Report of the

IVE Interim TAX STUDY COMMI 1955"'1957

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REPORT of the

LEGISLATIVE INTERIM TAX STUDY COMMITTEE

Authorized by

Heuse Joint Resolution No. 14, Oregon Laws 1955

Submitted to the Governor of Oregon

and the

Forty-ninth Legislative Assembly

JANUARY 2, 1957

MEMBERS OF THE COMMITTEE

Senators

RUDIE WILHELM, .JR .. , Portland Chair.lnan

JOHN PI> HOUNSELL, Hood River

PHILIP B .. LOWRY, :Medford

LEE V .. OHMART, Salem.

Wo LOWELL STEEN, .Milton .

Representatives

EDWIN SF;. CONEt Eug~

WARD }{I'.. COO.K, Portland

"J? AT DOOLEY, P~:rt1and

WAYNE Rr .. GIESY, )41>nroe

RODERIC,K T' .. ,McKENZIE, Sixes

CHARLES k.. TOM, Rufus

Thure A. Lindstrom,Jr 0

Executive Director

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CONTENTS Page

LETTER OF TRANSMITTAL ..... .. .. .. .. .. .. .. .. o 0 0 0 5

HOUSE JOINT RESOLUTION ,NO.. 14 00_080008000 6

PREFACE ..................... .. a • 0 0 • 0 • 0 0 • • 0 000 9

A TAX SYSTElVI FOR OREGON .. .. .. " .. .. " " .. " .. .. .. .... 11 lIJR 14{1) .............. " ...... " .. " ~ .. .. .. • .. .. .. .. .. .... 11 Reconunendations.. .. 0 .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 0 ... II

Recommendat;ions fur which bUls haye' been drawn.... Ii ~commenchi.tions for which bUls have not been drawn 14 Items recommended for further study by the legis ..

lature.. .. .. .. .. .. o. .. .. .. 0 .. e .. II! .. ., .. 0 e. .. .. " "" '15 Conunittee prQcedure o .... " " .. 0 " ........ 0 .... " II " 0.. 16 Analysis of tax s~ctures -of Pacific Coast States I> 0 ".. 18 Re commendati{)l1s..... .bUlsdraItedo " .. .. " " .. .. .. " .. "" 20

The Committee's tax program.o ........ " .... " .. " 0.. 20 In general " 0 0 .. .. .. 4\ " "." II " .. .. " .. .. II .. .. ".. 20 Re'Peal of the surtax .. .. .. 0 0 " .. II .. " .. .. .. " .. II" 20 Explanation .. o£ the saks tax bill" .. " " .. " .. " .. "" 21 Argmnents .£or the sales tax" .. " " " " .. .. " " " .... 25 lIigher persorudexexnpti(m" .. " II " II " .. " " II II II II 27 The COmlnitt.ee's tb:netal>le ...... .,0 " ... to " II .. " 28 Th¢ Cmm:nittee's I957 .. 59budgetesti,mates. ,. " .... 28

State prQperty tax~ • .. .. 0 .. .. .. .. .. .. .. " .. .. .. .. 0 • 0 29 Harmonize income tax laws with the Inte~l . R~enue

Code ., 0 • • .. fI: .. • ~ • 0 d! Q 8! 0 ~ .. 0, 0 CI! Q fI: Q •• 30 Capital gains. • .. .. .. .. .. " • 0 .. " II " II II .. " " " " "" 31 Utilities. to-eight percent rate 0 0 0 .. 0 0 .. .. .. " " 0.. 32 Pl'opeJ::ty tax -offset for oorporation: !nco-me tax" 0 ." 32 Final assessments in: one yeltr 0 .... 0 " • " " " " "" 33 Fraternity and sorol'ityomitted prQperty 0 ,. " '" " "" 33

RecQmmendations - .. nO' bJlls drawn. 0 • " !! 0 ... " .. 0" 33 Corporation excise and incom.e taxes II II .. " " 0 " "" 33 PeTsonaI income tax ••.•. 0 .8 .0 .• " .0 • .. • 0 II' ,. " III II 0 34 Property" taxes. " • " 0 • 0 8 " 0 • 0 0 .. " ... 0 • 0 ".. 34

Compine duties of- assesS,Or and :tax collector .. "" 34 Budg.et s.upervision.. 0 • .. • .. 0 • • 0 0 .. II " " " ." 34 lIomestead exemption for aged taxpayers II " " " "" 35

Subjects for .further study " • • " III II • • " " 0 .. " 0 " • 0 35 Corporation excise tax .. • • .. • I" • I" II' ,. • " " 8 " ". 35 C-o:rpO'l'aUon filing fees • .. .. 0 • • • " " 0 0 " 0 0 0 •• 36 P·ersonal income tax" .. 0 II • III 0 • • " It II • " .. " 0 p.. 36 Property taxes It • • • II II III II • 0 0 • • • 0 • " " .. • "" 36

Processor's law' " " •• 0' •• 0 " 0 .. " 0 0 0 0 0 "P .36 Tax Commission (Valuati(m DivisiQn) proposals 0 0 37

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CONTENTS .... Continued Page

TAXATION AND INDUSTRIAL DEVELOPMENT .... It .. .. .... 38 HJR 14(2) .. It ........ 1/ ...... 1/ .. 1/ 1/ " II II 1/ II " .. " 1/ 1/ 1/" 38 Connnittee procedUrel/ " .. 1/ " .. II II " 1/ " 1/ .... 1/ .. 1/ II II.. 38 Conclusions .... " .. .. .. .. " .. .. " .. .. .. .. .. .. .. II .. .. .. .. .... 38 Tax burden :on finns operating in Oregon, Washington

and/o'r . California .. .. .. .. .. .. .. .. " " .. " .. .. .. 0 " .. "" 3 9 Survey of the' atW;ude of. potential manufacturing -entrants 41 Chamber of Commerce questionnaire .. 1/ .. " " '1/ .. III 1/ 1/" 42 Border area interviews" .. .. .. .. .. .. .. .. .. .. .. .. " .. .. " .. 0 43 Experience of railroads in locating industry-so £~r a.s

taxes are conce'r:ned.. 0 .. .. " " " .. .. " '" 0 .. .. II .. .. "" 44 Oregon ,D.evelopment CQnunissio-n questionnaire .. .. " .... 44

ELECTRIC UTIUTIES ......"".. .. " • .. .. !II II .. .. " " II .." 4"9 H.JR 14(3) .... " .. " " " II .. 1/ 1/ .. " " .. II .. 1/ .... " " .. 1/ 1/" 49 RecommendatiQn-a.. .. .. .. " .. 0 .. .. .. .. .. 0 .. .. • " 1/ .. 1/ "!II 49 The SubcQmmittee on Electric Utility Taxation 1/ .. .. "" 4~ Theelectnc utility business in Or-egon 1/ II " .. " II .. " 1/ 1/ ,50 .Finan:cing electric u,tilit:l:es 1/ .. III " " " " 1/ " 1/ " 1/ " " .. II 0 51 Rate regulation" III .. " 1/ .. III II .. 1/ II .. 0 " (II It III " '" .. .. "iii 51 Taxation). 0 .. 0 .. 0 • " " III .. .. .. " 0 .. .. .. 0 .. .. OIl " " II 1/.. 51 Changes recommended to the' Subcommittee" .. " II .. " "" 53 Arg'Ulnents, pro and cOn. " " " " .. 1/ I' " "" " " " " II .... 56 Conclusions .. .. " 0 .. ~ 41 0 .. .. • .. .. .. 0 .. 0 .. II .. .. .. .. .. to 61 Statement by Repr.esentative Gle-sy concerning the taxa- l. .,

tion {}f electric utiliti-e's ............... " ...... 0 .. "II '(,).;J-

FOREST.S AN)) THE FOREST INDUSTRY .. 0 Q .. " Q .. ~ .. ~ 65 HJR 14(4) .. 0 ... " ~ 0 " .. lit " • " 0 II 0 .. " " .. " " It .. "" 65 Recommendations ...... " 0 ., " 0 0 QQ .... ' ......... o. 6.5

The Sqbcommitteeon ,Forests and the FoxestIndustry65 The pre!se:n.t F.orest Fee and Yield Tax Law. " " " ." 67

Advantages 0" ,0 ,0 .. 0 ," .. 0 •. 0 ,". Q ~ ~ .. " "0 0 .. • .67 Disadya.ntage's~ 0 ~ • .. .. .. 0 IiO ,,;, .. , ..... " 0 ,.... ,....68

Finding s of the Subc.o.mmitt~e 0 0 " 0 .. 0 lit 0 " ~ • " .. ~ 69 Graduated yield .tax" It ... it 0 II> 0 0 .. II " ~ 0 0 I> I> Q 6'9 Declassification •• 0 ...... " 0 .. " " 0 " P P .. " " II.. 70

Forest Yield Tax Law .of 1957,. '" II • 0 .... II 0 0 " ... 0 71 Purpose.. .. • .. .. 00 • 0 0 Q 0 0 0 " " .. .. " " 0 0 ,,0 71 Lands -eligible £00:' classification" .. " !II " " 0 " " "" 72 Cla.ssification procedure .. ,0 " ,P '" " !II " .. 0 " " 0 I).. 72 De'classification -(,If lands o " .. 0 • 0 " " .. .. .. " " ." 72 Harvest permit .. " .. .. 0 .. .. .. • 0 .. .. .. .. .. .. II .. o. 74

neld tax • 0 • " " .. " " 0 .. " .. " !l 0 " " " " 0 0 .." 74 Reclassification" ~ .. " .... 0 0 0 .. 0 0 ... 0 0 0 .... 0 75

. Dispositi-on .of forest fees, yi~ld tax and :declassi-fication iee's 0 I> " " • " 0 " " " II " " " fI " .. " ".. 15

.Main CQnunittee action.. .. • .. " 0 • 0 • • • .. •• .. • .. ... 15

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MEMBERS OF THE SENATE MEMBERS OF THE HOUSE

REPRESENTATIVE EDWIN E. CONE EUGENE

SENATOR RUDIE WILHELM, JR., CHAIRMAN PORTLAND

SENATOR JOHN P. HOUNSELL HOOD RiVeR

REPRESENTATIVE WARD H. COOK PORTI-AND

SENATOR PHILIP B. LOWRY MEDFORD

SENATOR LEE V. OHMART SALEM

SENATOR W. LOWELL STEEN MIL.TON STATE OF OREGON

LEGISLATIVE INTERIM TAX STUDY COMMITTEE SALEM

January Z, 1957

To His Excellency, the Governor of Oregon, and the Forty-ninth Legislative Assembly:

REPRESENTATIVE PAT DOOLEY PORTLAND

REPRESENTATIVE WAYNE R. GIESY MONROE

REPRESENTATIVE RODERICK T. MCKENZIE SIxEls

REPRESENTATIVE CHARLES A. TOM RUFUS

PL.EASE ADDRESS COMMUNICATIONS TO:

THURE A. LINDSTROM, JR., EXECUTIVE DIRECTOR 415 STATE CAPITOL.

The Legislative Interim Tax Study Committee, ap-

pointed and acting in pursuance of the provisions of House

Joint Resolution No. 14, Forty-eighth Legislative Assembly

of Oregon, respectfully submits this summary report of its

conclusions and recommendations for your consideration.

~.~~ RUDI WILHELM, JR., C lrman Legislative Interim Tax Stu y Committee

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FORTY-EIGHTH LEGI.I3LATIVE ASSEMBLY-REGULAR SESSION

'EN GRO,S SED

House Joint Resolution No. 14 (Ordered by the Senate April 27, 1955)

Introduced by COMMITTEE ON TAXATION and read March 4, 1955

1 Be It Resolved by the House of Rep7'esentatives of the State of Ore-

2 gon, the Senate jointly concurring:

3 That there hereby is created a special Interim Tax Study Com-

4 mittee consisting of 11 members. Five members shall be appointed

5 by the President of the S~nate from the members of the Senate and

6 six members shall be appointed by the Speaker of the House of

7 Representatives from the members of the House of Representatives;

8 be it further

9 Resolved, That the committee shall proceed immediately:

10 (1) To make a study and analysis of the tax structure of the

11 state and of all existing and proposed sources of tax revenue, giving

12 full consideration to the pres~nt and future needs of and demands

13 upon the state, county and municipal governments and the de-

14 sir ability and feasibility of separating their sources of revenue;

15 (2) To determine which, jf any, of the state and local taxes now

16 in, force in the state has. an adverse effect upon the location and

17 development of industry and wealth within the state;

18 (3) To make a. detailed study and analysis of the present system,

19 and to determine whether there is a preferable system, of state and

local taxation of all electric utilities, peoples' utility districts, REA-

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1 financed power systems, other electric cooperative power systems

2 and municipally owned electric utilities;

3 (4) To make a detailed study of state and local taxation of

4 forests and the forest industry within this state with a view to

5 determining a system of taxation which will best promote and

6 encourage (a) retention of forest lands in private ownership, (b)

7 harvesting practices which will result in stable forest economy,

8 (c) equalization of the tax burden between segments of the in­

n dustrial economy of the state, (d) protection, utilization and re­

LO forestation practices above minimum standards and (e) properly

11 managed forest farms; and be it further

12 Resolved, That the committee shall report its findings and

13 recommendations to the Forty-ninth Legislative Assembly and shall

14 implement its recommendations by drafting and submitting for

L5 introduction during the first week of the regular session of said

L6 assembly such bills and resolutions as it deems appropriate for the

17 consideration of the assembly; and be it further

L8 Resolved, That the committee may employ such personnel and

19 perform all other acts as in its judgment may be necessary for

20 the accomplishment of the purposes for which the committee is

21 created; and be it further

22 Resolved, That the members of the committee shall not receive

23 any compensation for their services but sha.11 be allowed all actual

24 travel and other expenses necessarily incurred by the committee

25 and its members in carrying out the purposes of this resolution;

26 and the expenses of the committee, upon approval of the chairman,

27 shall be paid out of moneys appropriated for the expenses of the

28 Forty-eighth Legislative Assembly, providing that such expenses

29 shall riot exceed the sum of $25,000.

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PREFACE

'In reviewing the directives of House Joint Resolution No.. 14, this Conunittee was well aware that the scope was broad and the areas COInplexo To expedite the handling of the two directives reiating to the taxation of electrical utilities and the forestry industry, which are somewhat specialized in nature, two s.uhcommJttees were appaintedo The whQle COtn­Inittee devoted its attention to the dir:ectives p'ertaining to the state's general tax struct.ure and its effect on the development of industry ,and wealth ..

B~cause ,of the vas,t amount of ground to he covered in a limited time with a sInal! staff, the Committee attempted to cons,ide'r the most important prableIns first.. It feels that its reco.mmendations cover the most important subjects that could be studied but does not wish to imply that uncovered areas are not also important ..

The COInmittee did not consider that passing judgment on the level of state expenditure was part of its assignmento It therefore accepted estimates of require.ments as submitted, modifying them Qnly on the .basisof probable executive and iegis­lative actiono

The Committee did, however, express concern over the ey~r-increasing percentage of income devoted to government .. The fact that the amount required for government is increasing faster than incomes makes taxes doubly important at this time o

As a result of its studies the Committee is' recommend­ing many changes in Oregon's tax laws.. It realizes that one of these, the ,sales tax, is a highly controversial issue in Oregon .. This recommendation was made only after all alternatives were considered and the Comm,ittee 'became convinced that it provided the only practical way to give' relief to' personal income' taxes and to- property taxe s ..

