Tag: economy

That’s-it,-I’m-done!-cm

COVID-19 Is Killing the Economy; New Business Taxes Are Bayonetting the Wounded

By Eric Fruits, Ph.D.

Many Oregon businesses are looking forward toward May 15. That’s the day the state expects to ease some of Governor Kate Brown’s COVID-19 “Stay Home, Stay Safe” order.

But, many businesses are considering whether they should they re-open at all. Dakine is closing its Hood River office and moving the outdoor gear company’s headquarters to Southern California. Nordstrom announced it is closing its Clackamas Town Center store. World of Speed motorsport museum in Wilsonville is permanently shutting down and sending its exhibits to schools and other museums.

As the state slowly re-opens, some businesses will be facing a seemingly insurmountable debt burden: delayed rent and utility payments will come due, Paycheck Protection Program loans may have to be repaid, lines of credit will have to be restored, and deferred taxes will have to be paid.

Coronavirus is only one of many new challenges facing Oregon businesses. Leading up to the pandemic, Oregon business owners were sweating the state’s new Corporate Activities Tax. Last year, in anticipation of the CAT and other new taxes, Stimson Lumber laid off 40% of its workforce in Forest Grove and moved some of the operations to Idaho and Montana.

While the rules governing this new gross receipts tax won’t be finalized until sometime in June, the first quarterly payments were due on April 30. Because it’s a tax on sales, the tax is due even if the business is losing money.

Portland’s Chown Hardware claims its first quarterly payment was approximately $30,000. Because of the combination of coronavirus and the new tax, the owner laid off 25 of his 100 employees. Facing a $10,000 quarterly tax bill, a pharmacist in the small town of Banks shut down his pharmacy and laid off his six employees.

In the middle of the pandemic, Multnomah County commissioners approved a steep increase in the county’s Business Income Tax, from 1.45% to 2%. The county expects the hike to increase business income tax revenues by one-third, or $900-$1,000 per affected business. These new taxes are on top of Portland’s 1% tax on the sales of large retailers which went into effect last year, with the money earmarked for so-called “clean energy” projects.

As if that’s not enough, the May 2020 ballot has Metro Measure 26-210. This measure imposes two new income taxes: one on businesses with more than $5 million in sales, and another on households with more than $125,000 in income ($200,000 if filing jointly). Business owners who earn pass-through income—many small and medium sized businesses—will be taxed twice under Metro’s measure.

Consider a pass-through business with income of $150,000 on just over $5 million in sales (that’s a 3% profit rate). The owner will be looking at more than $17,000 in new taxes this year:

Corporate Activities Tax $15,000
Multnomah County Business Income Tax 800
Metro business income tax 1,500
Metro personal income tax 75
Total $17,375

 

That’s the increase in taxes relative to last year, and it amounts to more than one month’s work—just to pay the new taxes.

As the economy slowly re-opens, business owners are going to go through the same calculus as Chown and the Banks pharmacist and ask themselves: “What’s the point?” Their businesses have been wiped out, they’ve racked up debt with unpaid rent and other bills, and to make matters worse they’re staring down steep new tax bills.

State and local politicians blandly remind us, “We’re all in this together.” But we’re not. You’re on your own. For business owners, your job is to toe the line on the state’s shutdown orders and cut checks to feed the government bureaucracies that got bloated during the boom times. No matter how much your taxes increase, they’ll keep saying your business doesn’t pay its fair share.

Someday, and that day may come soon, business owners will look at their financials and come to the conclusion that it’s easier to run a bookstore in Boise, open a restaurant in Reno, or a be financial adviser in Vancouver. Portland doesn’t have a monopoly on livability.

COVID is already killing the economy. We cannot let tax increases bayonet the wounded.

Eric Fruits, Ph.D. is Vice President of Research at Cascade Policy Institute, Oregon’s free market public policy research organization.

Click here for PDF version:

20-17-COVID-19_Is_Killing_the_Economy_New_Business_Taxes_Are_Bayonetting_the_WoundedPDF

Read Blog Detail
Interest-rate-financial-and-mortgage-rates-concept-cm

The Upcoming PERS Crisis: The system is facing a $30 billion shortfall—radical reform is needed

By Eric Fruits, Ph.D.

