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A payroll tax is an equitable solution

Nobody likes taxes. In the current conversation about the business income tax, I think we can all agree that some kind of change is necessary to keep our region competitive.

A large part of the ultimate answer to a healthy local business climate is the elimination of the city/county business income tax. No other local jurisdiction that I am aware of has such a tax burden on business. This puts Portland at an enormous disadvantage in its bid to attract and retain businesses. The Portland City Council has refused to seriously consider the reduction or elimination of this tax.

Until that happens, an immediate 'interim' step to address competitiveness must be put in place. The opposing essay in today's edition by the owners of three other small businesses raises the right question about the business income tax. Their answer is that the proposed reform is unfair to them because their taxes will increase substantially. So will mine.

While the question of what is a fair way to raise the needed revenue from all businesses is not answered by the impact on these businesses alone, the authors of the piece clearly identify where work still remains. So until we get true tax reform, the real issue is equity Ñ the tax burden should be carried equally.

The current business income tax, passed more than 20 years ago as a temporary measure, taxes locally apportioned net income. Apportioned net income means that if you are located within the city of Portland, all the money you earned within the city is taxable.

For example, if you are a carpet cleaner who works in both downtown Portland and Washington County, only income from the work in Portland is taxable. Conversely, if your office is in Washington County, but you travel to Portland to do business, the money from those transactions also is taxable.

A few examples illustrate the unfairness of this system. A five-employee investment firm, occupying 2,000 square feet of office space in Portland, has $1 million in locally apportioned income and pays $36,500. A manufacturer with 300 employees and a 2-acre factory pays $100 because it has minimal local income.

Further confusing matters are cases in which two similar professional or creative service businesses, with identical net incomes but different ownership structures, pay widely different tax bills.

There are numerous problems with the current system:

First, the tax rate, 3.65 percent of locally apportioned income plus an additional interim 1 percent for schools, is high enough to convince profitable businesses to relocate outside of Portland and Multnomah County.

Second, apportioned net income may have little relationship to either the level of government services a business uses or its ownership structure.

Finally, as recent history proves, depending totally on net income can create dangerous fluctuations in revenue for the city and county.

The proposed reform is based on the following principles:

Maintain (but not increase) the current level of collected tax revenue; substantially decrease the rate from 3.65 percent to 1.395 percent to remove the incentive to leave the city/county area; and broaden the base to reduce the volatility of collections by relying on net income and payroll, instead of just net income.

Taxing payroll more closely links the tax to consumption of government services: Net income does not consume government services, employees do. Taxing net income and payroll will be less volatile in terms of overall collections. The inequity of businesses paying token amounts of tax while having a relatively substantial numbers of employees will be eliminated. Taxing payroll is simple to administer because employers already pay the TriMet payroll tax.

The proposed reform does not ignore small businesses. It proposes to exempt from taxation the first $125,000 of the owner's net income, which is a 230 percent increase in this exemption. It also proposes to exempt a portion of the payroll of a small business in an amount that is still being analyzed.

I also agree that it is incredibly important that all businesses complete the practice forms provided by the city of Portland to ensure that calculations are being made correctly and that any unintended consequences within a complex system be addressed.

Under this interim solution, some taxpayers will regrettably pay more while some will pay less. The fairness should be measured by whether the new system spreads the burden fairly among all taxpayers, treats similarly situated taxpayers the same, links the tax burden to the use of government services funded by the tax, is a reliable source of the needed revenue, and is relatively easy to administer and comply with.

Using these tests of fairness, I believe change is necessary to save jobs and restore our competitiveness in Portland and Multnomah County.

Brad McLean is part owner and director of sales and marketing for the Mad Science franchise in Northeast Portland.Ê