Oregon has maintained its stake in the competitive manufacturing sector over the past two decades by a canny approach to tax policy.
Governor Kitzhaber’s proposal this week to create a tax policy guarantee for large manufacturers, such as Nike, is the latest in a line of proposals dating back to 1984 when Oregon lawmakers repealed the state’s worldwide unitary tax.
The circumstances through the years have been the same – state leaders needed effective ideas Oregon could afford to attract or retain major employers. Clever tax policy did the trick.
The 1984 repeal of the unitary tax occurred during an economic downturn and threats by Japanese and other foreign companies to blacklist Oregon. Repeal of the unitary tax wound up causing only a minor tax revenue drop, but served as a red carpet to companies such as NEC and Epson that responded by quickly building manufacturing plants in Oregon.
In the early 2000s, manufacturers with large physical footprints and lots of employees in Oregon complained that the state’s apportionment formula to determine tax liability penalized them. The three-factor formula weighed property value, employees and in-state sales equally.
Lawmakers recognized the tax disincentive for companies such as Intel and Precision Castparts to keep investing here and adding jobs. They modified the apportionment formula to give double weight to in-state sales.
Under continuing pressure from the manufacturing sector, lawmakers agreed to phase out the three-factor formula and replace it with an apportionment scheme that just considered in-state sales.
That change eliminated the penalty manufacturers felt when they expanded their operations and hired more workers. It undoubtedly reduced state corporate tax bills, but the addition of more, often higher-paid workers increased personal income tax collections. On balance, the state achieved a net positive.
Local communities also benefitted from higher industrial property valuations that helped pay for schools and firehouses and new residents who bought or built homes and shopped in local stores.
Kitzhaber’s latest idea basically enshrines the latest good idea for manufacturers who promise to make sizable investments and create jobs. It doesn’t cost anything, but it will reap dividends by once again helping Oregon stand apart from the crowd – and eager industrial recruiters from California, Arizona and Colorado and cities such as Austin and Raleigh-Durham.
Some may question Kitzhaber’s haste in summoning lawmakers to pass tax legislation undeniably intended to entice Nike to stay and expand. But it’s no different than Governor Vic Atiyeh who summoned a small group including us 20 years ago to count votes on repeal of the unitary tax.
Oregon’s sizable, productive and diverse manufacturing sector is the evidence of a smart, cost-effective strategy that still works.