A Year Later, Tax Repeal Stands Test
(The Business Journal, July 22, 1985)
By Richard Carson
In 1983 Oregon was in the depths or the recession, and like other states, was looking for economic and political solutions to increase employment and diversify its economy. By 1984, at the height of an international tax debate, the State of Oregon took the lead and repealed its worldwide unitary tax. On the first anniversary of that legislative action we can reflect on the events, political decisions and actual results.
The worldwide unitary tax is a method of computing state corporate income tax liability. A corporation's U.S. and foreign subsidiaries are required to "combine" their incomes into a worldwide combined report. "Worldwide combination" measures a corporation's in-state income by applying an apportionment formula to the combined worldwide income of the corporate taxpayer.
Supporters of "worldwide combination" contend its purpose is not to tax out-of-state income. They allege it merely measures income properly attributable to the taxing state.
Opponents of "worldwide combination" contend it is the international parent group whose income is being apportioned and not the in-state taxpayer's income. They object to the application of an apportionment formula to combined corporate entities, particularly when the application is extended to different lines of business in different countries. They say the tax discriminates against multinational business groups and causes distortion, inequities and major compliance problems.
Oregon's first public and media awareness of its own worldwide unitary tax came in August 1983. A joint-venture electronics plant, planned by Mitsubishi and Westinghouse Electric, went to North Carolina instead of Oregon. The final decision was publicly attributed to "proximity to market," but Mitsubishi also acknowledged the worldwide unitary tax had been an important consideration.
That same message was delivered to state officials when representatives of NEC America contacted the Oregon Economic Development Department in October 1983. NEC officials were clear on two points. First, they liked the Portland metropolitan area as a possible location for their new manufacturing plant. Second, they did not want to fall under the worldwide unitary tax requirements.
The state already had been involved with Epson America on locating a computer printer assembly plant since February 1983. Epson, a subsidiary of the Seiko Group, also expressed similar reservations.
In the spring of 1983, Oregon Gov. Victor Atiyeh moved ahead of the debate by ordering a thorough review of the impact of the state's worldwide unitary tax. The state's Department at Revenue explored both the administrative and legislative options.
This activity in Oregon occurred simultaneously with a rising international debate on the worldwide unitary tax. When Florida enacted the unitary tax in July 1983, a representative of the Sony Corp. of America was quoted as saying: "If the (worldwide) unitary tax is going to stay in Florida, we'll move."
In the last four years, the EEC (European Economic Community) has submitted two formal protests, and successive presidents of the EEC have sent strong notes to the Department of State, warning of inevitable reciprocal responses to the worldwide unitary tax. Harry Walsh, economic counselor at the British Embassy, stated, "It's hard to get the EEC countries to agree on anything, but they were unanimous on this."
In September 1983, Secretary of the Treasury Donald Regan responded to the international protest by creating a working group to resolve issues surrounding the worldwide unitary tax method that was being used in only 12 states.
The flurry of public statements and confidential discussions in Oregon continued from 1983 to 1984. By February 1984, then-Portland Mayor Frank Ivancie called for the repeal of the worldwide unitary tax. Ivancie's remarks were prompted by a Portland Development Commission (PDC) report that came after a two-week trade mission to Japan. The PDC reported, "It's getting to the point where Oregon is virtually being blacklisted in Japan because of the unitary tax."
While working with NEC America and Epson, the governor and the Economic Development Department agreed they should address the worldwide unitary tax issue face-to-face with Japan's premier industrial trade group, the Keidanren (Federation of Economic Organizations). The Keidanren, which has 812 member corporations, had scheduled an investment study mission in the U.S. The mission consisted of three groups of Japanese businessmen visiting 23 states over a two-week period.
On March 12, 1984, Governor Atiyeh wrote the mission's leader, Akio Morita, the chairman and chief executive officer of Sony. He requested that a Keidanren group visit Oregon, and specifically noted his publicly stated commitment to abolish the worldwide unitary tax. Mr. Morita accepted.
In late March, the state's Joint Legislative Committee on Trade and Economic Development, led by Sen. Jim Gardner, passed a resolution calling for the repeal of the worldwide unitary tax. However, the regular legislative session would not start until January 1985.
Also in March, after long deliberations between the state and company officials, NEC America decided it would build its new plant in Oregon and that it would be administratively exempt from the world-wide unitary requirements. That announcement came in May 1984.
The June 4-5 visit by the Keidanren elevated the worldwide unitary issue to new prominence in Oregon. Mr. Morita told the Oregon press that as many as 175 Japanese manufacturers were considering investing in the U.S. His visit gave both Oregon business and political leaders a chance to understand the total problem.
On June 20 the governor unveiled his plan to repeal the worldwide unitary tax in a speech before the World Affairs Council. The next day Wacker Siltronic, the Port-land subsidiary of a West German firm, announced an $85 million expansion of its existing silicon wafer production facility. The company cited the state's efforts to modify the unitary tax as one factor in the expansion decision. Wacker's executive vice president, Malcolm Russ, noted that "without the unitary tax, there's more of a possibility of adding new technologies here."
Oregon newspaper editorials spoke with increased frequency on the need to cut the unitary tax. In early July, Governor Atiyeh polled legislators and, finding a consensus, he called for a special session of legislature. The special session lasted one day. The vote to repeal the world unitary tax was a decisive 27-3 in the Senate and 53-6 in the House. The legislation becomes effective January 2, 1986.
That evening Mr. Morita called to congratulate the governor at home. The next day the legislative action was front-page news in the prestigious "Japan Economic Journal." It was also the same day heads of Keidanren committees began their annual meeting.
The July legislative action was followed swiftly by other major foreign investment announcements. In September, during governor's Japan trade mission, Fujitsu America and Fujitsu Microelectronics announced separate plant investments totaling $170 million in Oregon. Epson America announced its new $10 million computer plant in October. Also in October, Wacker Siltronic announced the second expansion for that year of $80 million.
There is a common thread in all these events that led to the July 30, 1984, legislative action. That common denominator the ability of the local and state political leadership to first understand the various international, national and state had taken place, and then to take a series of calculated steps that would end in positive legislative action and new international investment.
Oregon's early review of the worlds unitary tax liability, the effort to find administrative relief for two major Japanese investors, the legislative committee resolution, the Keidanren visit and the overall consensus building all combined to produce the desired result: legislative repeal the worldwide unitary tax.
In early 1984, there were 12 states using the worldwide unitary method. To date, four have followed Oregon's lead: Colorado (legislative repeal, June 1985); Florida (legislative repeal, December 1984); Indiana (legislative repeal, April 1985); Massachusetts (Supreme Court repeal, December 1984).
What was the actual fiscal impact of 1984 foreign investments in Oregon? The state's Legislative Revenue Office estimated that repeal of the worldwide unitary tax will result in an average annual net loss of $15 million in state revenues.
The 1984 foreign investments announced by the industries locating and expanding Oregon will total $370 million. These companies initially will provide more than 2,750 primary jobs and support 4,675 secondary jobs (a total of 7,425 jobs). The combined annual corporate income, personal income and property tax revenue $15.9 million will more than offset the estimated $15 million loss of annual tax revenues.
When these corporate expansions reach site capacity, the companies could provide 6,900 primary jobs, and support 11,730 secondary jobs (for a total 18,630 jobs). The total long-term investment of these corporations is estimated to reach $755 million. Future corporate income, personal income and property tax revenues may provide $31.7 million to the state, if future corporate expansion plans are fulfilled. This revenue gain is twice the estimated loss resulting from the repeal of the worldwide unitary tax.
Richard Carson in the manager of industrial properties section of the Oregon Economic Development Department.