Gains and Losses

Joan McGuire

Oregon’s property tax laws and abatement of corporate taxes have impoverished schools. Can the new billion-dollar business tax help solve chronic underfunding?

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n Evergreen Road, along the border of Hillsboro and unincorporated Washington County, the drone of dump trucks echoes through hayfields and housing developments.

The trucks make their way from the site of Intel’s latest expansion to far-flung dumping grounds. Along the way, the trucks pass Hillsboro’s Glencoe High School, which is undergoing a $41.3 million improvement project that expands and renovates the building while also expanding the school’s career-technical education programs.

They rumble past Evergreen Middle School, which is getting its own $23 million renovation. A new wing of classrooms and a new library/media center are making room for 200 additional students.

They also drive right by the home of Jerry Willey — who was Hillsboro’s mayor between 2009 and 2017 and now serves on Washington County’s Board of Commissioners — at the rate of one every 30 seconds. Willey notes that, thanks to tax abatements and state reimbursements to Washington County, the Intel construction and school construction have more in common than a dump-truck route.

JEK 4481Photo: Jason E. Kaplan

Willey served as mayor of Hillsboro in the wake of the 2008 global economic crisis. During that time, he saw Intel expand its manufacturing facilities in Hillsboro and expand jobs as the overall economy contracted.

A series of tax agreements with Intel, including a $100 billion 30-year deal reached during Willey’s tenure, kept Intel growing in Oregon and kept every dump truck in a 100-mile radius coming to and from its construction site every 30 seconds.

Those tax agreements and Intel’s growth led not only to jobs and construction but to millions of dollars in funds that Willey says “were going to be used to the benefit of everyone in the county.”

The boon in school funding as a result of growth at Intel is thanks to a law known as Gain Share. It has funneled tens of millions of dollars into Oregon public schools as something of a reward for job creation, job retention and economic growth.

But Gain Share has serious shortcomings: Counties and local governments have suffered from lost tax revenue. Only a few municipalities have been able to turn their state-issued returns into buildings, programs and funding for an entire school year.

Now a new form of school funding is in the works. Back in May, the Oregon Legislature and Gov. Kate Brown approved the Student Success Act, which aims to raise $1 billion a year for Oregon schools by imposing a .057% tax on gross receipts for businesses with $1 million or more in sales. The $2 billion school-funding package would ideally expand early-education access, decrease class sizes, add mental health resources for students, and restore art, music, physical education and career-technical education programs.

Gain Share helped bring private businesses into Oregon’s public school funding, but its missteps helped redefine business’s role in state education.

It shows how a flawed corporate taxation system led to chronic underfunding of the public school system. The Student Success Act is aimed at remedying those past failures. But will it go far enough in solving the problem of school underfunding?

Why is private funding necessary for Oregon public schools? Well, in 1995, Oregon voters approved a measure that capped property taxes for funding schools at $5 per $1,000 of assessed value. Then, in 1996, voters passed Measure 50, which not only cut the assessed property values of homes in Oregon but limited the annual growth of that assessed value.

Both measures shifted school funding from local property taxes to state income taxes, with the state compensating school districts for the loss of local tax revenue. Paul Warner, a former Oregon legislative revenue officer, notes that while real estate market values have increased sixfold since 1990 and personal income has increased fourfold, school operating revenue is only about three times more than it was 20 years ago.

School operating revenue went from 3.8% of personal income between 1989 and 1991 to 2.8% between 2017 and 2019. As a result, school operating revenue is $4.2 billion less in 2017 to 2019 than what it would have been had the measures never been enacted. With school funds in the same pool of personal income tax as the Public Employees Retirement System (PERS) and other items, districts were now competing with various other services for every dollar.

As local school districts looked for other sources of funding, the Oregon Legislature passed a plan for a Strategic Improvement Program that would allow local governments to lower business taxes if a company was willing to invest at least $100 million at an urban site or at least $25 million at a rural location in Oregon.

In Washington County, two Strategic Improvement Program agreements were approved in 1994 to grant abatements to Intel in exchange for an investment of up to $3 billion.

The move was popular with business. Kathryn Harrington, chair of the Washington County Board of Commissioners, worked at Intel between 1993 and 2004 and remembers hearing about the agreements in the company’s “business update meetings.”

JEK 4588Kathryn Harrington, chair of the Washington County Board of Commissioners Photo: Jason E. Kaplan

“Looking back, I remember being aware of Intel looking into multiple sites here in the U.S. and across the world for technology manufacturing, research and development,” Harrington says.

Other Strategic Improvement Program agreements with Intel followed. One in 1999 called for $12.5 billion in investments between tax years 2000-01 and 2014-15. In 2005 another deal was struck for $25 billion in investments over 15 years.

