Loosening the noose a little

What, a tax cut in Portland, Oregon? And even the socialistas on the City Council might vote for it? That's certainly worthy of note.

Not that it's all that big a deal. Councilor Eric Zimmerman and Mayor Keith Wilson are proposing increasing the exemption from the city's business license tax, which currently stands at $50,000 of gross receipts for the year. Under their proposal, the exemption would increase to $75,000 for this year, and $100,000 for next year and thereafter. That would be the first increase in the exemption since 2007, and it would put the city's taxpaying threshold at the same level as Multnomah County's.

It's long overdue. Inflation has been cranking since 2007. What cost $50,000 back then costs $78,434 today. And so boosting the exemption to $75,000 doesn't even catch up to inflation. Next year's $100,000, however, puts taxpayers ahead of the trend, at least for a while. 

If the Z-Man and the mayor really wanted to be smart, they'd boost the $75,000 to $80,000, and make annual inflation adjustments automatic, like the big boys have done since the days of Ronald Raygun. But taxpayers affected by the changes will take whatever they can get, I'm sure. 

How many taxpayers will benefit, and by how much? The last numbers I saw were 5800 taxpayers, at an average savings of about $286 a year. That's 78 cents a day. Woo hoo!

Ruminating ahout this modest tax reform, which has passed the City Council finance committee and is headed to the full 12-member book club, one notices some of the many quirks of the hideous local tax system here in Portlandia. The $50,000 exemption – or $75,000, or $100,000, or wherever it ends up – either gets you off the hook entirely from paying the city tax, or gets you nowhere.

For example, let's say your gross receipts for the year, as of the morning of December 31, are $49,999. If you earn one more dollar that day, you now owe the city business tax for the year, not just on that dollar, but on all of your business income. There's a deduction for owner compensation, which I believe is 75 percent, and so that gets your tax base down to $12,500. But if you have no other deductions, the tax is 2.6 percent of that, $325. And so the marginal tax rate on that last dollar of income is 32,500 percent. That's a pretty steep cliff to fall from.

On a different front, and forgive me for repeating myself, the city really needs to end its practice of demanding quarterly estimated tax payments from businesses whose tax liability is minimal. For example, under the current rules, a business that owes $2000 in business tax for the year has to pay $500 per quarter (including on December 15) or face a penalty. It's a hassle, and what good does it do? 

If the city earns 4 percent a year on its money, the time value of those quarterly payments is $20, $15, $10, and $5 respectively, for a big fat $50 total. It probably costs the city more than that to process the payments. Come on, people, give it a rest. Z-Man! Mayor! Here's another modest reform: No quarterly payments required if  your liability for the year is $5000 or less. Whaddya say?