Oregon’s proposed Measure 97, which will appear on the November ballot, is now being hotly debated, with proponents and opponents gearing up to outspend each other and do a little economic stimulus for the advertising and lobbyist industries.
The measure provides for an unprecedented 2.5% gross receipts tax on certain C corporations with sales in Oregon above $25 million. The proposed law exempts S corporations, LLCs, and “Benefit” Corporations from its provisions. It is projected to raise a whopping $3 billion per year from its tiny tax base. It is not a true VAT tax, so its effects will be multiplied across various levels of the supply chain as it forges its regressive path down to consumers. And, thanks to our world of corporate monopolies who influence pricing, some affected companies, such as our very own Powell’s, will not be able to raise prices to help absorb the tax hit, and so instead will be faced with cost cutting decisions such as employee layoffs. Other businesses that operate at a loss, or with thin margins would still have to come up with a way to pay the tax.
The measure is being sold as a way to “save the children” – an appeal so dishonest and crass as to be sickening. It is, in fact, a PERS bailout plain and simple. And it is a regressive tax, sloppily drafted with gaping loopholes, relying on a narrow tax base. In short, it is just about the worst piece of tax policy I think I have seen in a while (not including the Pdx Arts Tax).
So, let’s break it down:
Tax Reform – It’s tempting to get excited about a tax that falls on “the man” rather than on ourselves. Isn’t it only right that big corporations pay their fair share? For tax policy scholars, fairness has a specific meaning: progressivity. A tax can only be fair if it is progressive. Hence, most tax policy reformers rule out consumption taxes as falling too heavily on the poor, who need to spend most if not all of their income just to survive. Consumption taxes miss the mark in terms of fairness, and are to be avoided if fairness is your actual goal. Here we have a hidden consumption tax masquerading as a gross receipts tax. ALL of the economists who studied the proposal have concluded that the tax is regressive. The impact could be especially bad in the health care industry, where medical providers will be forced to pass on the rising costs to those least able to afford the increase. For these reasons, you can conclude that this tax is grossly unfair to the working poor in Oregon. And, as any good tax policy scholar knows, a well drafted tax policy is one which relies on a broad tax base. So, the measure fails miserably as tax reform. That’s because it was drafted by political activists who developed the measure by hiring consultants to conduct focus groups, to see what would “sell” in Oregon. It is our legislature that should undertake meaningful tax reform, not marketing experts. We recently had significant corporate tax reform back in 2010 with the passage of Measure 67. Now, all corporations must a least pay a minimum tax that ranges from $150 for small C corporations to $100,000 for businesses grossing $100 million or more. Our current minimum tax exempts S corporations and LLC’s from these provisions, which provides a loophole that could be closed should the legislature deem this as a legitimate way to raise additional funds. But, that’s just one idea among many that could have been considered by the legislature.
Loopholes Galore – The gaping loopholes in Measure 97 provide for a number of simple solutions that corporations can employ to escape the gross receipts tax: elect S status, reorganize as a partnership or LLC, choose to be a “benefit” corporation (which involves a meaningless set of steps that will keep law firm paralegals busy for a little while), relocate out of state, and best of all: constitutional challenges to the law. Larry Brant of Garvey Schubert Barer, among other legal experts, have already outlined a laundry list of possible constitutional challenges, which you can read about here.
School Funding – There’s no doubt that our public schools need more money to adequately prepare our children for adulthood. The reason that they need more money is that the unfunded $21 billion PERS liability is looming, and each year schools are assessed their contribution requirement, which now takes up a larger and larger portion of each school’s budget, leaving not enough left for teachers and curriculum. While various PERS reforms have been attempted, as it turns out, it’s illegal to break a contract with your employees. And, I for one do not begrudge a single teacher or other public servant their pension benefits – they were earned fair and square.
Let’s get some perspective, though, on the enormous burden the PERS board has laid before us, which was decades in the making:
2015 Annual Oregon budget: $33.4 billion
2015 Portion of budget spent on education: 19%
2015 Portion of budget spent on Medicaid: 21%
(source – BallotPedia)
As you can see from the above numbers, the unfunded PERS liability dwarfs the ENTIRE education budget by a factor of 3. How on earth will Oregon ever have enough money to fund this debt that we owe to our public servants? Add to that the ever increasing costs of Medicaid, transportation, and other programs, and one can see the temptation to try to find someone else to pay the bill. The legislature must work very hard to come up with viable solutions, and those solutions must include a combination of tax increases and tax savings. Closing loopholes, enacting viable PERS reforms, eliminating wasteful spending, and rooting out fraud need to be at the top of our priority list. Tax reform must be based on sound policy that involves both fairness and simplicity, and that relies on a broad tax base. That is how we will “save the children.” We won’t save them by passing a feel good tax that purports to tap evil corporations, and instead hurts the very children we need to help.