Today we highlight the final key finding in Oregon’s Legislative Revenue Office’s (LRO) analysis of Measure 97 (M97): the taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. increase would hit low-income households the hardest.
The LRO integrated all of the various economic changes mentioned in our previous posts, such as higher prices, lower employment, and higher tax burdens, into a distributional analysis that illustrates the effects of a tax change on individuals in different income ranges. The chart below shows the changes in after-tax incomeAfter-tax income is the net amount of income available to invest, save, or consume after federal, state, and withholding taxes have been applied—your disposable income. Companies and, to a lesser extent, individuals, make economic decisions in light of how they can best maximize after-tax income. for households in Oregon due to the price and employment effects of M97:
The results show that all households in Oregon would have less after-tax income due to M97, but it is low-income households that would be harmed the most, making M97 regressive. This occurs because higher consumer prices affect low-income households more, as low-income households spend disproportionally more of their income on goods whose prices will rise due to the tax. The increase in food and clothing costs would have a particularly disparate impact on low-income Oregonians.
Concluding Thoughts on Our Series: LRO’s Analysis Could Understate Negative Impacts of IP28
Predicting economic responses to any tax is difficult, and IP28’s unique structure makes the modeling even more difficult. M97 is not a broad-based tax, as only certain firms would be directly affected, which poses a substantial challenge to the LRO’s modeling efforts. LRO had to make several assumptions to approximate the tax’s effects, and even if we accept the assumptions, modeling a 25 percent increase in state general fund revenue is difficult. Most tax changes are smaller as a percent of general revenue, and consequently LRO’s model is better suited for less dramatic tax changes. The LRO states that “most economic models, including OTIM [Oregon Tax IncidenceTax incidence is a measure of who ultimately pays a tax, either directly or through the tax burden. This burden can be split between buyers and consumers, or different groups in the economy. Model] are calibrated with historical relationships that are estimated within a narrow range. Changes outside that range run the risk of generating unexpected results.”
The LRO acknowledges that the aforementioned forces make it possible that they have underreported these results. This would produce a “larger negative impact on state economic output and employment over time.” More jobs would be lost under this scenario, leaving fewer opportunities and higher tax burdens for Oregon residents.
LRO’s analysis provides helpful insight into how M97 would alter Oregon’s economy if the tax is adopted by voters in November. Supporters of the initiative argue that M97 would force large companies to pay more in taxes, but this rhetoric rings hollow, as the tax would cause prices to rise, employment to contract, and tax burdens to increase. After-tax incomes would fall, hurting low-income households the most. And even with all of these effects, LRO could be understating the economic costs of the tax.
All told, M97 would be the largest tax increase in Oregon history and would represent one of the most economically harmful tax proposals in the last decade.
Be sure to read the other three installments in our four-part series on Oregon’s gross receipts taxA gross receipts tax is a tax applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. initiative:
Oregon’s Gross Receipts Tax Proposal Would Increase Consumer Prices
Oregon’s Gross Receipts Tax Proposal Would Be the Largest Tax Increase on Residents in the State’s History
Oregon’s Gross Receipts Tax Proposal Would Hurt Job Creation