Oregon Measure 118 Is an $8 Billion Tax Increase That Raids $2 Billion from the State Budget

Oregon Measure 118 would raise $8 billion a year in its first full year, and nearly $10 billion a year within five years of implementation—yet it would shrink the state’s general fund by as much as $2 billion a year within five years ($1.2 to $1.5 billion immediately), with an additional $1.3 billion hit at the start. That seems impossible, but due to the peculiar design of the proposed taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities.
increase, it’s true: the largest tax increase Oregon has ever seen would create a substantial budget shortfall.

Under the measure, all of the revenue generated by the new gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding.
goes to rebates to Oregon residents, with the money spent on the checks themselves, administrative costs, and a “hold harmless” provision (about which, more later). But (1) some of the revenue is a replacement for existing revenue that currently goes to the state’s general fund; (2) some of it is double-obligated, with the new revenue triggering revenue transfers even though none of the new revenue is available for transfer; and (3) some of it changes the calculation of existing taxes, reducing collections.

Right now, Oregon’s corporationAn S corporation is a business entity which elects to pass business income and losses through to its shareholders. The shareholders are then responsible for paying individual income taxes on this income. Unlike subchapter C corporations, an S corporation (S corp) is not subject to the corporate income tax (CIT).
excise taxAn excise tax is a tax imposed on a specific good or activity. Excise taxes are commonly levied on cigarettes, alcoholic beverages, soda, gasoline, insurance premiums, amusement activities, and betting, and typically make up a relatively small and volatile portion of state and local and, to a lesser extent, federal tax collections.
(the name the state uses for its corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax.
) consists of two components: (1) a tax on net income and (2) an alternative minimum tax on corporations with little or no profitability. The vast majority of all revenue under the tax—95 percent of it—comes from the net income tax component.

Proponents of Measure 118 cite the minimum tax payments as evidence that businesses pay very little in taxes, since the maximum payment under the minimum tax is $100,000. They claim that a business with $100 million in sales into Oregon only pays $100,000 in taxes, a 0.1 percent effective rate. But that’s only the company’s payment if it’s unprofitable. Corporate income taxes are meant to tax company profits. If that company had a 7 percent profit margin, making $7 million in profits, it would pay $522,000 in corporate taxes, more than in most other states.

Under Measure 118, the existing minimum tax regime would be replaced with a 3 percent gross receipts tax for large businesses, imposed on all Oregon revenue, regardless of level of profitability (or lack thereof). A business with $100 million in gross sales into Oregon would pay $2.75 million in taxes (3 percent on the amount above $25 million)—even if it suffered losses. Businesses with low profit margins, like the grocery industry, would face taxes that far outstrip their net income.

The Oregon Legislative Revenue Office estimates that the source of corporate excise tax collections will flip: instead of 95 percent of revenues coming from rates on net income, only about 5 percent will.

That means that $927 million that the corporate tax would have sent to the general fund in 2026 won’t be available anymore, because taxpayers will owe under the minimum tax instead, and that revenue goes to rebates, not the general fund. This amount will rise to an estimated $1.1 billion a year by 2030.

Notably, 44 percent of the businesses paying the new minimum tax are estimated to already be paying the old one, which means that they’re unprofitable or very nearly so. At most, any large corporation subject to the current minimum tax has a profit margin of 0.12 percent. The new tax is 3 percent of gross revenue, which is a minimum of 25 times their profits. (Many, of course, have actual losses.)

According to state calculations, corporate taxes on wholesale and retail businesses will increase by 840 percent—and that’s industry-wide, including businesses not even subject to the new tax. It also doesn’t account for the tax imposed earlier in the production chain that will increase the costs of the goods they sell as well.

Corporate taxes on construction will soar 1,064 percent—more than 10 times the current amount. Taxes on utilities will skyrocket 1,901 percent. Health-care taxes will be more than eight times current levels, and transportation will see an almost five-fold increase.

And taxing transportation may pose an additional problem. Under the state constitution, taxes on transportation are dedicated to the Highway Fund. But Measure 118 would add new taxes on transportation and put all the money toward rebates. Originally, Oregon officials concluded that this would require them to make deposits into the Highway Fund in the amount of the new revenue generated from transportation—as much as $350 million per year—though most recently, lawyers for the state have concluded that this won’t be necessary.

