Government Finance: Taxes
Personal income tax and corporate excise tax are the most significant components of the state General Fund, and property tax is the most significant local tax in Oregon. The Corporate Activity Tax (CAT) provides additional education funding. Oregon does not have a state sales tax.
Personal Income Tax
Oregon residents and nonresidents who earn income in Oregon pay personal income tax. As part of the 2019 legislation that created the Corporate Activity Tax effective beginning in tax year 2020, the Legislature reduced Oregon’s first three income tax brackets from 5%, 7% and 9%, to 4.75%, 6.75% and 8.75% respectively. After deductions and credits, the average effective tax rate is about 6.4% of adjusted gross income. Since 1993, the income tax brackets have been indexed to changes in the Consumer Price Index. The current standard deduction is $4,840 on joint returns, $2,420 on single and married filing separate returns, and $3,895 for a head of household return. Blind or elderly taxpayers and persons over the age of 65, will receive an additional $1,200 standard deduction on a single return and an additional $1,000 per eligible person on a joint return.
The personal income tax is the largest source of state tax revenue and is projected to make up 86% of the total General Fund revenues in the 2021–2023 biennium. In January 2010, Oregon voters approved Ballot Measure 66, which made two permanent changes to personal income tax calculations. First, it established a new tax bracket for adjusted gross income above $125,000 (single filers) and $250,000 (joint filers) and second, phased out the federal tax subtraction for those same filers.
The corporate excise and income tax is the second largest source of state tax revenue for the General Fund. Corporations that do, or are authorized to do, business in Oregon pay an excise tax. Corporations not doing, or that are not authorized to do, business in Oregon, but have income from an Oregon source, pay income tax. The tax rate is 6.6% on Oregon taxable income of $1 million or less and 7.6% on Oregon taxable income above $1 million. There is a minimum excise tax of $150 for S corporations and one between $150 and $100,000 for C corporations, based on Oregon sales.
During the 2019 Legislative Session, the Legislature passed HB 3427, referred to as the Student Success Act, which created a Corporate Activity Tax (CAT) dedicated to education funding. The CAT is imposed on all business types, including partnerships and sole proprietorships, and is based on a business’s Oregon commercial activity. The tax is $250 plus .057% of taxable commercial activity greater than $1 million. Taxpayers are allowed a subtraction equal to 35% of the greater of cost inputs or labor costs. General contractors who incur labor costs for single-family residential construction located in Oregon qualify for an exclusion equal to 15% of the labor costs paid to subcontractors. Some items, such as the wholesale and retail sale of groceries and motor fuel, are exempt from the tax. CAT revenue is forecasted to be $2.44 billion for the 2021-2023 biennium.
Property tax rates differ across Oregon. The rate depends on the tax rate approved by local voters and the limits established by the Oregon Constitution. Most properties are taxed by a number of districts, such as a city, county, school district, community college, fire district, or port. The total tax rate on any particular property is calculated by adding all the local taxing district rates in the area. The total tax rate is then multiplied by the assessed value of the property. The county assessor verifies the tax rates and levies submitted by each local taxing district on an annual basis. The county tax collector collects the taxes and distributes the funds to the local districts.
Taxable property includes real property, mobile homes and some tangible personal property used by business. The state and each county assessor determine the value of property in each county. Measure 5, which was passed by the voters in November 1990, restricted non-school taxes on any property to $10 per $1,000 of real market value. It restricted school taxes on any property to $5 per $1,000 of real market value.
Measure 50 was passed by the voters in May 1997. Measure 50 added another limit to the Measure 5 limits. Now, each property has a real market value and an assessed value. Each taxing district has a fixed, permanent tax rate for operations which they may not increase. Districts may not increase this rate. Voters can approve local option levies for up to five years for operations and up to 10 years or the useful life of capital projects, whichever is less. Voters can also approve bond levies, which are used exclusively to repay a bond used to fund capital projects. Local option levies require a “double majority” for approval. Measure 50 established the 1997–1998 maximum assessed value as 90% of a property’s 1995–1996 real market value. In subsequent tax years, the assessed value is limited to 3% annual growth until it reaches real market value. The assessed value can never exceed real market value. New property is assessed at the average county ratio of assessed to real market value of existing property of the same class. For 2021–2022, the total assessed value of all property in the state was about 58% of real market value.