The Committee's pr,imary concern was to devise a tax structure that was fair and equitable and was conducive to pro­moting the economic growth of Oregon, thereby r.es.ulting in higher per capita incomes for its citizens ..

Since the sales tax issue is so controversial, the Co.m­nrltte.e is concerned that it wUl overshadow the remainder of the

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report 0 It would like to point out, th-erefor., that the majority of the r~commendations have no c.o:nnection with the sal-es tax issue and that each reconunendation of the Com:p1ittee shoUld be considered on its :In&vidual merits 0

Th~ Committeewould like to express itsappreciaticm for the valuable assistance given t() it by agencies, ~rga.nizations, and persons that appeared pe£ore the ComUlittee or submitted written statements o It is especially indebted to" the State Tax Commission fo.r the assistance given by.the Research Section, the Law Section, the Audit Section and the Valuation .Division, and to the L~is1ative Counsel's olficeand the Department of Forestry.

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A TAX SYSTEM FOR OREGON

HJR 14(1)0

"To make a study and analysis of the tax structure of the state and of all existing and proposed sources of tax revenue, giving full consideration to the present and future needs of and demands upon the state, county and municipal governments and the desirability and feasibility of separating their sources of revenue 0 "

Recommendations (for whicp. bills have been drawn)o

Surtax Repeal

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(1) Before consideration of the "sales tax package", repeal the 45 percent surtax and restore the per .. sonal exemption and dependency credits to $600 on incomes o (Surtax and lowered exemptions would then have been in effect two tax years, 1955 and 1956 0 )

"Sales Tax Package"

(2) Amend personal income tax law establishing per ... sonal exemptions at $1, 000, dependency credits at $ 500, and allowing double exemptions for tax~ payers over 65 or blind, effective on 1958 incomes o

Repeal surtax on 1956 incomes and make refunds for overpayment10 Tie these changes to pass~ge of the sales tax 0

(3) Refer to the people a three percent sales tax with food exempt and' with an annual appropriation of $20 million, effective July 1, 1958, for schools 0 1

(4) Call a special election at state expense for a vote on the sales tax while the legislature is in sessiono I

(5) Propose to the voters a constitutional amendment to section 3, Article IX to clarify earmarking of highway moneyo Make moneys derived from general

Representatives Cookp Dooley, McKenzie and Tom dissent from this recomt;nendati6no

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taxes which incidentally touch on motor vehicles and motor vehicle supplies and equipment clearly a vailable for general state and local government exp'enditureo This recommendation does not effect taxes presently levied for highway purposes .. 1

State Property Tax

(6) Amend the six mill statutory limitation on collec­tionof state property tax to allow the collection of a state property tax for bonds and interest thereon only .. 2

Codification

(7) Codify personal income tax law, corporation excise tax law, and corporation income tax law to provide uniform adIninistrative provisions ..

Personal Income Tax Law

(8) Adopt capital gains provisions of the type found in the California personal income tax law .. 1

(9) Permit accelerated depreciatiQn retroactive to the date of its inclusion in the Internal Revenue Code. I

(10) Allow carry forward of business losses. 2

(11) Allow double exemption for taxpayers 65 years of age andoldero

(12) Make soU and water conservation c.osts an ordinary business expense instead of an expense which has to be capitalized.

(13) Require Tax Commission to make final assessment within one year 01 notice of proposed assessment.

(14) Assume portion of carrying charges on insta1hnent contracts to be interest expense ..

(15) Allow deduction for theft losses in the year of dis­covery instead of the year of 10sso

lRepresentatives Dooley and McKenzie dissent from this recom­mendation ..

ZRepresentative Dooley dissents fr.om this recommendation ..

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(16) Allow deduction for outside salesmen's expenses.

(17) Grant dependency credit for dependent in school where presently barred because of the size of the dependent's income. This recommendation waives the $500 gross ,income rule in the described situation: but not the requirement of chief support.

(IS) Allow medical expenses for a dependent where pres­ently disallowed because of the size of the dependent's inco.me. This recommendation allows the deduction of medical expenses but not a dependency credit where the taxpayer is precluded from claiming the former by virtue of the $500 gross income rule ..

Corporation Excise Tax Law

( 19) Adopt capital gains pro.vis ions of the tYPr found in the California personal income tax law.

(20) Permit accelerated depreciation retroactive to the date of its inclusion in the. Internal Revenue Code. 1

(21) Allow carry forward of losseso 2

(22) Make soil and water conservation costs an ordinary business. expense instead of an expense which must be capitalized ..

(23) Require Tax Commission to make final assessment within one year of notice of proposed assessment ..

(24) Allow deduction for theft losses in the year of dis-covery instead of the year of loss. .

(25) Allow organization expenses to be prorated over a five-year period instead of deducting them entirely ;in the year of organization. 3

(26) Place utility corporations under the ex.cise tax laW at the full rate instead of the present half rate.

1 Representatives Dooley and McKenzie dissent from this recom­.mendation0

2 Representative Dooley dissents from this recommendation.

3RepresentaUv.e Dooley dissents from this recommendation insofar as it relates to foreign corporations o

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Corporation Income Tax

(27) Adopt capital gains provisions of the type found in . the Cali£ornia personal income tax lawo 1

(28) Allow carry forward of losseso 2

(29) Allow organization expenses to be prorated over a five-yecrr period instead of deducting them entirely in the year of organizationo 2

(30) Allow the property tax offset retroactive to the ef­fective date of the acto 3

Other

(31) Enact the For'est Yield Tax Law of 19570 (See part of this report on forests and f()rest industrYo)4

(32) Make the two percent in lieu of 'W.x on electric co­operative ear~ings ~p~ional. (See part of this re­port on e1ectrlc utihtles o )2

(33) Amend the property tax laws to prohibit retroactive collection of personal property taxes from frater­nities, sororities and similar organizations 0 3

Recommendations (for which bills have not been drawn) 0

Corporation Excise and Income Tax

(1) Make corporation excise and income tax rate struc .. tures similar to the method used by the State of California :5

(a) Disallow the personal property tax' offseto

1 Representatives Dooley and McKen?iie dissent from this recom .. mendationo

2Representative Dooley dissents from this recommendation.

3Senator Lowry dissents from this recommendation o

4Representative McKenzie dissents from this recommendation.

5 Representatives Cook and McKenzie dissent from this r.ecom-mendationo

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(b) Have the published rate and the effective rate correspond ..

(c) Enact a bank tax measured by the personal property taxes paid by other corporations ..

Personal Income Tax

(2) Have withholding tax approximate the tax due as nearly as possible" The Committee felt, however, that the decision on how the amount of tax is with .. held could not be made until the level of the per­sonal income tax program is established .. I

Property Taxes

(3) Com.bine the duties of the assessor' and the tax col­lector in the office of the assessor ..

(4) Coordinate and supervise the budgeting and levying activities of the many taxing districts in each county ..

(5) Adopt a limited homestead exemption for low income elderly home owners .. 2

Items recommended for further study by the legislature"

Corporation Excise and Income Tax

(1) The possibility of bringing utility corporations more closely into line with other corporations under the corporation excise tax law.

Corporation Filing Fees

(2) Adoption of a graduated filing fee in place of Oregon's present system of flat corporatic:m fees for foreign corporations .. 3

ISenator Steen and Representatives Cone and Giesy dissent from this recommendationo

2Senators Ohrnart and Wilhelm dissent from this recommendation .. Senator Wilhelm believes it should have further study along with the feasibility of a general homestead exemption ..

3Representative Cook dissents from this recommendation ..

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Personal Income Tax

(3) The taxation of retirement income with a view to equalizing the treatment of retirement pay received from federal, state, cmmty and private retirement plans 0

Property Taxes

(4) The processor's exemption o 1

(5) The taxation of trailer houses and fixed load vehicles.

(6) The proposal of the Valuation Division of the Tax Commission to allow an IBM utility roll and to al­low the cancellation of non-collectible taxes on cer­tain car companies o

(7) The bill of the Valuation Division of the Tax Com­mission relating to county boards of equalization.

(8) A general severance tax in lieu of property taxes on metallic and non-metallic minerals 0 2

19) The bill of the Valuation Division of the Tax Com­. mission placing under the Forest Fee and Yield

Tax Law forest lands transferred from a tax exempt ownership to a taxable ownership.

(10) The existing procedures and necessity for determin­ing the value of the exempt property in the state.

(11) The bill of the Valuation Division of the Tax Com­mission revising the method of appraising timber under the ad valorem tax laws to allow the deple­tion period of each timber owner to be taken into consideration in the determination of true cash value.

Committee procedure o

In meeting the provisions of section (1) of House Joint Resolution No. 14, the Committee, early in its deliberations, started to study the tax structure of the state. Since the princi­pal interest of Oregonians in comparative analyses is directed

1Senator Steen dissents from this recommendation.

2Representative Cone dissents from this recommendation.

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toward the tax systems of, t;he states of Washington and California, the Committee extended ii"B study to include the aforementioned -states o The tax systems of Washington and California also pro­vide excellent sources on proposed sources of tax revenue.

The re suits of this study have been published by the Committee under the title, The Tax Structures of Washington, Oregon and Californiao While this pUblication was released iii December, 1956, it was available to the members of the Committee in draft form ei:J.rly. in the year o A summary .of this report appears in the part of this section devoted to explana­tion of the recommendations 0

To understand the n~eds of and demands on the state, and county and municipal governments, the Committee obtained estimates for the state government from the major state agencies as to their probable expenditures over the next four bienniums o

While time prevented a thorough examination of the figures submitted, the amounts formed part of the background for pre­paring the tax program which the Committee is submitting to the legislature. Also heard were repl'c.sentatives of cities, countie sand school districts 0

Because the assignments given the Committee did not deal with the propriety of expenditure plans, the Committee accepted the submitted figures, but, in some instances, reduced them on a basis of past legislative reaction to executive budgets. The Committee, however, viewed with a degree of dismay in­cidental expenditure comparisons turned up in the studyo While the citizens of our state may accept the quantity of services provided, Oregon's rank 8,..$ one of the leaders in the amount of personal income taken for tax purposes is a dubious distinc­tiono Further, while complete figures are unavailable, it ap­pears that state and local expenditures have outpaced our growth in income o While these indicators are not necessarily bad in themselves, they do call attention to the need for an analysis by every citizen of governmental expenditures in relation to their personal wants and aspirations o

The part of section (4) of the resolution which dealt with "equalization of the tax burden between segments of the indus­trial economy of the state" was also considered in the study phase of the Committee's worko A joint study with Oregon State College covering taxes on owners of agricultural land in rela­tion to their income and the incomes of other taxpayers was consideredo This study was abandoned when it became apparent it could not be completed in time to be of value to the Committee 0

The Committee held sixteen meetings, many of which were of two days duration o Following its basic studies, the

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Committee started considering the ways in which the revenue structure of the state could be improved. The resulting pro­gram, a summary of which appears above, is described in more detail in a later part of this section ..

In addition to its program, the Committee heard many additional recommendations but was unable for reasons of time to accept them and draft legislation, or reject them.. The Com­mittee has placed most of these suggestions in one or the other of two categories: (1) recommended but no bill drafted, and (2) items recommended for further study and analysis ..

Analysis of Tax Structures of Pacific Coast States .. I

State and local taxes on a typical family of four are about the same in total in Oregon and California up to $9,000 but for .higher income families, Oregon taxes are higher .. Washington taxes are higher than the other two states below $5,000 and lower above $5,000 ..

The State of Washington is ahnost entirely dependent on sales and gross receipts taxes while Oregon is heavily de­pendent but to a lesser degree on net income taxes o California relies less than Washington and Oregon. on sales and net income taxes, respectively.. Washington does not impose any taxes on net income while Oregon does not levy a general sales tax .. California imposes both general sales and net income taxes ..

State and local tax payments take about the same per­cent of personal incomes in the three Pacific Coast states but all three are above the national average.. The range between the top and bottom state is less than one percentage point .. Whennontax revenue is included, the figures for the three states still remain comparable ..

Oregon is collecting the largest percent of personal in­comes for state and local taxes but is the middle state (after California) on per capita t~x payments.. Because the Internal Revenue Code permits deduction of most taxes paid state and local governments, tax differences between states are less than a comparison of rates, etc., indicates (i .. eo, the bigger the deduction, the smaller the federal tax)"

lIn preparing its publication, The Tax Structures of Washington, Oregon, and California, the Committee mcluded a summary page.. The concluslons listed in the summary are restated in this section as they form part of the reasoning behind the Committee's tax program.. The remaining reasons are in the arguments for the retail sales tax which are included in another part of this section ..

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In practically all cases, comparable personal income taxpayers will pay substantially higher income taxes in Oregon than in California o Oregon and California taxpayers in high inc'ome brackets also pay more (in incOlne taxes) than do simi­larly situated Washingtonians pay in sales taxes. California's personal income tax law with respect to gains and losses from the sale or exchange of capital assets takes a middle course between Oregon's position of not differentiating them from other kinds ,Of inc'ome and the Internal Revenue Code's short six-month holding period. Hence, California capital gains taxpayers pay less taxes than Oregon taxpayers making comparable gains" Washington does not tax capital gains ..

Corporations pay about the same rates of tax on net incomes in Oregon and California. The Washington Business and Occupation tax (gross receipts), calls for larger tax pay­ments from low return (profit) firms than Oregon and California corporation income tax laws and lower payments from high profit corporations ..

Oregon and California taxes on real property are com­parable on similar parcels while Wat>hington property taxes are approximately half as much.. California is the only state taxing intangibles and its law is limited to solvent credits" California is the only state to tax household furniture and per­sonal effects ..

Oregon obtains less, per capita, than the other two states in iederal grants in aid. It leads the three states (and all other states) in federally shared revenues.. -

The State of Washington collects a larger part of total state and local tax revenue than Oregon or California.. WaShington and California exceed Oregan in payments ta local gavernment ..

Despite a higher sales tax rate (including city and caunty levies), most Califarnia families pay smaller sales tax bills than camparable families living in the State of Washington be­cause of the greater numb-eraf exempt items in Califarnia ..

Oregon passenger car ,Owners pay less taxes an ,Owner­ship and operation of their vehicles than do residents ,Of California and Washington.. Residents of the latter states pay an annual excise tax in lieu of persanal praperty taxes in addition ta li­cense fees and gasoline taxes.

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10 RECOMMENDATIONS (BILLS DRAFTED)

The Committee's tax program.