They may be right. But perhaps not. It’s not clear-cut, and state officials were right to be concerned about it initially. A successful lawsuit could force the state to deposit hundreds of millions of additional dollars into the Highway Fund, even though the state isn’t actually receiving the extra revenue that triggers the deposit.

In the first year, moreover, Measure 118 will blow an additional $1.3 billion hole in the state budget due to the corporate tax “kicker,” by which corporate tax revenues more than 2 percent above projection are dedicated to a K-12 education fund. Because estimates for the current fiscal year, which runs through June 30, 2025, are already set, any additional corporate revenue raised between January and June 2025 will increase the required education transfer, even though all the new revenue goes to rebates and isn’t available for education. The state will have to come up with the money some other way, perhaps by raiding some other part of the budget.

This is also a problem for future years, though not on the same scale. Future revenue forecasts will, of course, take the Measure 118 tax into account. But the way the kicker currently works, revenue above forecast goes to education. With Measure 118, where all the money—above or below forecast—goes to rebates, any time revenues beat the forecast, the state is forced to make a transfer in that amount out of revenues they don’t have.

The Measure 118 tax would also reduce collections under a current tax on the insurance industry, a loss of about $70 million a year, and would reduce individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S.
collections by more than $100 million per year because, by taxing S corporations at the entity level, it reduces Oregon taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income.
.

This is worth explaining. It’s not a behavioral analysis, with revenue estimators assuming that the tax will affect the economy and therefore reduce income. Rather, the new tax falls not only on C corporations but also on large S corporations and partnerships before their proceeds flow through to their owners and investors, meaning that the amount taken by the new gross receipts tax won’t be available for taxation under the existing individual income tax.

Of course, there will be broader economic effects as well, which Oregon’s revenue officials have struggled to account for. An extremely conservative estimate has the new tax reducing collections under existing taxes by a further $275 million a year by 2030 by reducing overall economic activity. Lacking anything better to go on, state officials seem to have modeled it as a general consumption taxA consumption tax is typically levied on the purchase of goods or services and is paid directly or indirectly by the consumer in the form of retail sales taxes, excise taxes, tariffs, value-added taxes (VAT), or an income tax where all savings is tax-deductible.
, something much more like a 3 percent sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding.
than a 3 percent gross receipts tax. The actual impact is likely to be much higher.

An ideal sales tax falls one time on final consumption. (In the real world, it’s a bit messier than that.) A gross receipts tax falls on the entire sales price at every stage of production, meaning that it “pyramids,” with the tax embedded in the final price many times over, and with many businesses put at a competitive advantage because their tax liability wipes out their profits, or even drives them into the red. (For more on this aspect of Measure 118, click here.)

All this adds up to a tax that not only harms Oregon’s economy—thereby hurting employment, income, and population—but also raids the existing state treasury. Taxes go up by $8 billion, yet the state finds itself in a $2 billion hole.

This doesn’t even exhaust the impact on state government. Measure 118 also contains a “hold harmless” provision which could be impossibly difficult to implement. Essentially, if the federal government concludes that these rebate checks count as income (which is consistent with how most state tax rebates are handled by the IRS), then the additional income could affect residents’ eligibility for a wide range of federal programs. Measure 118 requires Oregon to make residents whole in that case, covering whatever they lose in federal benefits.

That includes Temporary Assistance for Needy Families (TANF); the Supplemental Nutrition Assistance Program (SNAP, often called “food stamps”) and the specific program for Women, Infants, and Children (WIC); Medicaid, including Medicaid-provided funding for individuals with disabilities; Supplemental Security Income (SSI); the Children’s Health Insurance Program (CHIP); Section 8 housing and other federal housing assistance; the Low Income Home Energy Assistance Program (LIHEAP); and a range of other benefits.

Oregon could have to ascertain alternative scenario eligibility for each of these programs on its own, and then provide offsetting payments. For instance, if someone with intellectual disabilities sees their income increase, they might not only lose some or all their Medicaid-provided medical benefit, but also their housing, in-home assistance, and more. Oregon would have to figure out how to make them whole.

Measure 118 is only four pages long, and that’s part of the problem. A four-page ballot measure, subject to no legislative process or review, creates a new tax that raises $8 billion a year and requires Oregon to administer parallel versions of a myriad of complex federal programs without any guidance for doing so, and without any thought for the new tax’s interactions with state constitutional requirements. That’s a recipe for disaster.

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