Coronavirus has hit the economy hard. Nearly all the stock market gains from the past two or three years have been wiped out. While it’s painful for investors and retirees, it’s likely to fuel the third major PERS crisis since the dot-com bust.

PERS, the public employee retirement system, has two major sources of funds: investment returns and employer contributions. PERS investments are managed by the state treasurer, under guidance from the Oregon Investment Council. “Employers” are state and local governments whose employees are PERS members.

PERS charges these employers a rate equal to some percent of their payroll to fund the costs of their employees’ anticipated retirement benefits. Currently, the average rate is approximately 25% of payroll. For example, for a city employee with a salary of $60,000 a year, the city must pay an additional $15,000 to PERS.

One of the many factors that affect the employer rate is the unfunded actuarial liability, or UAL. The UAL is an estimate of how much money would be needed to pay off all existing beneficiaries if the system were liquidated. Think of it this way: If you sold everything you owned—house, car, checking, savings, retirement—would you have enough to pay everyone you owe? If you don’t, you have unfunded liabilities.

PERS currently has a UAL of $24.5 billion. If PERS liquidated all its assets to pay its existing members, the system would be $24.5 billion short. The employer rate is set to fill that gap over a period of approximately 20 years. So, if the UAL increases, the employer rate increases. Similarly, if the UAL decreases, so does the employer rate.

Here’s where investment returns come in.

Because of the way PERS benefits are calculated, the system’s investments must earn an average of at least 7.2% a year to stop the UAL from getting bigger. That’s a very aggressive, and optimistic, target.

In good times, when PERS investments earn above average returns, the money from the investments reduces the UAL, which in turn reduces the employer contribution rate. If, on the other hand, PERS investments tank, the UAL balloons, and state and local governments must make bigger contributions to fill the gap.

PERS investment returns are correlated with stock market returns. Generally speaking, in a bull market, PERS investments run with the bulls; when the market drops, PERS investments suffer as well.

The stock market is down more than 20% from the beginning of the year. That means PERS investments would be down by about 11%. Based on past experience, such a drop would add another $6 billion to PERS’ unfunded liabilities, for a total UAL of about $30 billion.

Let’s say the economy improves and the stock market recovers all its losses, ending the year unchanged from the beginning of the year. PERS investments would be up by about 5%, based on past experience. Even so, PERS unfunded liabilities would increase by about $3 billion for a total UAL of about $27 billion.

Based on these observations, it’s very possible that state and local governments would face an employer contribution rate for PERS of 30% or more. That $60,000 employee would now come with an $18,000 additional cost to pay for PERS.

Where will that additional money come from?

It’ll come from us. Legislators and local governments will be under tremendous pressure to raise taxes to pay for skyrocketing PERS costs. Along with that will come budget cuts, with fewer teachers, state police, foster care workers resulting in bigger class sizes, reduced law enforcement, and more children stranded in the foster system. It’s not just a financial crisis, it’s a human crisis.

PERS has been a ticking time bomb for two decades. Attempts at meaningful reform have been put off by timid politicians and thwarted by powerful public employee unions. In the first PERS crisis of 2002, the system’s unfunded liabilities were less than $4 billion. In the second crisis, beginning in 2008, the UAL ballooned to $16 billion. Today, we’re looking at a third crisis with a UAL of $30 billion or more, or nearly $19,000 per household.

We are entering an era in which PERS cannot be merely tweaked or reformed. We are entering a PERS crisis that will require a radical overhaul of the entire system. It can begin with some straightforward first steps:

  1. Move all new public employees into a 403(b) defined contribution plan. These are similar to the 401(k) plans held by many private sector employees. TriMet has already made the switch, and it saved the agency from insolvency.
  2. The PERS Board must change its assumed rate of return on PERS investments. Because of the mismatch between assumed and actual investment returns, PERS is accruing liabilities much faster than it’s growing its assets. Bad assumptions were unsustainable 20 years ago, and they’re disastrous now.

These are just first steps that can be handled quickly in an emergency session of the legislature and an emergency meeting of the PERS board. There’s never a good time to upset the public employee unions. Now that we’re in a crisis, it’s time for leadership and action to save the state from fiscal disaster.

Eric Fruits, Ph.D. is Vice President of Research at Cascade Policy Institute, Oregon’s free market public policy research organization.

Click here for PDF version:

20-10-The_Upcoming_PERS_CrisisPDF (1)

Read Blog Detail