of households in the top bracket
and one-fifth in the second bracket is more than half
of their income from business income.
http://www.cbpp.org/files/8-29-08tax.pdf
From CBPP:
Estimates by the Urban Institute-
Brookings Institution Tax Policy
Center show that just 1.9 percent of
filers with any small-business income
(roughly 650,000 filers) will be
subject to either of the top two
income tax rates in 2009. In
other words, 98.1 percent of
small-business filers have
income too low to be subject to
either of the top two tax rates
(Figure 1).
Moreover, many of the roughly 650,000 filers with small-business income who
face one of the top two tax rates are merely passive investors who have nothing to do with
running the business. This is because the Tax Policy Center data cited above use the Treasury Department’s relatively broad definition of “small business.” Under the Treasury definition, for example,
the $84 of income President Bush received in 2001 from a passive investment in an oil and gas
company7 made him a “small-business owner.” About 35 percent of “small-business owners” with
incomes above $200,000, and about 58 percent of “small-business owners” with incomes over
$1 million, received some or all of their business income in the form of passive investments. The Treasury definition also counts as “small-business income” the fees that CEOs are paid for
sitting on corporate boards.
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connect with blueoregon
Jun 9, '09
Steve,
It is always interesting to read BO comments and posts. Looking at the list of contributors to BO, most of you are either directly paid by the Gov't, or consult/conract with the Gov't, so I can understand why the concept of "small business" or "big business" just seems like somebody else.
It seems everyone wants to talk about whether a small business would leave the state of OR if taxes were raised. I doubt many actually would just for the sake of the marginal increases talked about. It simply costs too much to uproot a business.
What you BOers aren't talking about are the businesses that will avoid relocating to Oregon. Let's say you are a small biotech firm in Austin Tx or St. Paul MN. You and your partner have 15 employees. 1/3rd of the employees/owners are highly compensated. Why would you uproot your firm and move to a state that will tax you at the 11% personal level? Why deal with new business taxes?
If Oregon want to attract new jobs and businesses (that aren't simply summer jobs from Obama at $10-$20/hour), we need to encourage successful business to move here, not punish them with tax policy.
Steve, you know as well as anyone that The Pearl District was developed due to the tax incentives (tax reductions or elimination) offered. Would the Pearl have built out if the Developers were to see their profits taxed at even higher levels than the year before.
Jun 9, '09
Scott,
Not disagreeing with anything you posted, but what do you think would be a fair and just rate to tax those earning $200,000 or more? How about those earning more than $500,000 and those earning more than $1 million?
Would it matter what %age of their earnings came from business income vs. investment income?
-tl (in sw)
Jun 9, '09
Scott, why would any business locate here even if we don't pass this bill, given that we currently have a 9% rate?
Why is the marginal difference - between 9 and 11% - the deciding factor?
A lot of business owners want highly educated work forces, good schools, good quality of life - the things we simply can't have if we gut our state budget.
So we'll attract ceratin businesses and lose others.
Jun 9, '09
@tl
The problem with 'fair and just' is that it isn't a concept covered by IRS code. Not only that, it is totally subjective and means something different to every person here.
In my opinion, I would like to see some type of flat tax w/ a high standard deduction. I would also like to see earned income taxed at a lower rate than passive income.
Jun 9, '09
Jesse O says: "So we'll attract ceratin businesses and lose others."
Unfortunately, the businesses we seem to be attracting generate most of their revenues from subsidies and tax credits pay by the businesses that are (or will soon be) leaving.
5:49 p.m.
Jun 9, '09
Scott,
I am neither employed by the government,nor do I sell to them. I have started several small businesses, invested in many others, and continue to work in one. I hear the complaint all the time about high Oregon taxes by people who are rarely paying them because their income isn't there, just like Joe the Plumber.
We are not a high tax state for business. You have to look at the total tax payments, not just income tax. I love the surveys that say that the best business state in the country is some place like South Dakota or Mississippi because the taxes are so low. Only problem is you can't recruit any sane executives.