In General

The Committee's program is in essence a four-phase program o The first, or preliminary step, is the repeal of the 45 percent surtax and the restoration of the $600 personal exemption and dependency credit. The second phase is the passage of a three percent sales tax, providing relief to prop­erty taxes, and the enactment of still higher personal exemp­tions in the personal income ta:x: lawo The third part of the Committee's program is to make numerous changes in the per­sonal income and corporation income and excise taxes to con­form the laws to the Internal Revenue Code. The final phase is to repeal the state's automatic right to levy and collect a six mill state property tax but at the same time maintain the property tax guarantee of repayment of principal and interest on the state's indebtednesso fu addition to this over-all pro­gram, the Committee has made other recomm.endations which are not included in the Committee's comprehensive fiscal plan for improvement of various tax lawso

Repeal of the Surtax

The Committee recommends repeal of the surtax and restoration of personal exemptions and dependency credits be­cause these changes have proved so unpopular and a surtax, in itself, is regarded as a temporary fiscal device. The bill which the Committee has had drafted repeals the surtax effec­tive on 1957 incomes o Provision is also made for fiscal year taxpayers so that they will pay the surtax for only two fiscal tax years. The Committee hopes this repeal bill will be en­acted early in the legislative session. With the 45 percent surtax and the reduction in personal exemptions and dependency credits from $600 to $500 repealed, the legislature will be back to the tax laws existing for the 1954 tax year 0 The Com­mittee in providing this repeal bill feels that it is carrying out the announced desires of most of the candidates for the 1957 legislature who ran on platforms which, among other things, called for repeal of the surtaxo

With the tax. laws back to their 1954 level, the Com­mittee proposes imposition of a combination sales - income tax system as the central element for financing the state's General Fundo In a later section, the revenues which will be derived from this program are enumeratedo

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Explanation of the Sales Tax Bill

The Committee's sales tax bill is a tax on the gross receipts less allowable deductions from the sale of tangible personal property at retail. In general, the law is patterned after the California law with changes in administrative sections to fit the tax administration practices used in Oregono The Tax Commission is designated the administrator of the act.

While sales tax laws may be framed in several ways, the C.ommittee chose the gross receipts approach. At the same time, the C.ommittee with regard to shifting the tax in­cluded language requiring the passing on of the tax where fea .. sible o This phraseology will permit Oreg.onians to take sales tax payments as a deduction on federal and state income tax returns 0

By limiting the tax to tangible personal property, the Committee automatically excluded intangible personal property such as stocks and bonds. Also excluded are services o Where the individual purchases a combination of go.ods and services as in the case where he has his car or TV set repaired, the charge for labor is exempt where the bill is itemized with the am.ounts for parts and for labor separately stated. The Committee did include in the taxable base .of its bill one kind of service. The service included is the rental of rooms 'to transients 0 Many states have made this one exception to the general exclusion of service enterprises and the Committee believes Oregon should emulate their example.

The word "personal" eliminates any tax .on sales of real propertyo While sales of land and of buildings and homes are exempt, the materials used in the construction of the build­ing .or home are taxable. Th~ products which the contractor or builder puts into the construction are items of personal property when he buys them and his purchases are considered retail sales.

By limiting the tax to sales tlat retail", most of the cumulative effects of the ordinary gross receipts tax are avoided. The use of the word "retail" does not mean that the tax is limited to sales made by retail establishments. Rather, it refers to the final step in the marketing process. Where the goods follow the traditional pattern of manufacturer .. wholes'aler retailer - consumer, the tax is collected by the retailer .. If a manufacturer, for instance, has a policy of making direct sales to his employes, he would, in effect, be a retailer and have to pay the tax on any such sales ..

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One particular type of sale which is final in the ordinary sense is exempto This type is the sale of goods which become component parts of manufactured products o These manufactured products are, of course, taxable when ultimately sold at retail .. For example, the sale of logs for the manufacture of lumber or plywood is not a taxable transaction but the sale of the re­sulting lumber or plywood to a contractor or an individual do­ing his own work is taxable 0

The sales tax bill contains a number of specific exemp­tions" These are in addition to the general exclusions inherent in the definition of the tax base" In discussing specific exemp­tions, the Committee equated the contradictory problems of equity and administrative convenience" The exemptions which survived this process and are included in the bill are the ones where equity prevailed over administratione

Food for human consumption is the most important exemp­tion" In this area, the Committee has departed from the California law to put both restaurant meals consumed on the premises and meals purchased for off premises consumption on a taxable basis" The latter meals are exempt in California" The defi­nition of food excludes some of the items sold in grocery stores which are taken out of the store and physically consumed" Exclusions from the food category include confectionery items (eo go, candy), soft drinks, and intoxicating beverages" .

Another important exemption for the average consumer is the one accorded products and services provided by public utilities" Water, electricity, natural gas, manufactured gas, and transportation and communication services are all exempted" Solid and liquid fuels, however, are subject to tax o These fuels were included in the tax base because they are used al­most exclUSively for heat while the others are used extensively in manufacturing as well as for heat"

An exemption important to farmers is the exemption of feed, seed, fertilizers, fungicides, insecticides and farm animals and poultryo These items are exempted in many states because they are considered to be analogous to the component part in the manufacturing process" As mentioned above, items in the latter class are exempt"

Other exemptions include:

(1) Occasional sales"

(2) Sales which the state cannot tax by virtue of the Constitution and laws of the United States or the Constitution of Oregon and sales to the United States" These are mainly sales by an Oregon retailer of property which is delivered to the purchaser out ... side of Oregano

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(3) Sales to nonprofit hospitals, educational institutions, churches, charitable or religious institutions or organizations and orphanages.

(4) Already taxed motor vehicle and aircraft fuels and fuels consumed by vehicles subject to the state's weight distance tax.

(5) Ice and dry ice used in packing and transporting food products in interstate commerce 0

(6) School lunches 0

(7) Tangible personal property which becomes a part of a newspaper or periodical issued at intervals not exceeding three months ..

(8) Newspaper and periodicals issued at intervals not exceeding three months.

(9) Bibles and other books, literature, and utensils of worship.

(10) Returnable and nonreturnable containers under cer­tain conditions ..

(ll) Watercraft and aircraft for commercial use in inter­state or foreign commerce o

(12) Medicine, oxygen, blood plasma, prosthetic and orthopedic appliances, dentures, eyeglasses, crutches and wheel chairs.

(l3) Motor vehicles sold to nonresidents for use outside the state but delivered in the state.

(14) Sales to a common carrier for transportation by the carrier outside the state for the carrier's use ..

(IS) Sales of tangible personal property in connection with a contract to improve realty located outside the state.

(16) Sales for use outside the state and delivered to a forwarding or expert packer.

(17) Sales of vessels of more than 1,000 tons burden.

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Complementing the sales tax and incorporated in the bill is a use tax. It is a tax at the same rate for the privilege of using an article in the state on which no Oregon sales tax has been paid. The use tax has the single purpose of discourag­ing would-be evaders from making purchases outside the juris­diction of the tax. It applies to the same items and sales made under the same conditions. Provisions are included to exempt the possessions of bona fid,e newcomers to the state.

The use tax departs from the exemptions found in the sales tax in one important respect. It taxes occasional sales where the transaction or the market value of item sold exceeds $250. The Committee felt this a necessary device for equaliz­ing competition between regularly established merchants and occasional sellers. An "occasional" seller is one not regularly engaged in business. A person making more than two retail sales in any 12-month period is considered to be engaged in business. Where a motor vehicle is involved, the buyer pays the tax to the Department of Motor Vehicles as a prerequisite to getting it registered in his name.

As mentioned earlier, the Tax Commission adIninisters the retail sales tax and the companion use tax. It issues li­censes for which a fee of one dollar is charged to businesses engaged in making sales at retail. In cases of gross or re .. peated violation of the act, the Commission may pick up the license and force the business to suspend operation.

Lesser penalties are also included in the bill. In order to protect the state's revenue, the Commission may require as a condition for continuing to do business the posting of a bond in cash or in securities acceptable to the Commission. The bill provides limits on the size of the bond which can be demanded.

The licensee remits the tax quarterly. The C.ommittee decided to follow the precedent set by Washington and California and not allow the licensee, to keep part of the proceeds of the tax. The merchant, thus, will have to treat any additional costs he incurs in handling the tax in the same manner as other increases in the cost of doing business 0 Offsetting this cost will be the fact that the merchant will be able to use the tax money, interest free, up to the time payment is required.

The expense of adIninistering the tax will be paid for by a General Fund appropriation -- the manner in which income tax administration expenses are paid. The net revenues (after refunds) go to the General Fund with one exception.

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Moneys which must go into the Highway Fund under the provisions of section 3, Article IX of the Oregon Consti­tution do not go to the General Fund. Provision is made for reimbursing the Department of Motor Vehicles, which is financed out of Highway Funds, for its costs in collecting the use taxes on motor vehicles for the Tax Commission.

The Attorney General and the Legislative Counsel have both advised the Committee that the only money, in their opinion, which will have to go to the Highway Fund is the revenue de­rived from applying the use tax to motor vehicles. They thought the retail sales tax on motor vehicles and related products could be paid to the General Fund. In order to remove any doubt, the Committee has drafted an amendment to section 3, Article IX. The amendment is discussed separately in another part of this report.

Once the moneys have been receipted to the General Fund, they will be available for legislative appropriation except for $20,000,000 per year which has been set aside for trans­mission to local school districts for property tax relief purposes. The Committee ha,s made no provision for its distribution other than to require its application within the six percent constitu­tional limitation. The mechanics of apportionment among the school districts is a matter in the province of the legislature's education committees.

Arguments, for the Sales Tax

The Committee recommends the passage of its sales tax bill for the following reasons:

(1) It is an excellent revenue producer and is, in fact, the largest source of revenue for states today" Over two-thirds of the states presently impose sales taxes" It is estimated that almost three out of every four persons in the United States are subject to state, county or city sales taxes. Assuming con­tinued high federal income taxes, the retail sales tax is the logical source left for meeting the ever increasing demands on the state.

(2) Property and income taxes in Oregon are already very high. Oregon personal income tax rates are for some citizens the hi~hest in the nation and for the rest of our residents among the highest in the nation. Oregon I s steep income tax tends to stifle the initiative of its citizens and to discourage the entrance of capital from outside the state. .

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(3) A sales tax will neutralize Oregon's tax structure with respect to competing with California and Washington for new industry. With a revenue system more similar to the ones found to the north and south of Oregon, developers can attract industry on the basis of economic factors without the tax climate being detrimental.

(4) The sales tax will give to the Oregon tax system the element of stability. Revenues from the sales tax are less affected by business cycles. Stability is a particular virtue for state taxes since expendi­tures such as public- assistance will increase in a recession and the state can only hope for, at best, offsetting reductions in other categories. A progressive net income tax of the magnitude of the present Oregon tax is particularly vulnerable to fluctuations in the business cycle. When incomes decline, the tax base becomes smaller and the aver­age effective rate decreases.

(5) Since everyone makes use of governmental services, everyone should make a contribution for support of the government. With a food exemption, payments by low income families will be nominaL At the same time, the sales tax gets at expenditure exempt from the income tax such as interest on United States bonds.

(6) It is a means of collecting taxes from the thousands of tourists who visit Oregon every year. In a sense, it is nothing more than reciprocity since Oregonians are already making substantial sales tax payments to California, Washington and other states o

(7) The tax is easier and less expensive to administer in that the Tax Commission has a much smaller number of people to deal with o

(8) The tax is easy to pay and is a relatively IIpain_ less II taxo

(9) By providing that industry must pay the sales tax on purchases not for resale, approximately 25 per­cent of the total tax collections will be paid by busi­ness and industry.

The Committee considered the arguments against the tax but found them to be of lesser substance. One opposing argument should be mentioned and that is the one relating to

c

regressivity. Opponents of the sales tax consider this tax principle the leading theoretical argument. The Committee

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in its study, however, found the sales tax with food exemption to be slightly progressive on incomes up to approximately $12,000. The Committee's publication, The Tax Structures of Washington, Oregon and California, contains a table of esti­mated tax payments for a famIly of four which illustrates this view.

Higher Personal Exemption

As a part of its pers.onal exemption amendment to the income tax law, the Committee proposes refunding the surtax on 1956 incomes. The Committee does not recommend refund .. ing of moneys collected from the lowered personal exemptions and dependency credits because of the size of the administra­tive task of recomputing all returns. Since the legislature is unable to attach an emergency clause to revenue laws and consequently head off the collection of most 1956 surtax pay­ments, the Committee has provided refund provisions.

In combination with the retail sales tax, the Committee recommends incre~sing personal exemptions to $1, 000 and allowing a double exemption for taxpayers 65 years of age and older or blind. Dependency credits remain at $500.

The higher personal exemption figure represents the amount of relief which, in the Committee's judgment, can be given. The Committee wanted to give approximately one-third of the relief which the sales tax affords to property taxpayers and the balance to personal income taxpayers. The repeal of the surtax and the restoration of exemptions and dependency credits absorb part of the relief and the increase in personal exemptions to $1,000 absorbs the remainder.

By making the exemption $1, 000, many taxpayers pres­ently paying personal income taxes will be removed from the taxable category. For a family of four, their income will have to be in the neighborhood 'of $300 per month before they start paying income taxes to the state. At present, the family of four has to have an income of approximately $200 per month before they start making income tax payments. The cumulative effect of the high personal exemption and the sales tax is to limit tax payments by the lowest income group to sales taxes and require all other taxpayers to pay both sales and income taxes.

In recommending the refund of the surtax on 1956 in­comes, the Committee is taking cognizance of the objections to its imposition. The passage of the "sales tax package" on

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the Committee's timetable for making the various changes will permit refunding of the surtax without, in any way, jeopardiz­ing the financing of the 1957-59 biennial budget.

The reflUlding of the surtax and the increase in personal exemptions are, however, directly conditioned on passage of the sales taxo Provisions to this effect are included in the Committee's bills ..

The Committee's Timetable )

The retail sales tax is accompanied by legislation pro-viding for a special election to' vote on the question of impos­ing a sales tax in Oregono It is anticipated that this election will be held in April. On approval of the voters, the sales tax will go into effect about July 1, 1957. Since payments to the state are made quarterly, the state will receive payments for seven quarters in the first biennium"

The bill for the special election provides for the state underwriting the cOlUlty's share of the election costo The total cost to the state of this election will be approximately $275,000.

Payments to the school districts for property tax relief begin with the 1958-59 fiscal year" Hence, only one $20,000,000 payment will be made in the 1957,-59 biennium. The Committee reasoned that the process of passing the sales tax and formulating the distribution method would extend beyond the time for orderly preparation and consideration of school budgets.

For the personal income tax, the Committee's bill pro­vides for making the $1, 000 personal exemption effective with the 1958 tax year. This means that for the tax year, 1956, the personal exemption and dependency credit will be $500 and for 1957, $600 .. For 1958, the personal exem{>tion will be $1,000 and the dependency credit, $500. The $600 exemp­tion for 1957 is due to repeal of the surtax and the $500 exemp­tion ..

The Committee's 1957 ... 59 Budget Estimates

The following figures represent the Committee's estimate of General FlUld expenditures and revenues for the 1957-59 biennium. For expenditures, the Committee analyzed estimates submitted early last year and the formal requests made in August and September to the Department of Finance and Adminis­tration for 1957-59 appropriations. Revenue estimates are based on projections made for the Committee by its own staff and the State Tax Commission ..

