October 23, 2016

Oregonian: 2.5-Percent Gross Receipts Tax ‘Could’ Raise Consumer Prices

I hope I’m right when I contend that most people in Oregon aren’t as dumb as the writer of a photo caption in an article found at Oregon Live, the web site of the Oregonian, apparently is (or, one hopes, is only pretending to be).

The caption’s writer, commenting on a 2.5 percent gross receipts tax — not an income tax, but a tax off the top on sales — claims that “One question Oregonians have about a corporate tax measure on the November ballot is whether it would increase costs for consumers.” He further notes that grocery stores “are one industry that could raise prices to cover the cost of the tax.” The idea that Oregonians won’t (excuse the expression) eat the cost of the tax imposed if what is known as Measure 97 passes, either through higher prices or other means, becomes more absurd the more one learns about the details of the tax.

Here are other pertinent items:

  • Only 5 states currently have some form of gross receipts tax. Texas, which has a horribly complex “margin tax” that is essentially a tax on a portion of a firm’s revenues, is one of the five. The five also includes Washington State, where an intensely despised Business & Occupation tax operates as a gross receipts tax which varies by industry.
  • The 2.5 percent rate in Measure 97 would be imposed on all gross receipts above $25 million. The tax on the first $25 million would be $30,000. The tax on just the next $1.2 million in receipts would be just as much ($1.2 million times 2.5 percent is also $30,000).
  • The 2.5 percent rate is far higher than the rates seen in other states which currently have gross receipts taxes. Washington’s ranges from 0.1 percent to 3.3 percent, but “most industry classifications … (pay) a tax rate below 1 percent.” The rates in the other four states are far below 1 percent.
  • Measure 97 is a clear “soak the big guys” scheme, as only about 1,000 companies operating in the state will pay the 2.5 percent tax on revenues above $25 million.
  • The tax will have a “pyramid effect” if there are multiple stages of production and/or distribution, which of course is not unusual. Thus, a big manufacturing firm will pay tax when it sells its goods to a big wholesaler. The wholesaler pays the tax when it sells the items to the big retailer, and the retailer pays the tax when it makes final sales to consumers.
  • Increased collections resulting from the tax of $3 billion per year ($6 billion per biennium), naively assuming no change in behavior (more on that later), will enable the State of Oregon to increase its budget by 25 percent.

As seen in the introduction, despite this massive change being imposed on businesses’ cost structures, Grant Butler wrote a photo caption at the Oregon Live story by Dana Tims which would make readers think that the new tax, if imposed by referendum, might not affect them (red underlines are mine; only a portion of the photo is being shown):

OregonMeasure97couldRaisePrices2016

Mind you, Butler and Tims are using the grocery store chains as their example of the type of business which “could” pass on the cost of the tax. The before-tax profit margin in the industry, which is “a 2-, 2.5-, to 3-percent type operating margin” on revenues, is either barely below, at, or barely above that Measure 97 tax. The $25 million virtual exemption does little to negate this impact in a high-volume, low-margin business.

The Oregonian reporter’s and photographer’s only fig leaf is a study with more holes in it than the deli counter’s Swiss cheese that they should have ignored. That study, defying all laws of economics and coming from a group which commissioned a study with the opposite conclusion just months earlier, claimed that consumer prices won’t increase. The Tax Foundation, as would be expected, said otherwise:

Earlier this week, Our Oregon, the group pushing for M97, released a report that argues that M97 would not increase prices for consumers. Their report attempts to prove that no relationship exists between prices and corporate income taxes, but fails at the task. This report is subject to a number of methodological issues and finds a result that is out of line with economic literature.

To reach its conclusion, this report, written in conjunction with the Oregon Consumer League, surveys five national retailers, Walmart, Kroger, Toys “R” Us, Lowe’s, and Target, and compares the prices of 25 goods in each state. Because the prices of the surveyed goods are generally the same in each state, the authors assert that there exists no relationship between prices and corporate taxes.

Ignores The Research: In June, the Northwest Economic Research Center at Portland State University added to the economic research on M97. In fact, Our Oregon actually commissioned the study. This report specifically discusses how gross receipts taxes, like M97, increase prices for consumers. On multiple occasions, the report says that the tax will become “embedded in the price of the [final] good or service.”

… If No Price Increase, Then What?: Even if we accept all of the authors’ dubious claims regarding the lack of relationship between prices and tax, the result would be more damaging for Oregonians. Corporations in Oregon, both with explicit and implicit incidence from M97, would need to make changes to shoulder the additional tax burden created. Passing it forward to consumers via price increases would be one way to handle the new costs. But corporations could also shoulder the burden by passing it to its workers, meaning more private-sector jobs would be eliminated, or hours, benefits, and wages would be decreased. So if the supporters somehow are right that M97 would not increase any prices in Oregon, which simply means that jobs, wages, and benefits are at even higher risk than previously estimated.

The last paragraph specifies the “other means” by which Oregonians will pay mentioned in this post’s introduction.

It should surprise no one that the Oregonian reporters are more concerned about reporting about how much money is being spent by supporters and opponents of the tax than what would result from its passage.

Readers will also have little trouble guessing who is behind this measure:

A major influx of campaign contributions opposing Measure 97 has made the measure the costliest in Oregon elections history.

With more than two weeks to go before the state’s Nov. 8 general election, groups against the corporate tax measure have contributed more than $22.5 million toward its defeat.

That surpasses the previous record of $21.2 million contributed in 2014 toward the defeat of Measure 92, the proposed GMO labeling measure.

The primary backers of the measure are public-employee unions.

Public-employee union leaders have rarely been particularly strong in the basics of economics, and this is another example.

There are some people who will benefit if Measure 97 passes: Merchants in Oregon’s bordering states of California, Washington, Idaho and Nevada, where Oregon residents near those states’ borders will flock to pay lower prices. This means that the projections proponents have developed estimating the size of the tax windfall aren’t worth the paper they’re printed on, or the electricity they used in computer and other device displays.

If media ignorance of basic economics such like that seen here is widespread, they will clearly deserve a large share of the blame if this disastrous measure passes.

Cross-posted at NewsBusters.org.

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