“Washington County and the City of Hillsboro have made Oregon a competitive place for all businesses, and the Strategic Investment Program is one of the reasons Intel has been able to invest more than $40 billion in the state over the last four decades,” Intel said in a statement. “Intel has a long-standing commitment to supporting education here in Oregon, and we know that it’s a critically important issue to the community and to many of our 20,000 Oregon employees.”

Jim McCauley, legislative director for the League of Oregon Cities, who served as government affairs manager for Washington County for more than a decade, goes a step further: “It’s the reason Intel exists in Oregon, no question.”

It’s also the reason more than two dozen other tech companies followed.

“Absent those programs, you don’t have the high-tech industry in Oregon,” he says. “Tech companies are all here but for the incentive packages.”

That 2005 Intel agreement led Washington County to offer biotech firm Genentech a 15-year abatement starting in 2010 in exchange for a $200 million investment, a $500,000 annual “community fee” and $7.6 million in additional payments over a 15-year period.

Intel and Genentech were creating jobs and giving the state considerable income tax revenue, but caps on property tax meant that Washington County was also abating taxes for businesses (Intel pays $34.3 million in taxes on $2.1 billion in property, while Genentech pays $3.5 million on its more than $212 million acreage).

For Hillsboro, Washington County and arguably the state of Oregon, it was a beneficial trade. In 2012, ECONorthwest noted that the Strategic Improvement Program agreement with Intel produced more than 16,000 jobs directly, created three jobs statewide for every job at Intel and generated $192 million in personal state income tax revenue from all of those roughly 68,000 jobs.

Genentech, meanwhile, notes that it has more than 550 employees at its Hillsboro site, more than double the 250 it initially promised.

However, under the 2005 Strategic Improvement Program agreement with Intel, the roughly $982 million in taxes lowered through the deal came nowhere close to matching the $171 million the agreement generated in revenue for schools and other public services.

In 2007 the state Legislature introduced a measure to take some of the sting out of the agreements for local governments. In exchange for limiting or abating local business taxes, the Legislature offered local governments a cut of the state income tax revenue created by jobs that the agreement created and retained.

The deal was dubbed Gain Share, and it offered local governments 50% of the income tax revenue on new and retained jobs.

“When Gain Share came on the scene, Washington County commissioners had grown wary of asking the public to support Strategic Improvement Program agreements when they were giving up hundreds of millions of dollars in property tax revenue,” McCauley says.

Gain Share was meant to calm debate about abated taxes and tax fairness while also easing the strain on local transportation and services. It did its job almost too well in some areas, and not nearly well enough in others.

Peter Buckley served as a state representative for Ashland and parts of Jackson County between 2005 and 2017. He voted for Gain Share in 2007, believing it would be a small payout of $5 million or less.

In 2011, according to data from both the Oregon Office of Economic Analysis and Business Oregon, the state’s economic development agency, the first Gain Share payouts in 2011 totaled just $600,000. But thanks to a growing business base, the 2012 payout ballooned to $24 million, with $23 million going to Washington County alone and $5 million going to Washington County schools.

“The definition of ‘retained jobs’ was so broad that virtually any employer could say, ‘I retained a job that would’ve been lost otherwise without this tax break,’” Buckley says.

Gain Share payouts soared to $48 million in 2013 and around $76 million in both 2014 and 2015. While the Hillsboro School District was already receiving money through Strategic Improvement Program agreements with Intel and Genentech (roughly $1 million each year between 2006 and 2011), Gain Share spiked that contribution to nearly $2 million for the 2014-15 school year.

“It is an economic incentive to attract business, and in the short term one could argue that it has a negative effect on schools statewide, because corporate tax collections are artificially lowered to attract a particular business,” says Alex Pulaski, spokesman for the Oregon School Boards Association, about Gain Share.

During the 2013-14 and 2014-15 school years, Gain Share money greatly reduced or eliminated the need for cutting school days within the Hillsboro School District.

“It wasn’t designed to be an education-funding program, but it has been used to help further education,” says Hillsboro Mayor Steve Callaway, a former Hillsboro School District principal and Banks School District assistant principal. “But as a principal, I was pleased when HSD [Hillsboro School District] was able to fund a full school year thanks to Gain Share funds.”

The issue, Buckley points out, is that Gain Share funding wasn’t trickling all that far beyond Washington County. Nearly 99% of all Gain Share funding between 2012 and 2015 went to Washington County. Roughly 18% went into Washington County schools.

“It created such an inequity: We had school districts all across the state laying off teachers, and then to have [some] school districts benefit from Gain Share in ways that other school districts didn’t, it just seemed unfair,” Buckley says.

“It seemed like it was going against what we were trying to do with education, which is bring up the funding for everybody and not just a few chosen districts.”

