CAT Returns

On Feb. 12, OBI Vice President for Government Affairs Scott Bruun testified in support of Senate Bill 1542, which among other things would raise the corporate activity tax (CAT) payment threshold from $1 million of corporate activity to $5 million.

Such a shift is both affordable and, as the graphic above shows, easily justified – at least if Oregon legislators value the well-being of small businesses. Employers at the very bottom of the corporate activity scale account for the vast majority of CAT returns yet produce only 7% of total CAT revenue, according to the Oregon Department of Revenue.

The Legislature established the CAT in 2019 with the intention of generating an additional $1 billion annually for education. The tax – 0.57%, plus $250 – applies to commercial activity in excess of $1 million. It’s worth remembering that this is a tax on activity, defined as the total amount realized from transactions and other activity in the regular course of business in Oregon. It is not a tax on profits.

The $1 million threshold also isn’t indexed to inflation, which means that the CAT effectively applies to a smaller bucket of commercial activity every year.

Filing CAT returns and paying the tax itself are significant burdens for small businesses, as Bruun noted. Yet these burdens generate relatively little benefit for the state. In tax year 2021, businesses with $1 million to $5 million in taxable commercial activity accounted for more than 70% of all CAT returns – but only 7% of CAT revenue.

That 7% share of CAT revenue was just over $78 million in 2021. Even without that sum, CAT collections that year exceeded the $1 billion the Legislature intended to raise when it created the tax. Meanwhile, revenue is expected to increase rapidly, exceeding $2.8 billion during the 2023-25 biennium. Oregon clearly can afford the relief SB 1542 would provide.

In early 2023, OBI asked more than 440 small businesses throughout the state to share their thoughts on Oregon’s business climate. Only 18% of those surveyed said they believe state lawmakers care about the success of their businesses. Raising the CAT threshold to $5 million is one way for legislators to begin changing that perception.