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I Expenditures:

Regular and continuing appropriations Additional school aid

Current resources:

Ending balance June 30, 1957 $ 32,000,000

$260,000,000 20,000,000

$280,000,000

Less refund of surtax 22,000,000 $ 10,000,000

Sales Tax

Personal Income Tax

Corporation 'Income and Excise Taxes

Other taxes and charges

Unexpended balances of appropriations and Police Department transfers

Ending balance, June 30, 1959

105,000,000

73,000,000

36,000,000

51,000,000

7,000,000

$282,500,000

$ 2,500,000

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While the Committee did not devote much time to study­ing probable expenditures beyond the 1957-59 biennium, its­program is believed adequate for at least one additional bien­nium. While the additional school aid will increase $20,000,000 to a total of $40, 000,000 a biennium, sales tax revenues will alone increase by $25,000,000 or more in the 1959-61 bien-. nium because collections from eight quarters will come in and the long range prospect is for a further expansion in the economy.

State Property Tax.

Under present law, the Tax Commission must automati­cally levy and collect a state property tax of not more than six mills plus whatever amount is needed for debt service when revenues on hand and prospective revenues from other sources are insufficient to balance the General Fund budget. The Com­mittee recommends repeal of this provision •.

This recolnmendation is not motivated by any lack of confidence in the judgment of the Tax Commission but rather is offered to put property taxpayers on equal terms with all other taxpayers. At present, persons owning property have,

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in effect, signed blank checks which are on file with the Com­mission. The Commission then can fill in the amOWlt when­ever additional moneys are needed or whenever some other group dodges imposition of a tax .on themselves by collecting the requisite number of signatures.

By repealing the six milliitnitation, any attempt to levy and collect a state property tax will have to rWl the gauntlet faced by other tax legislation of legislative and executive con­sideration plus the possibility of a referendum ordered by peti­tion of the people. The Committee's bill maintains the right to collect a property -tax to pay principal and interest on the state's bonded debt in order to protect the state's bond rating.

Harmonize income tax laws with the Internal Revenue Code.

The listing of the Committee's recommendations includes a number of items which conform the personal and corporation income tax laws with the Internal Revenue Code. These include accelerated depreciation, carry forward of losses, double exemp­tion at 65 years of age and older, soil and water conservation expenses, carrying charges as interest, theft losses in the year of /discovery, outside salesmen's expenses, dependency credits for students presently disallowed solely because of the dependent's income, medical expenses of dependents disallowed because of the size of the dependent's income, and organiza-tion expenses. The Committee recommends passage of its bills embracing these subjects.

One reason for urging their adoption is to ease the confusion which exists among taxpayers when the state treats an item one way and the Internal Revenue Code another. Other reasons for recommending these changes include bringing the state laws closer in line with recognized accoWlting principles and recognizing the nature of the business economy. ~t is com­mon knowledge, for instance, that depreciable items decline more in value in the years immediately following acquisition. With respect to carrying \ charges, the person who enters a conditional sales contract or other time payment plan certainly knows he is paying interest even if the additional payment is styled "carrying charges".

The bills for accelerated depreciation provide for retro­active computation. This provision permits firms and individuals allowed to employ depreciation formulas to report identical figures on eligible property acquired from 1954 to 1956 on their federal and state income tax returns.

Some of the other changes have been recommended solely on groWlds of equity. On allowing medi(;al expenses, for example,

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where the size of the dependent's income otherwise prevented taking the deduction, the Committee found no merit in not al­lowing medical expenses reaching, at times, several thousand dollars, because the dependent received a few extra dollars.

One subject in the area of achieving conformity which the Committee discussed at length was the wisdom and feasi­bility of directly tying Oregon's personal income tax law to the Internal Revenue Code. The Committee heard testimony from several individuals interested in the subject and had its counsel and the Tax Commission look into the legal and account­ing problems involved in such proposals.

The proponents of tying state law to the Internal Revenue Code usually recommend one or more of the following alterna­tives: (1) apply a percentage to the federal tax; (2) use federal adjusted gross income; (3) use federal taxable balance; or (4) put the Internal Revenue Code in the state revenue code.

The Committee believes Oregon can adopt such a method without violating the prohibition against delegation of powers. Such a law could be tied to the Internal Revenue 'Code as it existed on a specific day or the taxpayer could be given a choice of state income tax now in effect or the current federal code.

While these proposals would simplify state income tax returns, they would not simplify them to the degree envisioned by the proponents of such plans. Further, they would bring into the Oregon system some federal provisions not favored by members of the Committee. The Committee believes its proposals offer a measure of simplification without technical complications in that they conform state law to the Internal Revenue Code.

Capital gains.

The Committee recommends a middle approach on the taxation of gains and losses from the sale or exchange of capi­tal assets. At present, Oregon does not differentiate between capital gains and other kinds of income while the Internal Revenue Code includes only half the gain where the asset has been held longer than six months 0 The Committee proposes the adoption of the California system. Their rates are:

Holding Period

Under 1 year 1 year to 2 years 2 years to 5 years 5 years to 10 years Over 10 years

Percent of Gain Recognized

100 80 60 40 30

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This schedule will meet the demand for capital gains provisions yet avoid the pitfall of the short federal holding perioda Justification for separate treatment in the federal income tax originally was advanced on the grounds that taxpayers received gains in one year' on assets which had grown in value over the entire holding period. Since the gain fell in one year, the taxpayer probably had to pay a higher tax than the individual who received the same amount of income from other sources over the same period.

The Committee's proposal is premised on this logic. It gives to capital gains taxpayers a measure of equal treatment with other taxpayers but does not give them a preferable status as found in the Internal Revenue Code.

Utilities to eight percent rate.

At the last se'ssion of the legislature, utilities were placed under the corporation excise tax at half the rate applied to other corporations. They were also permitted to follow generally the Internal Revenue Code in preparing their returns instead of the provisions applicable to other corporations. The pos­sibility of conforming their income and expenses to the sections applicable to other corporations is one of the items on which the Committee recommends further study.

The Committee recommends applying the ei,ght percent rate to utilities" From 1929 to 1955, utilities were exempt' from the excise tax because their properties were valued higher for property tax purposes than properties locally assessed. The State Tax Commission, by direction of the legislature, is reducing county ratios to achieve uniformity between state and local assessments. ~t is the Committee's opinion that the rati~ reduction program has reached the point where utilities can be subjected to the full excise tax rate of eight percent.

Property tax offset for corporation income tax.

This recommendation is offered for the purpose of mak­ing the corporation income tax more closely correspond with the corporation excise tax. At present, corporations subject to the excise tax apply Oregon personal property tax payments as an offset of up to fifty percent of the excise tax. While many of the corporations subject to the income tax have no personal property in the state, some of them do. The Committee believes the same treatment should be extended to corporations paying the income taxa

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Final assessments in one year o

The Committee recommends the Tax Commission be required to make final assessments within one year of the no­tice of proposed assessmento This recommendation stems from past practices of the Commission rather than present policyo The Committee believes that this introduction of the element of certainty will be beneficial to. taxpayers and at the same time will encourage the Tax Commission to try to keep its staff at a size which makes such expeditious handling possible o

Fraternity and sorority omitted eropertyo

The Committee recommends prohibiting collection of back year taxes on the pe'rsonal property of fraternities, sorori­ties and related orga'nizations o In view of the confusion over their taxable status on the part of the organizations and the as­sessors, the Committee believes back taxes should be wiped outo Future exemption is another mattero Another reason for the preparation of a bill is that the back taxes will fall on the present residents of the house instead of on the ones who occupied the house while the tax bills accruedo

II. RECOMMENDATIONS (NO BILLS DRAWN)

Corporation excise and income taxes o

The Committee recommends adopting a rate structure for corporations similar to that employed by California o The principal reason for making this recommendation is to bring Oregon's published rate for corporations down to its actual ef­fective rate 0 That is, publications list Oregon's excise tax at eight percent and, at best, show the offset as a footnote while the actual effective rate is near five percento

While some corporations would pay more and ,others would pay less, a tax of five percent without the offset would raise about the same amount of money provided banks paid an additional tax as in California o A five percent tax would be better advertising for Oregon.

For banks it is recommended they pay an additional tax based on the personal property taxes paid by manufacturing and mercantile firmsg This computation would raise their cor­poration excise tax to eight percent, a limit which the Com­mittee recommends o Banks presently pay at an effective rate of eight percento

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Personal income taXa

With respect to withholding, the Committee recommends bringing amounts withheld more in line with the ultimate tax .. At present the amounts withheld approximate the tax at .only one P.oint for each of the various numbers of exemptions and dependency credits 0

While there are obstacles to development of a better withholding method such as the greater seas.onal character of Oregon's industry, the inclusion of the two variables of per­sonal deductions and federal tax deductions, and the smaller rate brackets in the income tax, the Committee concluded that Oregon's withholding could approximate the tax due much closer than it presently does o The Committee did not draw up a re­vised system because of the probable changes in the existing income tax law 0 It did conclude, however, that a withholding tax expressed as a percent of federal withholding would be more appropriate for the present income tax law o For example, a withholding tax of 25 percent of the amount withheld for federal withholding with a minimum of 2 percent of gross wages would be more accurate than Oregon's present 2 percent tax ..

Property taxes ..

Combine Duties of Assessor and Tax Collector

The Committee endorses the principle of transferring the duties of the office .of the sheriff pertaining to tax collec­tions to the office of assessor" The present method makes for some duplication of records and equipment and inefficient utilization of personnel.. Further, without intending to be criti­cal of any sheriff, the evidence presented to the Committee suggests that many sheriffs view themselves as peace officers with little interest in the important tax collection function o

In addition to the administrative saving, such a change would eliminate some of the confusion in taxpayers' minds when they seek information on their assessments and tax bills.

Budget Supervision

In connection with enforcement of the Local Budget Law, the Committee recommends central coordination and supervi­sion at the county level of the budgeting and levying activities of the political subdivisions 0 The Committee did not decide on the agency to do this work but most of the discussion before the Committee centered on a separate tax conservation and super­vision agency (as in Multnomah County) or the county court.

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The reason for making this recommendation is dissatis­faction on the part of the Committee with some local fiscal practices o Several instances were brought to the Committee's attention where at least the spirit of the Local Budget Law had been seri.ously stretched.

Supervisi.on and coordination will insure closer adherence to the budget law. At the same time, it will make available, in at least the larger counties, expert advice and assistance for all units of local government.

Homestead Exemption for Aged Taxpayers

The C.ommittee endorses a limited homestead exemption for aged taxpayers with limited incomes. This suggestion is made in recognWion .of the character of their assets, incomes and needs for governmental services. Numerous situations were brought to the Committee's attention where aged taxpayers had clear title to their homes but found it difficult to meet their property tax obligations because .of limited incomes. At the same time, they demand comparatively little in the way of services from local government.

While the Committee makes no specific suggestion as to limits on the proposal, one suggestion which attracted some interest on the part of the Committee was to adopt the provi­sions of the disabled veterans' exemption pertaining to veterans certified by the county health officer -- $7,500 true cash value where annual income from all sources does not exceed $2,500. As to age, most interests center at placing the minimum age below 65 years of age. Recent changes in social security legis­lati.on were cited as justifying an age limit.of 60 0

IlL SUBJECTS FOR FURTHER STUDY

These recommendations for study cover areas on which the Committee did not have sufficient time to draft legislation or suggest principles for legislation. In some cases, the rec.om­mendati.ons were received late and in .others funds were insuf- ~ ficient fDr the studies preliminary to the preparatiDn .of reCDm­mendatiDns.

C.orp.oratiDn excise tax.

AlthDugh utilities will be brDught fully under the c.orp.ora .. tiDn excise tax ra11e .of eight percent under anDther C.ommittee recDmmendatiDn, a questi.on still remains .on the pr.opriety .of permitting them t.o f.ollDW the Internal Revenue C.ode in arriving at net incDme and all.owing them tD use all prDperty taxes paid

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for offsetting purposes o The use of the federal code gives them certain advantages (eo g .. , accelerated depreciation) not accorded other corporations.. The Committee's recommenda­tions, however, for conforming to the Internal Revenue Code in certain instances will somewhat reduce the present lack of uniformity in the treatment of corporations 0

While utility corporations are also limited to a 50 per­cent offset, they may apply taxes paid on both real and personal property in arriving at the of£seto In addition, any tax payments which cannot be offset can be used as a business deduction. Other corporations can only use personal property taxes paid­and cannot make use of any excess personal property tax pay­ments as business deductions. These provisions provide sub­stantial tax savings for utility corporations o

Corporation filing £ees o

At present" foreign corporations pay an annual fee of $200 while domestic corporations pay according to a table graduated on authorized capital stocko The unfairness of the fee on foreign corporations was called to the Committee's at­t,ention by several speakers and writers. While the fee, as taxes go, is not high, it does appear high where a corporation wants qualification before making a single transaction or for some other nominal activity.

Personal incom-e tax ..

The disparity in treatment of retirement pay received by pensioners under federal, state and private plans was brought to the Committee's attention particularly by former federal employes seeking the exemption accorded recipients of state retirement fund pensions. While the state's exemption of its own pensions may be good from a personnel standpoint., the larger problem of equity between all classes of pensioners re­mains.. The Committee hopes further study can be given this matter by the legislature ~nd appropriate action taken ..

Property taxes"

Processor's Law

The Committee devoted the greater part of one day to hearing testimony on the processor's law (ORS 308 .. 250). Prac­tically all of the speakers stressed the importance of continu­ing the exemption essentially in its present form.. The proces­sor's law permits the cancellation of assessments on certain agricultural commodities, fish and processed products thereof where the product was shipped within the four months following the assessment day ..

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Recommendations for change ranged from repeal of this section to exemption of all inventory items from the personal property tax. The Committee takes no stand on the proper course of action but recommends further study with a view to realistic revision or ultimate repeal ..

Tax Commission ~Valuation Division) Proposals

At the next to the last meeting (November 1956), the. Committee heard a number of proposals which the Valuation Division intends presenting to the legislature" Because of the lateness of the presentation, the Committee could not accept any of the proposals and offer them as Committee proposals" Many of them, for example, involve the holding of public he~r­ings o For its report, the COlllmittee took one 0'1' the other of two courses: further study or no action" The proposals for which the Com:mittee recommends further study are:

(l) Trailer houses and fixed load vehicles -- taxation by means of an excise tax based on market value in lieu of personal pr.operty taxes"

(2) Utility assessment rolls -- preparation of the 1'011

by use of punch card tabulating and accounting equip­ment and cancellation on noncollectible taxes on certain private car companies.

(3) Boards of equalization -- corrections ordered by boards of equalization can he entered on the rolls only by the assessor"

(4) Severance tax -- taxation by means of a gross re­ceipts tax in lieu of real property taxes on metallic and nonmetallic deposits.

(5) Forest fee and yield tax -- placing forest lands transferred from exempt status to taxable owner­ship under the forest fee and yield tax.

(6) Exempt properties -- repeal or implementation of ORS 307 .. 310.

(7) Timber appraisal methods -- allowing a depletion period in computation of the true cash value of timber"

TAXATION AND INDUSTRIAL DEVELOPMENT

HJR 14(2}"

"To determine which, if any of the state and local taxes now in force in the state has an adverse effect on the location and development of industry and wealth within the state."

Committee procedure"

The Committee made five specific studies in the area of the foregoing subsection of the resolution" These studies were made by Dr" Allan He Muir who was temporarily avail­able for conducting this phase of the Committee's work. Dr" Muir was formerly employed by the California Senate Tax. Com­mittee and Stanford Research Institute" Mro Edward Bates, Eugene, conducted most of the interviews held in the state out­side the Portland and Salem areas"

With the assistance and cooperation of the Oregon De­velopment Commission, the Committee also sent out a question­naire in conjunction with the general Commission questionnaire on industrial location" Mro Foye M. Troute, Executive Direc­tor of the Development Commission summarized the responses to this questionnaire"

Conclusions ..