Yes, there may be some financial consultants who can set up in any state and they chose Florida because the taxes are low and they want to live in the sun. Then they find the hurricane wiped out their condo and they can't get any insurance. Each state has its problems and its attractions, but the case for Oregon high taxes is not one of them.
The example given of a biotech startup with 5 owner/employees earning over $250k? While I doubt that many small bio startups pay that much to more than one individual(and I am an investor in several around the country)they will locate where the research resources are and the life style where they want to live. It won't be Oregon because of taxes but because of the lack of a biotech community.
The number of high salary professionals earning that level in small businesses is truly rare. I have no statistics, but I do know what much of the entrepreneurial community in silicon forest earns and this is not a problem until they are able to sell the business and then the issue is not salary but capital gains.
Taxes are rarely the deciding factor in where businesses locate regardless of what the anti-tax folks say. I was involved when Intel set up in Oregon and taxes were not a factor. Do they use that as a threat to negotiate when they want to set up a plant? Yes. Is that the deciding factor of where they decide. Nope.
6:35 p.m.
Jun 9, '09
I think it's safe to say that I'm one of the most prolific bloggers on Blue Oregon.
I'm not paid by the government nor do I sell to the government. I also think it's insulting to say that someone who is can't possibly understand the meaning of "small business". Frankly, there's a common definition for the label (which Novick cites).
I've seen no evidence that Oregon has an unfriendly tax scheme for business, even with the current tax raising, relative to other states. It would be refreshing if those who make these claims do some source citations to enlighten the rest of us to what they're referencing.
Jun 9, '09
The problem with Oregon is that it is physically remote. Other than Seattle it is many hundreds of miles to the next metropolis or market area. Oregon sucks as a location for distribution and even manufacturing due to transportation costs except in products in which it has a quality or competitive advantage. A favorable tax environment is unlikely to overcome these obstacles to economic development.
What Oregon is good at are resource extraction industries, agriculture and other industries that add value to these. However all of these industries have been under assault by various left-leaning organizations for many years. Oh yeah there's tourism but as Carla's offensive against Metolius shows, even this is hardly without controversy and doesn't create particularly properous communities as anyone who has ever ventured to places such as The Bahamas would know (that is if they left the resort grounds).
7:16 p.m.
Jun 9, '09
Old duck,
In your review of Oregon industry your description is where the state was 25 years ago, not now. Much of the growth in the state for several decades has been in semiconductors, software, sports shoes and clothing, and other creative industries. Shipping is not the deciding factor to any of these industries. Not to imply that ag and tourism aren't important. They are, but the state is much less dependent upon them than was the case in the 70's and 80's.
Jun 9, '09
Once upon a time I worked for what I am sure everyone would consider a small business--an independent mall bookstore which had been bought by someone seeking a career change.
The owner, a couple of friends who had been co-workers in another occupation, and a few staff worked in the bookstore doing everything--opening and closing the store, sales of books and other merchandise, unpacking shipments, shelving books, doing special orders, doing the daily bank deposit, etc.
It was over a year after I started work there that the mall management decided they wanted 2 tenants, so they raised the rent in order to force out the large bookstore which had been there since the mall opened, so they could cut the space in half and have 2 tenants. When the man from the mall management company came to measure the space, he said "no bookstore could make enough money to pay that much rent!"---the price was on a square foot basis.
That was a quarter century ago.
At some point, even those 2 tenants left and that section of the mall was remodeled---it is now the mall food court.
I bring this up to show that contrary to rhetoric used today on the House floor, some business decisions are just that--related to business conditions and not just tax decisions.
Jun 9, '09
John Calhoun,
There is more to Oregon than Washington County and a few other small enclaves, rumors to the contrary. :)
Jun 9, '09
I'm married to a "small business"man. I can't even get him to consider leaving Eugene, let alone the state. The only taxes we mind are those that pay for ridiculous oil wars and torture. He and I are both happy to support education, social services, community corrections and health care.
We'd also be delighted to see a more affordable health care system.
Jun 9, '09
It is always interesting to read BO comments and posts. Looking at the list of contributors to BO, most of you are either directly paid by the Gov't, or consult/conract with the Gov't, so I can understand why the concept of "small business" or "big business" just seems like somebody else.
