Oregon Issue: Measure 97

Most Oregon Democrats generally support Measure 97.
Most Oregon Republicans oppose Measure 97.

I am a Democrat, but I oppose it.  Here is why.

I am posting this at the request of some Oregon readers.  It is an Oregon issue, but it has relevance to readers elsewhere because it reveals something about what kinds of taxes get support and how interest groups line up.

Oregon public employee unions gathered petitions for an Oregon statute that would impose a 2.5% tax on gross receipts greater than $25 million per year, to be paid by C-corp corporations, but not S-corp or partnerships or sole proprietorships.  Here is a link to a group that supports the tax:  Support 97 Group and here is a link to one that opposes it   Oppose 97 Group

The extra revenue gives Oregon a source of revenue to pay for the huge liability of public employee pensions based on income guarantees given to employees from 1970-2000, which benefits were based on investment and longevity assumptions that have proven massively incorrect.  Retirees are living longer and a safe, reliable investment return of 7.5% per year, plus inflation, is not attainable in an environment of 1.7% 10 year Treasury rates.   The shortfall needs to be made up somehow.  This tax was the answer.

From my point of view it was the wrong answer.   I have two objections.

One is the source of the law.   I don’t like tax measures by initiative.  Initiatives are blunt instruments..  They are designed to get support by being popular with voters who place their vote based on lightly informed impressions, rather than careful analysis.  It is a battle of bumper strips.  Tax laws need to be complicated because definitions and the implication of exclusions are significant.   Direct democracy is good for giving or withholding consent but it is not good at creating checks and balances.  Tax plans need to be created with the full participation of a republican form of government, in which whatever slender wisdom and attention to the consequences to individual cases can come to bear.   I trust representative government more than I trust direct democracy.  I am in good company in saying this: Madison, Jefferson, Washington.  

The other is the content of the law.   The risks of direct democracy show up in this law.  The law is haphazard and unfair in whom it taxes and exempts.  Taxes should be levied with some equality and paying taxes should not be haphazard.   A tax that was levied at 4% on people whose name on the birth certificate started with A through M, is less fair than a tax of 2% on everyone.  Exempting half the people doesn't "reduce the burden".  It doubles the burden on the people it included, plus it makes the whole system unfair.

Examples:

**The 97 measure taxes differently businesses doing exactly the same work if the business does $30 million in revenue versus a similar one doing $20 million.   That is unfair.  The $25 million test wasn't done to create fairness or reason.  It was bumper strip marketing driven, there to meet the need of a sales slogan, tax "large" businesses.

***The 97 measure taxes differently based on business organization, taxing a company that, for its own good reasons, has multiple shareholders in a C-Corp format, while exempting an identical business which, for its own reasons, is owned as a partnership or sole proprietorship or S-Corp.   That, too, is unfair.   There is nothing wrong or against public policy by having multiple owners and indeed such a business may well reflect a business where the employees have access to ownership, versus a closely help family owned business wherein the employees are forever on the outside looking in.   Measure 97 takes sides.

 
***The 97 measure taxes revenue, not income.  This is unfair.   Some perfectly good businesses have revenue but no income because they are in a bad part of a business cycle.  There is a profound difference between revenue and profit.   Taxing profits has the advantage of there being money available to pay the tax.  Taxing revenue is haphazard, sort of equivalent to taxing names A to M, because revenue and whether a business is a high margin or low margin business is only loosely connected to profits.

***The 97 measure taxes some supply chain arrangements more than others, which is unique and unfair.   It advantages large vertically organized enterprises (Walmart, e.g.) versus people in the same business who use wholesalers in their supply chain (local grocery chains.)  Let me give an example.    Sage Melons grows melons for sale in southern Oregon.   There are some steps getting them to market. 

(Feel free to skip this next section.  I explain where melons come from.  Not the stork, and they don't grow on trees.  This may be more interesting to me than to you.  I understand.  Still, this may be the one chance in your life to learn what happens to melons before you see them on the shelf.   Read or skip.   Your choice.)