The staff reports in themselves are somewhat inconclu­sive as to the assignment handed the Committee. While several conclusions can be drawn from the data gathered for the Com­mittee, the conclusions can be backed only with limited factual material" This is due to the limited finances at the Committee's disposal, the reluctance of some business establishments to discuss their financial affairs with officials outside the realm of tax collection agencies, the lack of readily available data in forms most meaningful for comparative purposes, and the questions of comparability in the case of multi state corpora­tions ..

The responses to staff interviews and questionnaires appear to be a reasonable cross section of present and poten­tial industrial establishments. Based on this assumption, the Committee offers its conclusions as being representative of what would have been derived if time and resources had per­mitted a more extensive study" The Committee arrived at two major conclusions:

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~ /~ , ( .. a ......... .

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(1) The two taxes most apt to have an adverse effect on the location and development of industry and wealth in Oregon are the pe,rsonal income tax and the property tax, both real and personal, not be­cause of the nature of the taxes but because of the high rates.

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(2) Oregon's tax structure is more costly to most in­dustrial corpo rations than the one found in the State of Washington and about equal to the system found in California. Since Washington is undoubtedly Oregon's principal competitor, the relative position of the State of Washington is of consi derable concern to the Committee. While the difference in taxes may not seem large, 2" 87 percent of gross receipts in Oregon compared to 1.9 percent in Washington, this one pe rcentage point could be significant in many cases since other costs associated with the manufacturing process in the two states would tend to be somewhat similar. If all other costs are equal, the fact that Oregon's tax costs in the companies checked tended to average about 50 percent higher than Washington's would not be an inducement for industry to locate here"

While the Committee opposes the granting of tax sub­sidies as is done in some states, it believes that no additional income or property taxes can be imposed on industry without further increasing Washington's present advantage ..

The program which the Committee recommends provides some relief in the recommendations for adopting certain features of the Internal Revenue Code and passing a sales tax with a property tax relief provision.. While the Committee would also like to see some form of personal property tax relief, the Com­mittee believes it could be done, in the light of present state and local fiscal needs, only at the expense of all other tax groups .. Time limitations prevented the Committee from studying the advisability and feasibility of taking this step ..

Tax burden on firms operating in Oregon, Washington and/or Californla.

To determine the relative burden of state and local taxes on firms operating in Oregon, Washington and California, 55 multi state firms were contacted. Of the 55 firms, 33 sub­mitted comparative tax data.. Data from 4 firms was received too late for inclusion in the comparative analysis.. Twenty interviews were held with top management personnel of the selected firms.

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With respect to the over-all tax burden, total state and local taxes in Oregon and California were found to be about the same while the Washington totals were somewhat lower. For specific taxes, the burden of property taxes and workmen's compensation was less in Washington and unemployment com­pensation was lower in Oregon. For personal property, Oregon and particularly Multnomah County was higher than the neighbor­~ng states.

On a rank order basis, the burden of total state and local taxes, as measured by the various bases of comparison, was less in Washington and California in 38 cases and more in 30 cases. In comparison to Washington alone, Oregon taxes were more in 23 cases and less in only 7 cases. In comparison to California, Oregon taxes were lower in 23 cases and higher in 15 instances" These rankings are based on the measures of comparison submitted by the firms. These measures included gross receipts, net income, capital investments, etc. In a few cases, companies submitted their figures on more than one basis and, accordingly, are included more than once"

As a percent of gross receipts the over-all tax burden was 2.87 percent in Oregon and 1" 9 percent in Washington for firms with operations in these two states. For firms oper­ating in Oregon and California, the tax burden was 2. 1 percent in Oregon and 1.8 percent in California. Washington thus showed a tax advantage in both rank and percent of gross receipts bases. Oregon showed a tax advantage on a rank basis over California, but California showed an advantage in relation to gross receipts.

In connection with the analysis of interview and compara­tive tax data for the 29 firms, the comparability of several firms included in the 29 was questioned because of the apparent dissimilarity of operations between the states in which they were operating. As a result, five firms were dropped from the list and a separate tabulation made. The results of this second tabulation were substantially similar to those given above.

Another part of this study was 'to divide the firms by broad industrial groupings. Seven classifications were estab­lished: can manufacture; chemicals, paints, etc. j wood and paper products; buildit:lg materials and construction; metal products; food products; and textile products. The average tax burden was calculated for four of the seven industries for which there were two or more firms reporting data.. For each industrial group on which a tax computation was made, the taxes in Wa~hington were lower than in Oregon" In comparing Oregon and California, neither state was found to be consistently higher or lower 0

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In the field of specific taxes, the study was limited to corporation income plus general gross receipts taxes, property taxes, unemployment compensation taxes, and workmen's com­pensation charges o All other taxes were omitted because of lack of data submitted with respect to them ..

In Washington, most firms paid a smaller proportion of their total taxes in property taxes and workmen's compensa­tion than in Oregon. The Washington firms did, however, pay more for unemployment compensation.. They paid about the same amount in taxes in the two states in the income plus gross receipts tax category. Property taxes were also a smaller part of the total tax burden for most firms in California in com­parison to Oregon.. For the other categories, there was little difference between Oregon and California"

In percentages, income and gross receipts taxes aver­aged 25 .. 1 percent of total taxes in Washington, 23 .. 4 percent 'in Oregon, and 21" 8 percent in California" For property taxes, they averaged 50 .. 8 percent of total taxes in Oregon, 42 .. 3 per­cent in Washington, and 51,,5 percent in. California" On unemploy­ment compensation, taxes ranged from 14" 0 percent of total taxes in Washington to 7 .. 5 percent in California. Oregon was the. middle state at 707 percent.. For workmen's compensation, the firms averaged 10 .. 8 percent of total taxes in Oregon, 10 .. 6 percent in California, and 7" 4 perc,ent in Washington ..

With respect to real and personal property taxes, the ratio of Oregon personal to real property taxes was higher in eight out of eleven case s when compared to the State of Washington.. In comparison to the State of California, the ratio of Oregon personal to real property taxes was higher than California in seven out of nine cases ..

Survey of the attitude of potential manufacturing entrants ..

To find out what manufacturers, not presently located in Oregon but who could conceivably locate plants here, think of Oregon's tax structure, a representative of the Committee contacted 25 major manufacturing establishments in the San Francisco Bay area.. These firms were selected at random from the Thomas Register of American Manufacturers from establishments meeting the following qualifications:

(1) Their headquarters were in the San Francisco Bay area.

(2) They could conceivably operate in Oregon.

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(3) They did not produce forest products"

(4) They had a minimum capitalization of $1,000,000"

Of the 25 firms, 10 reported they had given no thought to manufacturing in Oregon and consequently had not examined Oregon's tax structure" Another 5 felt they could easily serve Oregon markets from pre sent plants located outside of Oregon" Of the remaining 9, 3 said they would enter the state regard­less of taxes if markets or raw materials were available ..

Only 6 of the 25 had some business experience in Oregon" Of the 6, one felt Oregon's taxes were high and one felt they were low" The remaining 4 felt they were average in compari­son to the other states in which they operate"

Two-thirds, or 19, of the companies on the list thus had given no thought to Oregon's taxes. With respect to com­panies which had Oregon experience, the favorable and unfavor­able reactions offset themselves"

Chamber of Commerce questionnaire"

To determine how often Oregon's. taxes have adversely affected the location of new industry or the expansion of the existing industry in recent years, the Committee addressed an inquiry to all of the Chambers of Commerce in the state" Follow-up inquiries were made with the individual firms where the Chambers indicated taxes might have been a significant factor ..

The Committee mailed out 105 questionnaires and received 37 responses.. Of the 37 Chambers responding, 17 reported no industrial inquiries" The remaining 20 Chambers, exclud-ing the Portland Chamber of Commerce, reported 48 ipquiries" Of the 48 inquiries, 31 eventually resulted in the construction of a new plant in the community submitting the information or in another community in the state" On 9 of the inquiries no action had been taken" Of the remaining 8, 3 located in Idaho, 2 in Washington, I in California and 1 in Virginia.. The loca­tion of one other plant was unknown to the Chamber submitting its name"

One of the firms locating in Idaho and one locating in California claimed Oregon taxes as the chief reasons of their moves" In the case of the firm moving to Idaho, the Committee found its plant grossly underassessed for years immediately prior to the move. The assessor had increased the valuation of the plant severalfold on the completion of an industrial ap­praisal by the Tax Commis sion"

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The Portland Chamber of Commerce provided the Com­mittee with a list of 41 new industries which have located in the Portland metropolitan area since World War II., Of these 41, 4 located in Vancouver.. Of these 4, only one was reported to have considered taxation as a factor in 10cating in Vancouver.

The Committee, in reviewing the material gathered by its staff from the Chambers of Commerce, was disappointed by the lack of response on the part of most Chambers on the question of the effect of taxation on industrial location.. While this study, like the other studies, produced very few cases in which the Oregon tax structure was asserted to be a factor, the lack of response suggests either a lack of interest on the part of some Chambers of Commerce or that many bus:inesse's stop short of field inquiries after examining data found in standard tax publications on, Oregon's tax structure ..

Border area interviews"

To sample the attitude of business leaders in border areas on the impact of state and local taxes, the Committee sent an interviewer to discuss the effect of taxes on the loca­tion and development of industry and wealth :in 16 communities along the southern, eastern and northern borders of Oregono

In each town contacts were made with the Chamber of Commerce, local banks, public utility companies, and, where appropriate, port authorities.. Industrial leaders were also contacted upon reference by the former individuals" Particular emphasis was placed upon obtain:ing facts, figures and other support:ing ma­terials to substantiate the impact of taxes upon industry"

In terms of tangible results, the Committee received letters from a group of Oregonians moving their timber sales headquarters to California and a doctor leav:ing the state, both for tax reasons" Outside of these two cases, little written evidence was found to indicate that Oregon is losing out on any substantial amount of industry or wealth" The Committee felt that, particularly :in the area of wealth, specific cases of the effect of taxes is obviously difficult to obtain. It felt that the clearly apparent tax disadvantage of being subject to Oregon's high personal income tax as compared to the taxes of the sur­rounding states was bound to be an active deterrent to indivi­duals moving into the state who had incomes of any sizeable proportions 0

In the areas adjoin:ing other states, the Committee found some apprehension over a sales taxo On the Washington and California borders, some lllerchants feared the imposition of the sales tax would tend to keep custOlllers in their own states ..

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On the Idaho' horder, some merchants said a sales tax would drive away some of the business which naturally gravitates to Oregon establishments" The Committee noted that an Idaho :interim study committee is recommending a sales tax for the State of Idaho.. If this recomm.endation is adopted, this fear would be lessened ..

Experience of railroads :in locat:ing :industry so far as taxes are concerned"

To determine if Oregon's tax structure is a detriment in locating new industries :in Oregon, the Committee sought in­terviews with the five railroad companies operat:ing out of Portland.. Two of the companies transact this kind of business through the offices of one of the railroads interviewed" The railroad location agents told the Committee that nontax factors are considered to be considerably more important in plant lo­cation.. To their knowledge no plants have been lost to Portland primarily for tax reasons" Although some felt the Multnomah County tax situation is confused, it has not yet dr.iven any in­dustries from the count yo Despite sizeable differences both ways for specific companies, they believed there were probably no great over-all differences :in taxes between Oregon and Washington and that the differences that do exist, as in the case of the property tax, tend t.o even out over a period of years ..

Oregon Development Commission questionnaire ..

The Committee sent a questionnaire which it had developed with the cooperation and assistance of the Oregon Development Commission to 800 Oregon manufacturing firms.. The Committee's questionnaire was part of a package which included a questionnaire developed by the Commission on general factors involved in industrial location.. Of the 800 questionnaires mailed, 158, or 19.6 percent, were returned" Of the 158 returned, only 134 were completed either in their entirety or partially.. Those returning the questionnaire completely unanswered frequently said they could not add any significant comment.. Of the 134 answering the questionnaire, 40 answered only the first ques­tion which asked if they had made a study of Oregon's tax system" These 40 answered it in the negative ..

The answered questionnaires represented a reasonably representative cross section of Oregon manufacture.. The returns were received from all parts of the state.. The location of the respondents did not seem to have directly influenced responses to any part of the questionnaire" The questions together with the tabulation of the responses is included, section by section, below.. The variation in the number answering each question

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is due to the variation in the number of actual responses received .. The questions and responses follow:

10 In connection with your establishing a factory, plant, or office in Oregon, did you study the Oregon state and local tax system and the systems of other states then under consideration?

Yes" 26. No. 108 ..

Only one out of five firms indicated that they studied the tax systems of Oregon or other states in connection with their plant location decisions. A number of the firms, however, in­dicated they made studies subsequent to locating in Oregon pri­marilyas a part of expansion studies. The 26 firms which made studies represented a wide variety of industries.

2. If yes, what is your estimate (in man-hours and in percent of industrial location study man-hours) of time actually spent in collecting and analyzing information and data pertaining to taxation?

Hours Percent

This question was not tabulated since the responses were so few in number and so inconclusive in content ..

3 0 To what extent did you rely on secondary sources (i .. e", legal and accounting firms, chambers of commerce, tax­payer associations, public utilities, etc,,) for information on taxation?

Heavily. 20" Partly. 24" Slightly, or none", 40 0

4" Did you retain an independent firm to make your tax study?

Yes" 18.

Questions 3 and 4 were asked to find out where firms in­terested in locating plants acquired their informationo It re­quires little interpretation other than to say that it is quite evident that most businesses prefer to conduct their own studies .. It also suggests to state agencies and other units of government that care should be taken in answering what might appear to be routine inquiries from business establishments"

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5. What conclusion did you reach in respect to Oregon's state and local tax system in comparison to other states then under consideration?

Substantially better. 5. About the same. 29.

Substantially worse. 32.

Although 32 firms state Oregon's tax system is substantially worse than those of other states, a greater number (34) state Oregon's tax system is better (5) or about the same (29).

6. With regard to specific taxes, how did you rank Oregon's state and local taxes with those imposed in other areas considered at the time?

Substantial! y About the Substantially Better Same Worse

LOCAL TAXES Property Taxes

Real 7 32 31 Tangible Personal 2 25 33 Intangible Personal 4 29 15

Local License Fees 19 29 13

STATE TAXES Net mcome Taxes

Personal 2 14 56 Corporation 2 19 30

Retail Sales and Gross Receipts Taxes

General Sales Tax 37 12 0 Gross Receipts Tax 23 16 1

Selective Excises Motor Fuels 3 47 5 Real Estate Sales Taxes 10 27 4 Other 0 23 1

Licenses Motor Vehicles 30 32 3 Corporations 6 35 3 Other 1 21 1

Pa yroll Taxe s Unemployment Compensa-

tion 7 44 13 Workmen I s Compensation 9 47 6

Miscellaneous Taxes Severance 4 24 3 Documentary and Stock Transfer 2 26 2

Other 0 14 0

Total

70 60 48 61

72 51

49 40

55 41 24

65 44 23

64 62

31

30 14

....