That's the difference between liberal and conservative media. In the conservative media, you take money from anyone that wants access and influence. In the liberal media, you take money from anyone that wants access and influence, but you publicly savage them if they're not PC.
Both would scream, "how can you not see the difference"? The question is, when the peasants rise up, will they see the difference?
Rose, maybe they're just the details. In more general terms, you're getting a bunch of costly stuff you don't even want, instead of basics that you need. THAT is the situation that will not change. Sure, we might get out of Iraq, but next up will be more costly stuff you don't want. In a non-parliamentary democracy where senators are directly elected, you will always have rule by a pre-cognitive mob. That is very unlikely to EVER be what you want and need. Don't blame the terrified little people we elect. Take the power away from the mob.
It took Plato 150 pages to reach that conclusion. You would think we could learn it in the subsequent 2500 years. Maybe we did and it is the most efficient way to get the populace to swallow oligarchy.
Jun 9, '09
The definition of 'small' depends on what industry you are in. The SBA list is here
Jun 9, '09
According to the IRS 62% of small business owners earn $50K or less, 88% earn $100K or less, and less that 3.4% earn $250K or more. How does that 88% vote and think as if they're in that top 3.4 percentile?
9:42 p.m.
Jun 9, '09
Old Ducker,
The new economic diversity extends well beyond the tri-county metro area. From the Dalles (wind turbines, Google data center) to the coast (medical products, software), up and down the valley to Medford (high tech, software), over to Bend, there is a more diverse industrial structure than the old line timber, Ag, and tourism you described. Again, I don't want to imply that those industries are not important nor that every town in the state has an equal share of these newer jobs, but it is a lot broader than just one county.
Jun 9, '09
According to the IRS 62% of small business owners earn $50K or less, 88% earn $100K or less, and less that 3.4% earn $250K or more. How does that 88% vote and think as if they're in that top 3.4 percentile?
This too easy. Unlike some state employee looking forward to the next COLA bump, regardless of merit or outside economic conditions, most of those "small business owners" aspire to be in that top bracket. The more money that is funneled to the government, the further they are removed from their goals.
Finally, when some of them at long last make it to the pinnacle, after eighteen hour days, years with little or no vacations, after hiring employees, partnering with local schools, sponsoring youth sports teams, keeping the local newspaper afloat with advertising, etc., there is Uncle Ted asking him or her to please turn out the pockets for an extra cut in the name of "fairness?"
Shameless.
10:08 p.m.
Jun 9, '09
Scott J, yes i got paid by the govt - 1975-79, when i served in the Air Force. i work in the private sector, low pay, can't afford the benefits (such as they are). you truly are an ass to make such a sweeping, uninformed comment.
i do however take my orders from my pinko leftwing socialist masters free of charge. i hate america enough to do it pro bono.
Jun 9, '09
Okay Boats, so I'll ask you:
What do you think would be a fair and just rate to tax those earning $200,000 or more? How about those earning more than $500,000 and those earning more than $1 million?
Would it matter what %age of their earnings came from business income vs. investment income?
Jun 10, '09
Glad you asked. First off, this state has no business taking more than 10% off of any individual, regardless of their income level from earnings derived from their current TY labors.
I view passive investment income as a different stream that could be taxed a little higher, say 12-13%, but were it raised too much, it causes capital flight and the relocation of investors, wealthy retirees, etc.
I just find it grimly amusing that certain folks seek to punish success via tax "surcharges" while seeming to deny that perceived confiscatory tax policies are tantamount to actual confiscatory tax policies.
Jun 10, '09
To all you "free market" Libertarian trolls:
Oregon has lots of bridges go find one.Jun 10, '09
Shutting down debate while screaming "troll" or "disruptor" betrays the fact that you aren't thinking at all.
Ms. O'Brien is wrong since imagined "straw lefties" and the genuine article are indistinguishable save for the excessively whiny drone given attributed to the straw ones.
And if one really believes Ms. O'Brien, they'd best be down with the fact that they are guilty of the very same thing they accuse others of--creating a caricature and pantomiming victory over it.