In 2015 the state Legislature took another look at Gain Share and came up with a compromise that would spread funds throughout the state. The 2015 Legislature cut the distribution of personal income tax revenue to 20% for retained jobs from 50%, while continuing to share 50% for newly created jobs.

The Legislature also capped the annual distribution at $16 million for any county and created a “sunset” date for the program in 2024.

According to numbers from Business Oregon, Washington County would have taken in $31 million in Gain Share funds in 2018 without the cap. The excess now goes into state coffers. Washington County and its communities, meanwhile, have since adjusted to a smaller pool of Gain Share funds.

“We’re using one-time money for one-time projects, as opposed to ongoing programs,” Harrington says.

Washington County now dedicates large portions of its Gain Share revenue to paying down debt on its facilities, performing seismic upgrades and funding a wood-stove exchange program to improve air quality.

The funds have purchased a new courtroom, parking lot, security system Sheriff’s department training facility and event center at the Washington County Fair Complex.

Under the newly capped Gain Share agreement, Hillsboro lost some of the incentive for a Strategic Improvement Program agreement it entered with Intel in 2014. That agreement included a $100 billion investment from Intel over a 30-year period, $122 million in property taxes and fees over the life of the agreement, and up to $228 million in other fees from Intel.

As Intel expands, Genentech is also building a new $170 million facility at its Hillsboro site. Any new jobs created there will also be subject to Washington County’s $16 million Gain Share cap.

With the end of Gain Share drawing closer, Hillsboro has funneled Gain Share money into one-off capital projects including a public safety training center and its HiLight high-speed public internet utility.

After Gain Share was altered, the city struck an agreement with the Hillsboro School District giving it $1 million a year in Gain Share funding. About half of that goes toward infrastructure improvements around schools, while the rest goes toward improving career-related learning programs.

“My focus as mayor was to look back 10 or 15 years from now and say that project or that building that has a special focus to it — not just a regular City of Hillsboro building — is what we did with the Gain Share money,” Willey says.

What Washington County and Hillsboro have lost from Gain Share in recent years, career-technical education programs statewide have gained. When the state Legislature reconfigured Gain Share in 2015, it increased funding for career-technical teaching.

“Almost all of my colleagues on both sides of the aisle were lobbying very hard, saying ‘You have to get us up to $83 million’ for career and technical education,” Buckley says.

“These two issues became joined together: If we could actually rein in Gain Share, we could fund career and technical education programs throughout the state.”

Those trucks full of Intel dirt are set to rumble their way through Hillsboro until the end of the company’s latest expansion in 2021. Whether Gain Share will still be around at that point is anyone’s guess.

Both Gov. Brown and former Gov. John Kitzhaber each separately proposed ending Gain Share early. But Gain Share’s unpredictability and fragility have secured its legacy in this state.

When funds from Gain Share were shifted to career-technical education programs in 2015, educators and state legislators saw an opportunity to bolster those programs even further.

In 2016 legislatures threw their support behind a referendum item, Measure 98, that would distribute at least $800 per high school student annually for career-technical education programs, college-level courses and dropout-prevention initiatives.

Buckley notes that career-technical education funding has now been directly addressed through the Student Success Act. Instead of being tied solely to personal income tax or to job creation and retention, school funding now has a dedicated source rooted in both private business tax and the public’s income taxes.

“The Student Success Act provides the first chance in a generation to make a meaningful investment in Oregon students,” says Pulaski. “We understand that not everyone was in agreement about the means to put our schools back on track, but we thought that legislative leaders worked incredibly hard to identify the issues and attempt to reach a compromise.”

Just as importantly, the Student Success Act received a big push from Oregon businesses. Nike wrote to the state Legislature to “close the opportunity gap for historically underserved students.” It also formed the Coalition for the Common Good, which included the Oregon Education Association, Oregon Health Care Association, Portland tech firm Cloudability and Portland developer Russell Development Company.

Though Pulaski says he can’t see a connection between Gain Share and the Student Success Act, Buckley says that the latter doesn’t happen without the former.

If Gain Share hadn’t shown what corporate funding could do for Washington County, there wouldn’t have been the tweak in 2015 that made it benefit all of Oregon. If that funding of career-technical education courses in 2015 didn’t happen, there may have been no Measure 98 in 2016.

If Oregon’s graduation rate didn’t climb from 68.7% in 2013 — when Oregon was spending $1,200 less per student than the national average — to 78.7% in 2018, there may not have been support for the Student Success Act’s business tax from Nike and others.

With Nike calling for improved career preparation and technical education programs specifically, the evolution of Gain Share helped expose some of the shortcomings in Oregon’s educational system and its funding.

“Gain Share did some good things, but it was costing far more than was projected, and it wasn’t helping us resolve that big-picture issue of the structural budget deficit,” Buckley says. “I think it has made some positive impacts and moved the big-picture discussion forward.”

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