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In answering the foregoing question, a majority of the respond­ents felt that tangible personal property, personal income and corporation income taxes in Oregon were substantially worse than those found in other states" For other taxes, they thought Oregon's were better or about the same" The respondents who felt Oregon was substantially better with respect to g~nera1 sales taxes but not to intangible personal property taxes pose a problem of interpretation since Oregon imposes neither tax.. A possible interpretation is lack of knowledge or outright inconsistency in response" In any event the favorable vote for the sales tax should not be construed as an endorsement of a sales tax or as a criticism of it.

7. How important are state and local taxes (excluding work­men's compensation) to your firm in percent of gross receipts and net income, nationally and if available, for your Oregon plant, factory, or office?

Gross Receipts Net Income

Nationally percent percent ---Oregon plant percent percent ---This question was discarded on tabulation because of the

lack of response ..

8. What features in Oregon's tax law do you find particularly favorable to your operation, if any?

The comment which brought the most number of replies (10) was the absence of a sales tax.. Next in importance with four comments was the sales allocation theory employed by the Tax Commission.. With three comments each were the personal property offset in the corporation excise tax and the laws pertaining to unemploynlent and workmen's compensation. Two mentioned laws pertaining ,to agriculture while there was one each for real property taxes, gasoline taxes and the state income tax.. The timing of the state's income tax paynlents were also commented on favorably. One respondent said the later state date was particularly helpful to small businesses"

9. What features in Oregon's tax laws do you find particularly unfavorable to your operation, if any?

On the unfavorable side, the personal income tax brought the most responses (25)0 Closely following it was personal prop-

, erty and inventory taxes with 23 comments" The Portland city license tax attracted seven remarks. The general thesis that corporation taxes were too high was advanced by five respondents.

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Real property taxes and workmen's compensation were each cited by four writers o Two respondents mentioned the lack of a capital gains provision, the combination of high income and personal property taxes and the lack of an operating loss carry back and carry forward o One respondent mentioned each of the following: Fish Commission poundage fees and motor vehicle highway ,use taxes"

In addition to these comments which could be classified there were a number of others including criticisms of specific parts of the corporation excise tax, the personal property tax, and workmen's and unemployment compensation taxes. One respondent objected to the absence of any tax for unemployment compensation on the workers themselves.

100 What elements, if any, in Oregon's tax system affecting individuals have been brought to your attention as possibly bearing on your firm's personnel programs? If any elements are listed, what type of employe (io eo, managerial, super­visory, technical, etc,,) is voicing them?

Twenty-eight respondents mentioned the personal income tax. Of the twenty-eight, five mentioned it applied particularly to managerial personnel. Two mentione,d the personal property tax. The effect of Oregon's income tax on inve'stors was men­tioned.. One respondent said investors would not reside here because of the income taxa Still another writer pointed to the lack of a higher withholding tax.. Another criticism was that it was difficult to get Washington and California personnel to move to Oregon because of the income tax.

11. Other (The Committee welcomes any comments or sugges­tions not covered by the previous questions which you wish to make)?

Responses to this question centered around sales taxes and the need to reduce other taxes.. In total, 19 firms suggested a sales tax as being neces.sary or desirable, with five of them specifically suggesting the use of the California system as a model. Three firms, in addition to the ten responses to ques­tion No.8, indicated they objected to a sales tax. The remain­ing comments or suggestions covered a wide range of topics, including the substantive features of many of our present taxes, as well as the administration of the taxes ..

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ELECTRIC UTILITIES

HJR 14(3).

liTo make a detailed study and analysis of the present system and to determine whether there is a preferable system of state and local taxation of all electric utilities, peoples I utility districts, REA-financed power systems, other electric cooperative power systems and municipally owned ele ctric utilitie s. II

Recommendations 0

(1) The Committee, after making the study required by HJR 14(3), recognizes there are problems par­ticularly in reference to property taxes but does not wish to make any specific recommendations for changy, other than the one mentioned below, at this time.

(2) The Committee recommends revising ORS 308.805 to make the two percent gross earnings tax in lieu of property taxes on cooperative transmission and distribution lines optional. Where the cooperative elects to pay the gross earnings tax, as at present, such fact and the amount of property taxes which would have been paid if the election had not been made, should be reported on the aPfropriate asses .. sor! s published tax levy statement.

The Subcommittee on Electric Utility Taxation.

To carry out the provisions of subsection three of HJR 14, Chairman Wilhelm appointed a Subcommittee of five mem .. bers: Senator W. Lowell Steen, Milton-Freewater; Representa­tive Edwin Eo Cone, Eugene; Representative Ward H. Cook, Portland; Representative Wayne R. Giesy, Monroe; and Repre .. sentative Charles Allen Tom, Rufus. Mr. Tom served as chair­man. Mr. George R. Pederson, a tax economist for the Tax Commission, served as secretary.

1 Representative Giesy dissents from this recommendation. His statement is included in this Pi'irt of the report.

2Representative Dooley dissents from this recommendation.

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(SO)

The Subcommittee held ten meetings between September 17, 1955, and November 8, 1956. All of these sessions were open meetings at which time testimony was heard from the gen­eral public, industry representatives, and technical experts. Individuals unable to appear personally were invited to submit letters stating their views.

On the evidence presented, together with information gathere<J. by the Subcommittee's secretary, the Subcommittee adopted the "no change" recommendation which appears above. This recommendation was adopted by the' full Committee at its November 16, 1956, meeting. The recommendation pertaining to an optional taxing system for cooperatives, while discussed by the Subcommittee, originated with the full Committee.

As is customary in committee reports, each member dissenting or agreeing with the conclusion for reasons other than those stated in the formal report is accorded the privilege of recording his views. A dissent by Mr. Giesy is included with this section of the Committee's report.

The electric utility business in Oregon.

Electric power is retailed in Oregon by 37 companies, cooperatives, and political subdivisions. They range in size from less than 100 accounts to more than 220,000. Of the 37, 17 are cooperatives, 11 are municipal electric utilities, 5 are privately owned utility corporations, and 4 are peoples' utility districts. Electricity is also retailed in substantial quantities but to a handful of accounts by the Bonneville Power Adminis­tration, a bureau of the United States Department of Interior.

The five private utilities serve 500,000 customers; the city plants, 40,000; the cooperatives, 31,000; and the peoples' utility districts, 17,000. The Bonneville Power Administration has five retail accounts. In 1954, the private utilities sold 5,600,000 megawatt hours; the municipal plants, 455,000; the cooperatives, 290,000; and the peoples' utility districts, 205,000. The Bonneville. Power Administration sold 1,725,000 ro.egawatt hours to its five retail accounts.

Revenues of the 37 systems per kilowatt hour ranged, in 1954, from $.008 to $.03. The latter system has since been absorbed by one of the private utilities. The highest reve­nue return per kilowatt hour in 1954 for a utility presently in business was $.026. Investment per customer ran from less than $300 to over $2,500 per customer.

Customer density ranged from less than one customer for every two miles of wire to in excess of ten customers per

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mile 0 A further distinction is that most only market electricity purchased elsewhere while others market their own production and supplement it by outside purchases o

Financing electric utilitie s 0

Private utilities, when they need funds for expansion and/or improvement of their system, go to the private money markets when retained earnings and depreciation reserves are insufficient 0 That is, they can issue stock, sell bonds, or negotiate loans 0 The municipal plants and the people s I utility districts, in addition to using retained earnings and depreci­ation reserves and issuing bonds, can, in varying degrees, make and collect tax levies on the taxable property in their jurisdictions 0

Cooperatives selling electricity in Oregon are financed in two wayso Fifteen of the 17 are referred to as "REA co­operatives" or sometimes, simply, "REA's"o This designa­tion refers to the source of their funds, that is, the Rural Electrification Administration, a bureau of the United States Department of Agriculture o The Rural Electrification Adminis­tration is authorized to make loans to public bodies, coopera­tives and nonprofit or limited dividend associations for facilities to bring central stati0n service to rural" people not having such service. The remaining two cooperatives obtain their funds from private sources o

Rate regulation o

Of the four kinds of electric utilities only the private utilities are subject to state' rate regulation o The state sets rates which cover costs and a return on the investmento While the Committee has not en!ered the area of rate regulation, incidental testimony has sugge'sted indirect regulation in varying degrees by the Bonneville Power Administration and the Rural Electrification Administrationo fu the case of the latter agency, economic studies on the feasibility of a proposed project include analysis of the rates which will have to be charged to payoff the loan and meet operating expenses o The agency, according to one speaker, also insists on rates which will protect their investment o Provisions 'of Bonneyille contracts which affect the retail price of electricity have been c.alled to the Committee's attention 0

Taxation.,

At present, private utilities and peoples' utility districts pay corporation excise taxes to the state and property taxes

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based on their entire system to units of local government. A case is presently before the Oregon Supreme Court on the legality of~1.mposing property taxes on peoples ' utility districts. A case involving the applicability of the corporation excise tax to these districts is just starting through the courts. In addi­tion to these major taxes, private utilities and peoples l utility districts usually pay franchise fees to the cities which they serve.

Cooperatives are subject to property taxes on their lands, -buildings, and personal property. In lieu of property taxes on their transmission and distribution lines, they pay a two per-eent gross earnings tax. Revenues derived from this tax are ap­portioned to the general funds of the counties containing sucb. lines. Cooperatives are also sll;bject to the corporation excise tax if they fail to meet certain tests in the exemption section (ORS 317.080(8)). Because taxation of utilities under the excise· tax started in 1955, the Committee has no knowledge of the muhber of cooperatives which will be eventually subject to the excise tax. The somewhat ambiguous language of the exemption section offers little in the way of clues as to its ultimate interpretation.

Cities are required to pay to themselves where certain conditions are met not less than three percent of the gross operating revenues df city owned electric utilities. These payments, according to ORS 225.270, are for the purpose of reducing general property taxes within the city. The largest municipal utility, Eugene, presently contributes at the rate of six percent to the city general fund. Municipal plants in other cities on which the Committee has information pay at rates ranging between three and five percent. In addition to gross receipts, some of the municipal plants are making indirect contributions by providing the city with electricity gratis or at reduced rates, and by paying salaries of employes engaged part­time on work for other city departments.

Municipal electric plants do not pay either local property taxes. or state corporation excise taxes. Eugene has been making payments in lieu of taxes to School District No. 19 (Springfield), Lane County, to recompense the district for the cost of educating children of employes living in municipally owned houses at power dam sites. Eugene contributed $1,000, per year in 1955 and 1956 to the district for current expense. It paid an additional $14, 000 in 1955 to district capital outlay funds. While the agreement covering these funds has been between Eugene and the Springfield school system, the district has voluntarily divided this revenue with School District No. 68 (McKenzie), Lane County.

While not of immediate concern to the Committee, electric utilities pay a number of other taxes and charges to the state.

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These include motor fuels taxes, motor vehicle licenses, work­man's and unemployment compensation contributions, corpora­tion fees, and public utility commissioner's fees. These taxes and charges on an individual basis apply to some kinds of elec­tric utilities but not to others.

In a computation made available to the Committee by the Public Utilities Commissioner, taxes in 1954, as an ex­pense per kilowatt hour sold, amounted to $.0027 for the private utilities, $.00045 for municipal plants, $.00107 for peoples' utility districts, $.00035 for non-REA cooperatives and $.00048 for REA cooperatives. Approximately hali of the tax cost for private utilities may be attributed to federal taxes, a subject outside the Committee's jurisdiction.

After deducting hali of the private utilities' tax cost, they have an estimated state and local tax cost of approximately $.00135 per kilowatt hour sold.

Changes recommended to the Subcommittee.

The Subcommittee received numerous recommendations for changes in the methods of taxing the several types of elec­t:i:ic utilities. Most suggestions centered on increasing taxes paid by municipal plants and cooperatives. Only a few of the recommendations centered on technical amendments. Letters and written statements mcluded the following recommendations:

(1) Eliminate the present two percent gross revenue tax on cooperatives and place all properties of co­operatives on property tax rolls with assessments by the State Tax Commission.

(2) While the gross earnings tax is a commendable approach to taxing small systems (e. g., coopera­tives) the rate should be raised from two percent to approximately ten percent to equalize the tax burden between privately owned utilities and coopera­tives.

(3) Exempt cooperatives from the two percent tax for the first five operative years.

(4) Maintain the present taxing system for cooperatives which have been in operation for more than five years.

(5) Clarify the phrase "transmission and distribution lines" (ORS 308.805--cooperatives) by adding "sub­station equipment, poles, towers and fixtures,

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tions:

conductors, transformers, services, meters, and street lighting equipment", and amend certain other sections to harmonize with the foregoing recom:i:nen~ dation.

(6) Place at least those properties of municipal electric systems outside the boundaries of the city, if not all their properties, on property tax rolls with assessment by the State Tax Commission.

(7) Place properties of municipal electric utilities lo­cated outside city boundaries on the tax roll.

(8) Continue the present exemption from state and lo­cal taxes accorded municipal electric utilities.

(9) Opposed direct taxation of municipal electric plants but suggest the organization (League of Oregon Cities) offer its facilities in developing plans for payments in lieu of taxes where city owned facilities create a demand for services from the governmental units or the acquisition of new facilities works a hard­ship on the fiscal position of other political sub­divisions.

(10) Memorialize Congress for payments in lieu of taxes from federal power facilities located in the state.

(11) Impose a kilowatt hour tax of one-half mill per KWH sold on all electric utilities.

(12) Allow the State Tax Commission more discretion in allocating values to the several taxing district~.

(13) Permit the State Tax Commission to assess all utility property including the nonoperating property presently locally assessed.

Speakers at the meetings offered the following sugges-

(1) Make the gross receipts tax optional so that coopera­tives who wish, from the public relations standpoint, or other reasons, to place all theil' property on the tax roll may do so.

(2) Protect cooperatives from private utility encroach­ment by establishing service area boundaries 0

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(3) Distribute part of the receipts from the two per­cent tax to school funds instead of putting all of it in the county general fund.

(4) Include factors such as kilowatt hours and ~ost

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of investment per mile of line in any formula mak­ing cooperative taxes higher.

(5) Display conspicuously, if an optional gross receipts tax is provided for cooperatives, on the walls of the assessor's office what the tax would have been if the cooperative had not taken the option.

(6) Increase the two percent gross earnings tax to six percent.

(7) Encourage cooperatives with a lower gross earn­ings rat'e for a specific period of years 0

(8) Place cooperatives on the property tax rolls but amend the property tax law to include such factors as density of territory served.

(9) Employ a graduated rate which takes into account customer investments.

(10) Levy a gross receipts tax on cooperatives and mu­nicipal electric utilities which would be in lieu of property taxes but would be at a rate equal to the ratio of property taxes to gross revenues for pri­vately owned utilities and peoples' utility districts.

(11) Place municipal electric properties outside city limits on property tax rolls.

(12) Don't upset the operation of all municipal plants to solve one local situation.

(13) Include the value of exempt plants in the computa­tion of the base for equalization funds from the Basic School Support Fund.

(14) Require payments in lieu of taxes from municipal plants serving outside city boundaries.

(15) Minimize taxes on all electric utilities.