Jun 10, '09
Phil, I understand where you're coming from. I was "educated" in government schools. My family were all (and still are) democrats, as was I. While I don't think I was ever as callously mean-spirited as you, I did consider everything conservative as "evil" and free markets a sell-out to the rich.
I reformed myself, gradually. Made myself anew. It isn't easy to come to grips with the reality that everything you know is wrong so I am generally gentle with the affected. It's probably too late for you, but not for others, even those who post here. Believe it or not, liberty IS worth fighting for and in fact it is our only hope. But I won't proseletyze as it's a waste of time. I take the advise of a wise college professor who said, "I cannot teach you anything but merely point the way."
Anyway, bridges are for crossing, not for jumping from. :)
Jun 10, '09
Old Ducker For the past thirty years, since Ronald Reagan’s ascendancy, conservatives have been able to implement their world view on America’s policy apparatus. Look at the results: The biggest economic collapse since the Great Depression, the contraction of the middle class, failing schools, 4200 of our most precious resource killed in Iraq, our military overstressed beyond belief, increased dependence on foreign oil, 45 million Americans without healthcare coverage, and relatively no investments in our infrastructure. Not to mention deregulation schemes resulting in financial disasters perpetrated by Enron, Bernie Madoff, and Sir Alan Stanford leaving many to lose their retirement and pensions. As NFL Coach Bill Parcells says: “You are what your record says you are”. Contrary to what you "righties" would like people believe The reason business don't want to move here to Oregon is because of our underfunded education system. Don't take my word for it ask any one who's job it is to recruit businesses to the area. The reason are education system is underfunded is because of 16 years of Republican rule of the legislature combined with your right-wing buddy Bill Sizemore. I can't believe you guys actually still buy into your conservative claptrap. And if you guys don't like it because I'm mean spirited - TOUGH! Conservationism as screwed this county and this state and we're going to change it.
11:24 p.m.
Jun 10, '09
Rose, you rock. Dead-on comment.
Can we grab a beer before I depart Eugene next weekend? Ashley should be involved, too. I'm going to miss all the Lane Bus Project folks!
Jun 11, '09
...this state has no business taking more than 10% off of any individual...
I view passive investment income as a different stream that could be taxed a little higher, say 12-13%, but were it raised too much, it causes capital flight and the relocation of investors, wealthy retirees, etc.
First off, Boats, thanks for answering my question!
I am too ignorant of the numbers to estimate what the state revenue would be were it to reduce taxes to the levels you propose, but I suspect it would be a significant reduction. So a few more questions:
What public services should be reduced or eliminated to cut costs?
How did you arrive at your 10% and 12-13% figures? Is there a healthy state or country which has those rates (or something close to them) you can cite?
Do you have any evidence or figures to support your "capital flight and relocation" premise (beyond anecdotal)?
Do you consider yourself a Libertarian?
I suspect we differ significantly on what we think are reasonable tax rates as well as what services should be funded by and for the public good. I appreciate your willingness to discuss your views.
-tl (in sw)
Jun 11, '09
Phil, This country has been on a downward spiral, as far as individual liberty is concerned, since the "Civil" War and especially the Progressive Era. Some believe we lost our Republic when the Federal Reserve Act was passed. Most certainly that's when the financial oligarchy took command.
Interesting you bring up Reagan. Reagan gave good speeches and in fact declared that "Libertarianism is the heart and soul of Conservatism." Some libertarians didn't much care for him. Check out Murry Rothbard's critique of the Reagan years:
http://www.lewrockwell.com/rothbard/rothbard60.html
To most "conservatives," Reagan's star burns brighter the further removed by the passage of time he becomes. In fact, his accomplishments were meager. Debt increased during his time and government at all levels grew as well.
<h2>Not much else in your post makes sense either. Test scores have dropped ever since the Dept. of Education was created. I would somewhat agree that our Universities could use some improvement, but it's not necessarily a matter of funding but management. Go to Oregon State and check out the crap heap that is Wiegand Hall (Food Science Lab), sometime...</h2>