Process #1:  Wash and cool down.    Melons when picked in the field are warmed from the sun and they need to be cleaned and cooled to have the field heat is pulled out of them to preserve their shelf life.   

Process #2:  They get held in a refrigerated warehouse briefly until they are packed into 40 pound boxes and put onto pallets ready to be delivered to a grocery store.

Process #3: They get picked up from that warehouse by a guy with a forklift and trucked to the delivery door of the grocery store.

Process #4: The melon is put onto a shelf and sold to a fortunate consumer by the retail grocer.

Unwashed melons in bins in the field are worth about 35 cents a pound.  Washed, cooled, boxed, palleted melons on a grocery delivery dock are worth 45 cents a pound to the grocer. The grocer needs a 35 cent markup, so they sell for 80 cents a pound.  

Sage Melons

If the hardworking owner-operator of Sage Melons brings a bin to the Distribution Center of Walmart he sells them for 35 cents a pound.  Walmart is vertically integrated so they own the melons throughout the time they wash, cool, box, warehouse, and deliver them to their various local stores.  There would be no tax on the process that added 10 cents to the value, but they do add 2.5% tax to the final sale of their price of 80 cents, so they sell them for 82 cents a pound, and the consumer paid a tax of 2.5%, as intended.

But imagine another, entirely plausible, supply chain that uses local processors who make good use of idle resources.  Sage Melons sells the other half of the day's pickings to Consoidated Cooling for 35 cents a pound, at the building across the street from the Walmart Distribution Center.   They do a cool down using their high efficiency powered refrigeration system (the same one Walmart uses) for their standard 2 cents a pound to pull 40 degrees of heat out of them.  The cooler is there to handle pears for the pear industry and it is idle during the melon season which is earlier than most pears.  There is a 2 cent a pound cost and markup. (They then add the tax as the Consolidated Cooling people sell them to Southern Oregon Fruit.)

As soon as they are cool Southern Oregon Fruit takes possession and removes them from the cool down units and brings them to their warehouses across the alley where they wash them and pack them into 40 pound boxes..  The warehouse is empty, awaiting the bosc pear crop.  They hold them for a day or two until there is a market for them.  They get 2 cents a pound for this phase. (They add a tax when they sell them.)

Within 48 hours the melons are sold to Fresh Express, a wholesaler and truck delivery company, which picks up the pallets of boxes and delivers them 3 to 50 miles to local stores, along with corn, tomatoes, cucumbers, and other local produce from other growers.   They get 6 cents a pound. (They add a tax when they sell them to local grocery stores.)

Out of State Melons at the store

The melons had 10 cents of value added, just like Walmart's internal system, but here there were 3 internal sales and a total tax of 3.1 cents added because of the 3 transactions as value got added at each step as the melons changed hands.   The cost to the local grocer is now 48.3 cents, versus the 45 cents at Walmart, even though both processes were necessary and efficient and cost 10 cents/pound.  The difference wasn't "efficiency", it was tax on receipts as the melons changed hands.  When the local grocer sells them, with the 35 cent markup they sell for 82 cents at Walmart vs. 85.2 cents at the local grocer.  (You know.  The one that buys 4 H beef at the Fair, the one that supports local hospitals and food banks, the one that deposits checks in local banks, not the one that ships profits to Bentonville, Arkansas.)

It is unfair to give an advantage to Walmart over an equally efficient local supply chain that helps support local agriculture by using idle facilities.

Summary:    I would be OK with a sales tax, if it were broad based and it replaced some of the current income tax.  Taxes on "income" misses a good piece of the underground economy and a sales tax would help even out the states revenue streams.   But I don't support a hidden sales tax that is haphazard.   Measure 97 is haphazard.






Wait, once again, there's more.   I have uploaded a new podcast, episode 3 of Two Left Eyes.  Thad Guyer and I look at the election and we present some new, even more worrisome observations for Hillary supporters.Podcast: Watch out, Hillary!