(16) Adhere to the general principle of treating like thing s alike.

(17) Take all taxes off private and publicly owned utilities.

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Arguments, pro and con.

Most of the Subcommittee's time was devoted to hear­ing the reasons why cooperatives should or should not pay higher taxes and why municipal electrical plants should or should not start paying taxes of general application on their electric utility operations. The arguments given below are divided by types of electric utilities, cities and cooperatives, although some of the arguments cut across organization lines. For the most part, proponents and opponents spent their time in arguing the proper magnitude of taxes on these two types of electric systems rather than for a specific tax program to accomplish their respective goals. Proponents urged bring­ing city and cooperatives taxes to the level of taxes paid by private and peoples' utility districts while the opponents urged maintenance of the status quo. Arguments dealing with techni­cal amendments follow the views on the proper levels of taxa­tion.

The reasons for increasing taxes on cooperatives included:

(1) Disproportionate tax burdens are imposed on private utilities and peoples I utility districts. These systems were portrayed as paying three to four times as much of their gross operating revenues out for state and local taxes. This policy, in the mind of one writer, violated the spirit of the Oregon Constitu .. tion- .. uniformity of taxation on the same c1as s of subjects.

(2) Since utilities can only be tax collectors, any dis­proportionate burden puts them in a disadvantageous position. The legislature should level state and local taxes. The cooperatives would still have their federal tax advantage.

(3) Unequal treatment requires customers of private utilities and peoples I utility districts to pay more than their pro rata share of local taxes. Since both groups are providing service in many counties and school districts, the lower taxes in effect sub­sidize cooperative customers.

(4) The same reasoning (3) will apply if plans for more state school equalization funds are granted at the forthcoming legislative assembly. The present base for equalization takes into account local ability to pay as reflected in a minimum levy on the tax­able property in the districts. With cooperative transmission and distribution lines not on the tax

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rolls, it will be easier for school districts having their lines to get equalization aid than for districts served entirely by priva..!.e utilities.

(5) Cooperatives are competing in various degrees with privately owned utilities and peoples' utility districts. With their greater freedom in rate matters, they are occasionally able to grab off lucrative industrial accounts in or near their service areas.

(6) Encouragement of electric cooperatives may have been all right initially, but for a permanent policy it is contrary to generally aGcepted principles of public finance.

(7) While an increase in taxes may force upward ad­justments in cooperative rate schedules and subse­quently lessen demand for power, other businesses dealing in commodities for which the demand is somewhat elastic have survived price increases.

The reasons advanced for leaving the present method of taxing cooperatives intact included:

(1) They are not in the general business of selling electricity but rather they are providing a service for themselves, the members of the cooperativeso­The only reason they came into existence was be­cause private utilities were unwilling to extend serv­ice to their farms.

(2) By their existence, they have promoted fuller develop­ment of Oregon agriculture and rural life in general. This, in turn, has led to larger personal income tax payments to the state and to property tax pay­ments to local government in more valuable farms.

(3) Any significant. additional taxes would interfere with the financial plans- of the individual cooperatives. Because they already have their margins, any tax increase would have to be passed on to the members. They are not allowed to extend their debt by refund­ing operations.

(4) Their rates are already significantly higher than those charged by private utilities. This is due to the marginal character of their operations and higher unit costs for smaller operating units.

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(5) There is no demand from the areas in which they operate for greater tax contributions from coopera­tives. Further, none of the political subdivisions in their areas have asked for higher taxes.

{6} Unlike private utilities, they are not guaranteed a fair rate of return by the state.

(7) Comparative tax analyses which compare their tax payments with the property tax bills of private utili­ties ignore the fact that they are distributors of power only. Private utilities generate as well as distribute electricity.

(8) Any increase in taxes which forces cooperative rates upwards may start a vicious cycle (e.g., higher rates, lower demand) due to the elasticity in demand for electricity. This process could force many cooperatives out of business.

The reasons for subjecting city electric plants to direct taxation for general governmental purposes included:

(1) Cities which have municipal power plants are engaged in a proprietary activity as distinguished from govern­mental activity. They are not doing an essential job.

(2) Their plants are in direct competition with private plants in at leas.t one city and in competition in the suburbs surrounding many of the cities with municipal plants.

(3) They are profit making enterprises.

(4) Service outside the city limits further supports the charge of being proprietary profit making enterprises. These areas can achieve the power by getting them­selves annexed or, if they wish public power, by forming a peoples I utility district.

(5) Costwise, their operations are comparable, except for taxes, with those of private utilities. Further, their operations cannot be described as marginal or thin.

(6) The absence of municipal electric plants from local property tax rolls forces all taxpayers in the counties ,and in the school districts in which they operate

to pay higher taxes with only the customers of the municipal plants getting an offsetting reduction in the form of lower rates.

(7) Consumers of municipal plants are escaping their pro rata share of state taxes.

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(8) Municipal plants operating beyond city boundaries force additional expenditures on other political sub­divisions.

(9) The needs of local government demand as broad a tax base as possible.

The justifications given the Subcommittee for not plac­ing a direct tax on municipal electric systems included:

(I) By tradition, one government has not sought the tax on the property of another. This is a tradi­tion which has stood for many centuries.

(2) Taxation also violates the concept of home rule.

(3) Providing power is an essential service for the welfare of the residents of the city.

(4) If municipal plants are taxed, the cities. will ask the state for tax payments on state universities and colleges, liquor stores, etc.

(5) It is impractical and perhaps impossible to draw a line which singles out some activities for taxa-

, tion and not others. How can you justify taxation of the electric plant when you don't tax water, rail­road, sewer, dock and airport units?

(6) Tax exemption actually tends to equalize tax pay­ments in that city residents pay substantial county taxes for which they receive comparatively few services.

(7) Municipal plants are justified in serving areas out­side city boundaries because the suburbs together with the city constitute integral economic units.

(8) Competition \iffords comparison and benefits cus­tomers of private utilities by forcing private utili­ties to adopt the most efficient methods.

(9) Low rates promote maximum economic development.

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(10) No demand for tax revenues from municipal electric utilities exists except for the requests from two school districts.

Among the other suggestions to the Subcommittee were ones applying to all types of electrical systems. One speaker suggested removing all taxes on electric utilities •. The indi­vidual advancing the thought pointed to the generally accepted view that utilities are tax collectors rather than taxpayers. Opposition to this suggestion centered on the disruption it would cause in the field of local finance and the belief that the bene­fits utilities receive from governmental services should be charged to their customers.

Another major change proposed was the adoption of a kilowatt hour tax applying to all distributors of electricity. The proponent stressed its administrative simplidty and the fact it would be the least burdensome on high cost distributors. The converse of the latter argument is that it bears most heavily on low cost distributors.

Allowing cooperatives to place all of their properties on the tax rolls if they so elect was suggested. Some of the cooperatives' representatives, particularly the ones from the non-REA cooperatives, urged making the two percent gross earnings tax optional. Some of their spokesmen believe it might be to their advantage in a public relations sense to pay state and local taxes on the same basis as private utilities. At the same time, they recognized such a move on their part might prove embarrassing to REA cooperatives as the public might not be aware of their generally more prosperous opera­tions. The suggestion of announcing the cooperatives making the election on the assessor's tax summary was urged on grQunds of bringing the whole matter more to the attention of the af­fected areas.

Several technical matters were brought to the Subcom­mittee and action urged on ,them. While the suggestions were listed as being desirable, most of the suggestions presented have been at least partially accomplished by administrative action.

The Subcommittee was urged by several individuals to recommend memorializing Congress for payments in lieu of taxes on federal power facilities located in the state. The speakers cited the magnitude of these projects. Those opposed to the suggestion pointed to the probability of increases in wholesale power rates and urged the Subcommittee to take no action which would tend to hasten a boost in rates.

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Still other suggestions covered areas not within the jurisdiction of the Subcommittee. Typical of these was the suggestion that cooperatives be given protection from encroach­ments by other utilities.

Conclusions.

After carefully reviewing the evidence submitted by interested parties, the Subcommittee decided to offer no pro­posals for changing the tax laws with respect 'to electric utilities other than the minor suggestion of permitting those cooperatives which want to pay property taxes on their entire facilities to drop the two percent gross earnings tax.

Inaction .by the Subcommittee should not be taken as an endorsement of the present system but rather as an acknowledg­ment that the existing laws are reasonably well accepted and that the alternative systems proposed to the Subcommittee of-fered little, if any, improvement over the existing order of taxation.

Evidence presented to the Subcommittee clearly demon­strated the greater tax burdens borne by private utilities and people s I utility districts in relation to ope rating revenue s as compared to municipal and cooperative systems. While this conclusion, on its face, appears to justify tax increases, the Subcommittee found several basic reasons which justify prefer­ential treatment in the case of cooperatives and maintenance of the exemption of governmental municipal systems. The reasons included:

(1) Coqperatives would be unable to pay significantly higher tax bills out of current earnings 0 While the Subcommittee is unwilling to concede that any rate increase would jeopardize their operations, rate increases of the· magnitude proposed. to the Subcommittee would be extremely deleter;i.ous if not fatal to some cooperatives •.

Cooperatives have an upper rate limit which~hey cannot exceed if they are to remain solvent--the unit cost of power produced by individual generators in the hands of their customers. The cost for such an operation according to one utility engineer would be in the neighborhood of four cents per kilo~ watt hour where the farm used the more common appliances and equipment. Any tax increase which necessitates a substantial rate increase would push some cooperatives precariously close to this upper rate limit.

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II

(2) The device of classification appears to be the best solution for bringing some equalization in coopera­tive taxes as compared to those paid by private utilities and peoples' utility districts. The Sub­committee in recommending an optional gross re­ceipts tax made a start towards classification.

On the basis of testimony presented to the Subcom­mittee, the two non-REA cooperatives will probably place all of their properties on the tax rolls if given the opportunity to do so 0 The publicity features of the recommendation may also bring several of the lowest cost REA cooperatives entirely on the property tax rolls.

(3) With respect to cities, the Subcommittee found fiscal and rate considerations relatively unimportant. Admittedly, any changes which the Subcommittee might recommend would require a rearrangement of municipal finances.

The Subcommittee rejected imposition of direct taxation of municipal electric systems because it believes such a recommendation would not achieve a greater degree of equalization. While direct taxa­tion would equalize state and local tax costs between the different types of electric utilities., it would also produce a disparity of treatment between the different kinds of government owned and operated enterprises 0 Equalization cannot be achieved until all of these activities are brought under the general tax laws. The Subcommittee received no specific directive to study tax exemptions and time and other considerations precluded examination of the subject in our general studies.

(4) Wliile the Subcommittee made no recommendation with respect to municipal electric utilities it hopes payments in lieu of taxes will continue in the Eugene­Springfield area and will be started in other areas where similar situations arise.

(5) Finally, the Subcommittee took notice of the lack of demand for any affirmative action. The Subcom­mittee publicized its meetings and invited opinions and recommendations from the general populace as well as industry representatives. The lack of interest suggested to the Subcommittee general ac­ceptance of the tax laws as they presently apply to electric utilities.

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STATEMENT BY REPRESENTATIVE GlESY CONCERNING THE TAXATION OF ELECTRIC UTILITIES

(63)

After hearing the evidence and recommendations presented by the various segments of the electric utility industry and interested individuals, I reached the conclusion that taxes must be increased on cooperatives and imposed on city electric systems.

In my mind, the gross earnings tax should be increased, for the present, from two percent to four percent for coopera­tives operating in Eastern Oregon and to six percent for co­operatives operating in Western Oregono These proposed in­creases represent a start toward uniformity of tax treatment for similar businesses and at the same time allow a degree of preferential treatment in recognition of the different operat­ing problems which confront cooperatives o

Cities should pay a gross earnings tax of nine percent. This is approximately the' percentage of private utility and peoples' utility dis,trict earnings paid out in property taxes. The nine percent tax and the lesser rate for cooperatives should be optional alternatives to placement of all their properties on local property tax rollso

The receipts from these gross earnings taxes should be apportioned to the political subdivisions in which the coopera­tive or city operates according to each subdivision's relative share of property tax levies 0

I make these recommendations for several reasons. First of all, the electric systems in this state, while different in the details of organization, are all engaged in the same business. Since the legislature has not seen fit to fix areas of service by requiring "certificates of public convenience and necessity", the electric systems are free, in ,varying degrees, to compete among themselves 0 While this competition is not state wide, there are numerous areas in the state where serv­ice from more than one s,ystem is available. I be'lieve we should eliminate the tax favoritism accorded cooperatives and municipal electric systems 0 Let them compete if they wish but not with the advantage of lower state and local tax costs.

My second reason for making the foregoing recommenda­tions is the effect of present tax laws on the customers of the different types of electrical systems. Many counties and some school districts fall in the service areas of more than one electrical system. We know individual utilities acting

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as tax collectors pass the taxes imposed on them to their cus­tomers" Since the taxes are shifted, the customers of the utilities subject to all taxes pay more than their pro rata share of local taxes. I do not believe any individual should be pe­nalized because he. buys his power from a private utility or peoples' utility district" My proposals will eliminate this penalty"

Finally, the rate on cities of nine percent will, I be­lieve, encourage many of the cities to place their municipal electric systems on the property tax rolls" Getting them on the rolls will make the distribution of state grants in aid where the test of local capacity is taxable property as in the case of the Basic School Support Fund more equitable" This is especially important at this time as we are presently being asked to increase the equalization factor"

~ I I I

I FORESTS AND THE FOREST INDUSTRY

HJR 14(4)0

"To make a detailed study of state and local taxation of forests and the forest industry within this state with a view to determining a system of taxation which will best promote and encourage (a) retention of forest lands in private ownership, (b) harvesting practices which will result in stable forest economy, (c) equalization of the tax burden between segments of the industrial economy of the state, (d) protection, utilization and reforestation practices above minimum standards and (e) properly managed forest farms."

Re commendations 0

(1) The "Forest Yield Tax Law of 1957" should be enacted to replace all of the present forest fee and yield tax law compiled as ORS chapter 528. 1

(2) The bill prepared by the Valuation Division of the State Tax Commission providing for the considera­tion of the depletion period of each owner when determining the true cash value of standing timber for ad valorem tax purposes should be given care­ful consideration by the legislature.

The Subcommittee on Forests and the Forest Industry.

To carry out the provisions of subsection four of HJR 14, Chairman Wilhelm appointed a Subcommittee of five mem­ber.s: Senator John P. Hounsell, Hood River; Senator Philip Bo Lowry, Medford; Senator Lee V 0 Ohmart, Salem; Representa­tive Pat Dooley, Portland; and Representative Roderick T. McKenzie, Sixes. Senator Ohrnart served as chairman.

The Subcommittee held twelve meetings during 1955 and 1956 at which time testimony was heard from the general public, industry representatives, and technical experts. The Subcommittee secured comments from as wide a segment of Oregon's economy and from as many points of view as possible, either by hearing them at the meetings or by inviting them to submit written statements.

1 Representative McKenzie dissents from this recommendationo

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Over three-fifths of Oregon's manufacturing payroll is derived from its pulp and paper mills and the lumber and wood products industries. For one-third of the counties, over fifty percent of employment is in these forest based industries, and they account for one-fifth of total state employment in the private sector of the economy".... It has been estimated that the state's dependency upon the forest products is so great that seventy-five percent of the trade carried on with the area out­side the state is directly- conditioned upon the well being oX­~ single resource.

