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Tax talk puts firms on edge

Payroll proposal makes manufacturers wonder if they're wanted

A proposed business-tax revision in Portland and Multnomah County signals that heavy manufacturing isn't welcome, some industry leaders say.

'I've attended a number of meetings with people in the heavy-manufacturing segment who are starting to take a very hard look at whether they want to be here,' said Vicki Tagliafico, vice president for corporate affairs at Oregon Steel Mills Inc.

The Portland-based company has divisions elsewhere in the United States and in Canada. Its annual payroll in Portland is about $37 million.

'They don't feel like there's very much understanding of the value they're bringing to this locale' Tagliafico said.

The Portland City Council and the Multnomah County Board of Commissioners approved the framework for the new tax last week. Specifics of the proposal go before the two boards for approval in the fall after its impact is computed. A questionnaire will be sent to all businesses in the city and county to determine the effects of the new tax.

The new tax, in whatever form, would go into effect on Jan. 1, 2004.

A partnership that included representatives from the city, the county and the Portland Business Alliance, the organization that resulted from the merger of the Association for Portland Progress and the Metropolitan Area Chamber of Commerce, drafted the proposed tax reform.

The group's charge was to create a new system that taxed businesses more fairly. Many businesspeople thought that the existing business income tax was unfair and a disincentive to business growth in Multnomah County.

In the proposal's current form, 40 percent of the proposed tax collected would come from business income; 60 percent would be assessed on business payroll.

One manufacturing executive, however, said the new tax proposal suggests that government officials aren't tuned in to the export sector's struggle to survive in the highly competitive global economy.

William Furman, president and chief executive of the Greenbrier Cos., said he fears there is 'tacit acceptance of the concept that manufacturing is not a sector that can survive in a place like Portland.'

'If they are determined to neglect the manufacturing sector, it becomes a self-fulfilling prophecy,' he said. 'Why would you want to stay somewhere you're not wanted?'

Greenbrier, a publicly traded company based in Lake Oswego, owns Gunderson Inc., which builds rail cars and barges at its Portland factory. Gunderson has about 1,100 employees in Portland and a payroll that in 2002 totaled $46.3 million.

Some would pay more

Diane Linn, chairwoman of the Multnomah County Board of Commissioners, acknowledged that 'there are winners and losers' in the proposed tax structure.

'Will some of them wind up paying more? Yeah, they might,' she said. 'But we're going to know, and they're going to know, exactly what it means so we can make adjustments before we implement it.

'I promise you, not everyone's going to end up real happy. But we want to be sure we consider all the implications and communicate how it will work with everybody.'

Under the new proposal, the payroll tax would be capped at $100,000 and the business income tax at $30,000. Companies with payrolls of $26 million or more would pay the maximum of $100,000.

But that means a vast increase in the tax bill for some corporations, whose net income has withered in the shaky economy.

'The cost of being in our kind of business is high right now,' Tagliafico said. 'It's not just Multnomah County and Portland wanting more money. The cost of energy and raw materials is going up. There's a point at which the cost of doing business overtakes the revenues the business creates. We're not there yet, and we don't want to get there.'

Larry Brady, chief financial officer for Greenbrier, said, 'The amount of payroll is not indicative of the earnings of the operation. You could have a significant payroll and still not be making any money.'

The payroll tax, he said, 'obviously would be $100,000 of expense we currently don't have, and every additional expense reduces the amount of possible earnings.'

When the tax plan was written, Portland Business Alliance spokesman John Czarobski said, representatives of both small businesses and larger companies throughout Portland participated.

'We looked at absolutely every business sector to see the repercussions. What if we do this? What if we do that?' he said. 'Who gets affected with this scenario or that scenario? It's been thoughtfully put together.'

He said the PBA board voted 5-1 in favor of the tax revision. The alliance has about 1,600 members, about 1,500 of whom came into the merged organization from the chamber of commerce.

Sam Adams, chief of staff to the mayor, said the city is 'trying to strike the balance between achieving greater equity in the business tax burden while making sure we don't drive businesses out of the city or out of the county.'

He also said revisions to the tax plan could be made before the tax goes into effect.

'We don't have any fiscal history to rely on to judge the impact of payroll taxes,' Adams said. 'We don't know the ramifications. This is a test drive. We could wind up with anything from tweaks to major changes, depending on the results of the returns.'

Staying competitive

Steve Pratt, chief executive of Esco Corp., conceded that 'the payroll tax is not something that's going to drive us out of the city, but it's just another indicator, a confusing signal.'

Esco, like many manufacturers in Portland's export sector, sells its products all over the world. Founded in 1913 as the Electric Steel Foundry Co., Esco employs about 650 people in Portland, with an annual payroll of $25 million to $30 million. The firm owns factories across North America.

Oregon Steel spent $300,000 in the late 1990s to build a new mill at the Rivergate industrial park. With the U.S. steel industry in a major downturn, the company recently furloughed almost 300 employees, a first for the Portland plant, Tagliafico said. The company now employs 450 in Portland.

'There are hulks of industrial facilities all over this country that no longer operate. A lot of people talk about moving operations offshore,' she said. 'We would like to keep ours here.'

According to economist Joseph Cortright of the consulting firm Impresa Inc., the tax money 'may be less important than the signal it sends: how they're regarded, how they're treated on other issues that are likely to be important to them in the future.'

A company such as Greenbrier Ñ or Esco, or Oregon Steel Ñ all trying to stay competitive in the global marketplace Ñ 'really is very limited in its ability to shift the burden of its taxes to its customers,' Cortright said.

When a manufacturing business pulls out of a city, 'I'm not sure anything steps in to fill that breach,' he said. 'It's difficult to replace that kind of job.' Gunderson employees, for example, make an average $16 an hour, not including benefits.

'Sometimes,' Cortright said, 'a tax structure can just have sharp edges on it for a certain kind of business activity. You want to avoid that. É On one hand, you don't want to discourage the businesses that are profitable. On the other hand you also don't want to discourage businesses that have big payrolls.'

Steady decline

The number of manufacturing jobs in Oregon, which peaked during World War II at 46 percent of the state's nonfarm employment, has been on a steady decline in the years since. In 2002, manufacturing jobs were just 14 percent of the total.

But the importance of an export sector remains. 'Essentially it's a balance of payments issue,' said Art Ayre, Oregon State Employment economist. 'If you want to import goods and services, you have to export goods and services.'

When factories close, he said, often it's difficult to convert them to another use. 'The fact that a facility is sitting idle doesn't create a lot of attraction for other industry É it's unlikely that anything is going to come along that pays like those jobs did.'

Furman, an Oregon native, said: 'Portland is a great place to live. It's not going to be a great place to live without jobs. You cannot abandon the export core Ñ Portland would be a third-world country.

'And you cannot survive by selling coffee, real estate and banking services to each other.'

Don Hamilton and Todd Murphy contributed to this story.