Such a single resource based economy would be in a precarious position indeed if the historical depletion of forests which occurred in the East coast forests and later the Great Lakes region were being followed in Oregon. However, under forest management our forests become a crop which can be­harvested for the indefinite future and enlightened public policy can do much to create conditions which do not act against the economic factors favoring sustained yield programs.

A tax policy which recognizes that the forest industries must contribute their fair share toward the expenses of govern­ment but which guards against allowing taxes to exert a restrain­ing hand on the development of good fOI:est management is an essential and important part of this enlightened public policy.

The Subcommittee, after reviewin,g the entire problem of the taxation of forestry and the forest industry, felt that the most fertile field for improvement was the forest fee and yield tax law and therefore decided to study and revise this area as the first step. The first step proved to be so important and time-consuming that it occupied nearly all of the Subcom.­mittee's deliberations. The Subcommittee feels, however, that the time was well spent, the area reviewed important, and the recommendations well founded.

The field of ad valorem taxation of timber was also re­viewed and considered by the Subcommittee. At the Subcom­mittee's request, the ValUation Division of the State Tax Com­mission prepared a bill designed to provide a means of taking the depletion period of each timber owner into consideration when determining the true cash value of standing timber. How­ever, time limitations prevented the Subcommittee from properly analyzing the bill submitted. The Subcommitt~e therefore pro­posed that the bill should be submitted by the State Tax Com­mission to the Legislative Assembly and recommends that it be given careful consideration there. The main Committee accepted this recommendation.

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The present Forest Fee and Yield Tax Law.

The Oregon Forest Fee and Yield Tax Law, ORS chap­ter 528, was enacted by the 1929 legislature to encourage the growth and protection of forest crops on lands chiefly valuable therefor, and to provide a fair, stable and continuous tax reve­nue from such lands. The law provides that the State Board of Forestry shall determine what lands within the state may be classified as reforestation lands, and, after holding hear­ings and c.onsidering the proposed classification, notify the Tax Commission which will prepare orders classifying the land. The land is then taken off the tax roll and is subject to an annual forest fee ,of five cents per acre if located west of the Cascade Mountains and two and one-half cents an acre if located east of the Cascade Mountains. At the time of har­vest it is also subject to a yield tax of 12.5 percent of the value of the forest crop harvested which is payable to the local county. In actu.al practice the State Board of Forestry has not recom­mended the classification of any lands over the objection of the owner.

Timberlands once classified may be declassified only (a) if erroneously classified, (b) if they are used for some other purpose than growing timber, or (c) are to be transferred to an exempt owner. In these cases the owner must. pay to the county the difference between the forest fees previously paid and the property taxes that would have been paid had the land not been classified.

The State Forestry Department listed for the Subcom­mittee the advantages and disadvantages of the present law as follows:

Advantages

(1) Low annual rate per acre (5¢ for fir lands; 2-1/2¢ for pine lands).

(2) Shift of main tax payment (yield tax) to the time of crop harvest.

(3) Savings in compounded interest.

(4) Flat, unchanging rate permits long time estimate of tree growing costs.

(5) Eliminates fluctuation and uncertainties of ad valorem tax.

(6) Permits owners with limited capital to grow timber.

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(7) Affords owner opportunity to retain lands during recessiono

(8) EX$i'!rts a "leveling" pressure on assessments of similar, but unclassified, cutover lands 0

(9) Eliminates necessity of continued and costly tim-· ber cruises.

(10) Nominal tax removes pressure on owner to liqui­date timber.

(11) The owner is free to change the use of the land from forestry to agriculture or other use at any time.

(12) Prevents school districts from voting burdensome taxes on lands which will produce no income for many years.

(13) Classification is optional and subject to the decision of the owne r.

Disadvantages

(1) Relogging on cutover lands subject to 12.5 percent yield tax.

(2) Payment of full yield tax on management thinnings may eliminate profit and is a deterrent to good forestry.

(3) Administrative problems relative to the establish­ment of stumpage values.

(4) Payment of full yield tax on forest protecUon meas­ures, as hazard reduction, acts as a penalty and increases costs.

(5) A number of owners expressed the opmlOn that the yield tax encumbers title to the lando

(6) Fear that state and "red tape" will restrict activi­ties on lands if classified.

(7) Opponents speak of the law as a "tax subterfuge or evasion" measure.

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(8) Others feel the 12 0 5 percent yield tax is too great a share to pay to the local count yo

(9) Assessments may be increased on other property to recoup losses caused by classification of cutover lands 0

(10) Some counties feel the lands, if once classified, cannot be changed o

(11) 12 0 5 percent yield tax on re10gging of cutover lands is additional tax burden that would not be present under ad valorem lawso

(12) Acts unfavorably in school districts which look to forest lands for much of their revenue.

(13) Variable tax income to counties 0

While the Subcommittee does not necessarily agree with all of the items listed above, this list serves to point out gener­ally the problems it faced o

Findings of the Subcommittee 0

The Subcommittee agrees that the objective of the forest fee and yield tax should be to approximate the ad valorem prop­erty taxes but should do so in such a manner as to be least disruptive of sound forestry practices 0

The problem of approximating the property tax is par­ticularly troub1esome o The last session of the Legislative Assembly provided for the transference of the responsibility for the valuation of standing t;irrlber from the county assessor to the State Tax Commission over a period of years o Thus, the past history of thirty-six different county procedures of valuing timber gives. no indication of what will occur in the future under cen~ralized appraising o The Subcommittee there­fore does not feel that the rates established in the proposed Forest Yield Tax Law of 1957 for either the forest fee or the yield tax should be considered final but should be reviewed when the results of the State Tax Commission's administration of the valuation of standing timber has progressed to the point that valid comparisons ·can be made of the taxes paid under each system o

Graduated Yield Tax

The Subcommittee concludes that the 12 0 5 percent flat rate of the yield tax, applicable irrespective of how long the

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land had been classuied, is discouraging the proper thinning of timbero The thinning of growing stands of timber is a more expensive operation in terms of the value of the timber cut than is the normal harvesting of timber o Because thinning is essential to good forestry practices, and in the long run will increase the revenue by increasing the yield, the Subcommittee suggests that a graduated yield tax be applied to all timberlands classuied under the proposed acto This would automatically­allow thinnings at a reduced rate, thereby removing the bar­rier set up by the present law o

The Subcommittee does not believe that this feature should be applied to lands classuied under the existing law because none of the land has been classified over the objec­tions of the owner and, therefore, these- owners have classi­fied their lands knowing that the yield tax. on all crops harvested would be 12.5 percento Holding to this view, and fearful that the amendment could not be phrased to guarantee that it would not be used as a back door approach to allowing' the graduated rates to apply to at least part of the normal timber harvest, the Subcommittee turned down an amendment proposed by the industry which would have permitted thinnings only to be har­vested at the graduated rates for timber classuied under the existing law o The Subcommittee did, however, suggest that the industry should submit this amendment to the legislature for consideration when the Forest Yield Tax Law of 1957 is being discussedo

Declassuication

The Subcommittee agrees that th,e present practice of not classuying land over the objection of the owner should be continued and has written this provision into the proposed billo However, it concludes that much of the land which could and should benefit by the yield tax law is not being classified. It, therefore, has expanded the definition of lands eligible for classification to include lands having mature timber and farm wood lots o To prevent this action from eroding the tax base of local governmental units the Subcommittee has incorporated into the qualuications of lands eligible for classification the provision that the classification must be in the public interest. This means that the Board of Forestry must be sure that the classification will not hamper the taxing bodies in which such lands are located from receiving a fair, stable and continuous tax revenue.

The principal deterrent to classification under the pres­ent law is not, however, the definition of eligible lands but the finality of the classification. Once classified, lands remain

L

so unless used for another purpose or are transferred to an exempt ownershipo This arrangement would be proper under a compulsory classification law but since the Subcommittee

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agrees that classification should not be permitted over the owner's objection, it also agrees that declassification should be permitted at the owner's requesto

The Subcommittee, therefore, proposes that the lands be allowed to be declassified upon request of the owner at any time o To prevent the law from being a tax haven which owners can move into or out of' at will, the Subcommittee proposes that this feature of the law be allowed to operate retroactively but that owners electing to declassify lands classified under the existing statute be required to pay the 12 0 5 percent yield tax on the market value of the forest crop at the time of de­classification or the ad valorem property taxes that would have been paid had the land not been classified, whichever amount is the greatero For owners electing to declassify land clas­sified under the proposed law, the Subcommittee proposes that upon declassification the owner pay the graduated yield tax depending on how long the land had been declassified or the ad valorem property taxes that would have been paid had the land not been classified, whichever amount is the greatero Under these conditions lands can be declassified at the option of the owner whenever he desires to do so but under no con­ditions will he be able to declassify to get a tax advantageo

Many other minor changes are incorporated in the act such as allowing the State Forestry Department to handle the admini1trative functions instead of the Board of Forestry and realigning the duties of the Board of Forestry, the Forestry Department and the State Tax Commission to provide for a more logical operation of the law.

Forest Yield Tax Law of 19570

Purpose

The proposed bill authorizes the classification of lands meeting prescribed qualifications as forest yield tax 'lands. Lands classified as forest yield tax lands are removed from the ad valorem property tax rolls and, in lieu of ad valorem property taxes, are subject to:

(1) An annual forest fee of five cents per acre on lands situated west of the Cascade Range arid two and one-~alf cents per acre on lands situated east of the Cascade Range; and

(2) A yield tax payable when forest crops are harvested from the lands 0

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Lands Eligible for Classification

In order to be eligible for classification as forest yield tax lands, lands ,must meet all of the following qualific'ations:

(1) Be suitable chiefly for forest crop productiono

(2) Meet a standard equivalent to the requirements for release under the Forest Conservation Acto

(3) May in the public interest be classified as forest yield tax lands o

In addition, the classification of lands must be in con­formity with a policy of not hampering the taxing bodies in which such lands are located from receiving a fair, stab-Ie and continuous tax revenueo Mature timber and farm wood lots may be classified as forest yield tax lands if they meet the above qualifications 0

Classification Procedure

The State Board of For,estry each year prepares a list of lands which are eligible for classification and which the board proposes for classification as forest yield tax lands. A public hearing is held on the proposed classification at the county seat of each count yo After the hearings have been held, the State Board of Forestry will issue an order classifying the land that meets the required qualifications for classifica­tion as forest yiel~ tax lands, except that no land may be clas­sified if a person having an interest therein has filed his written objection to the classificationo A land owner may petition the board for classification of his land as forest yield tax lands, but the board may classify lands whether or not a petition has been fHed a Consent of the county court or board of county commissioners is not required in order to classify', land as forest yield tax lands under the proposed law o Classification orders are to be recqrded in the county deed records o

Declassification of Lands

Lands classified as forest yield tax lands may be declas­sified only under the following circumstances and upon declas­sification the amount indicated shall be pa,id to the county:'

(1) All of the forest crop has been removed from the lando Declassification automatic upon request of owner and no money need be paid for declassifica­tiono

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(2) Lands erroneously, classified. Declassification by board if circumstances justify and the owner must pay to the county the difference between the forest fees paid and the ad valorem property taxes that­would have been paid had the land not been clas~ sified o

(3) Owner elects to declassify lands classified under existing statute. Declassificahon automatic upon request of owner and owner must pay to county which­ever of the following amounts is the greater:

(a) 12.5 percent of the market value of the forest crop on the land at time of declassificatiol1.

(b) The difference between' the forest fees paid and the ad valorem property taxes that would have been paid had the land not been classified.

(4) Owner elects to declassify land classified under the proposed new taw. Declassiflcation automatic upon 'request of owner and owner must pay to the county whichever of the following amounts is the greater:

(a) A varying percent, depending upon how long the land has been classified, ranging from one to 12" 5 percent, of market value of the forest crop on the land at time of declassification.

(b) The difference between the forest fees paid and the ad valorem property taxes that would have been paid had the land not been classified.

(5) Classified land used for purpose other than growing timber. Declassification by board when circumstances justify and owner must pay to county same amount as would pay were land declassified upon request of owner. 'amount depending on whether land was classified under existing statute or under the pro­posed new law 0

(6) Land transferred to exempt owner. Declassifica­automatic and owner must pay to county same a­mount as would pay were land declassified upon request of owner, amount depending upon whether land was classified under existing statute or under proposed new law 0

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When forest yield tax lands are declassified, the lands are placed upon the ad valorem property tax roll. Declassi­fication order will be entered in the county deed records.

Under the proposed law I lands may be declassified un­der the same circumstances as under the existing law and may also be declassified upon request of the owner -at any time. Under the proposed law the amounts to be paid for declassi­fication under various circumstances are different than under the existing law.

Harvest Permit

A permit from the State Tax Commission is requi~ed before any forest crops may be harvested from lands classi­fied as forest yield tax lands just as under the existing law.

Yield Tax

A yield tax is paid upon the market value of forest crops harvested from lands classified as forest yield tax lands. The amount of the yield tax paid depends upon whether the lands from which the forest crops are harvested were classi­fied under the existing law or under the proposed new law. If the lands were classified under the existing law I the forest crops are subject to a yield tax of 12.5 percent of the market value of the forest crops harvested as determined by the State Tax Commission. If the lands were classified under the pro­posed new law, the forest crops harvested are subject to a yield tax ranging from one to 12.5 percent of the market value, depending on the period of time the land was classified as forest yield tax lands. The yield tax increases by one p~rcent­age point each 5 years up to 50 years. After the land has been classified 50 years the yield tax is 12.5 percent.

for Exemptions from payment of yield taxes are provided

(1) Forest material removed during the first ten-year period of classification if such material consists of snags, fire-killed or down timber left on the land after logging which was carried on prior to classification.

(2) Forest crops used for road construction in harvesting.

(3) Forest crops -not in excess of ten thousand feet, board measure, annually used or consumed by the owner for his own agricultural or domestic purposes.

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If the State Tax Commission has doubts as to the finan­cial responsibility of a person issued a permit to harvest forest crops from forest yield tax lands, the Commission shall re­quire the permittee to deposit security for the payment of the tax.

Reclassification

After a timber crop has been harvested, in order that the new crop grown on lands classified as forest yield tax lands may be entitled to be harvested at the graduated rates begin­ning with one percent and increasing to 12 .. 5 percent, the forest yield tax lands must be "reclassified". Reclassification is automatic upon request of the owner. No money need be paid for reclassification but land may be reclassified only if all of the forest crop (except seed sources) has been removed from the land.

Disposition of Forest Fees, Yield Tax and Declassification Fees

Forest fees are collected annually and are distributed­to various taxing bodies in the same proportion that the mill­age levy of the taxing body bears to the total millage levy for all taxing bodies within which the lands are situated for each year during which the lands are classified as forest yield tax lands. The yield tax and declassification moneys are applied as a direct offset against the property tax levy of the taxing body and are not considered receipts of the taxing body for the purposes of the local budget law.

Main Committe'e action.

The recommendations of the Subcommittee were adopted by the Subcommittee and the main Committee with but one dissenting vote, that of Representative McKenzie who voted againstintrodu.cing the "Forest Yield Tax Law of 1957" ..