On May 20, 2016, A Better Oregon, a group calling for higher 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. es, delivered 130,000 signatures to the Oregon Secretary of State’s office in support of Measure 97 (M97). The ballot question would change Oregon’s corporate minimum tax structure to include a new 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. on C corporations at a rate of 2.5 percent on sales in excess of $25 million.
Oregon’s Legislative Revenue Office (LRO), a nonpartisan legislative research service, released its analysis of M97 on May 23, attempting to quantify the revenue and economic effects from the tax change. The LRO estimates that Oregon taxes would increase by $6 billion per biennium, a 25 percent increase in general revenue. A tax increase of this size would have widespread economic consequences, such as higher prices, fewer jobs, and lower 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.
Over the next few days, we will be releasing a four-part series analyzing and summarizing the LRO’s key findings.
M97 Would Increase Prices for Consumers
Proponents of M97 argue that this tax will ensure that large, out-of-state businesses “pay their fair share,” but economic analysis finds that consumers, wage earners, and shareholders would bear the true economic cost of the tax. By 2022, LRO predicts that prices would increase by 0.9 percent.
In the abstract that increase might seem small, but an increase of 0.9 percent represents almost $2 billion in additional consumer costs. Higher prices present challenges for consumers as they face greater difficulties purchasing the same products as before, given the same budget. Increasing prices, particularly for necessities, puts pressure on households to either decrease or delay purchases. It can also impact retailers as their customers scale back their purchasing patterns.
The LRO report may also understate the increase in prices for certain industries. Gross receipts taxes, such as M97, disproportionately affect firms or industries with longer production chains, as the tax compounds multiple times, a problem inherent in gross receipts taxes known as “tax pyramidingTax pyramiding occurs when the same final good or service is taxed multiple times along the production process. This yields vastly different effective tax rates depending on the length of the supply chain and disproportionately harms low-margin firms. Gross receipts taxes are a prime example of tax pyramiding in action. .”
Industries like retail or wholesale trade, which involves multiple production steps, could see prices rise considerably higher than the median of 0.9 percent. The LRO stated that “industries vary greatly in the number of transactions that occur; the effective tax rates can be considerably higher for those industries with multiple transactions compared to those with very few.” That means consumers at retail establishments, such as grocery stores, could see even higher prices, forcing even greater adjustments to household buying patterns.
The LRO’s results match those of academic economic literature, which also finds that gross receipts taxes result in higher prices. Unlike a sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. that is only charged on the final sale of a good or service, gross receipts taxes are charged at every level of production. The graphic below illustrates the process:
Under a sales tax, the gallon of milk is taxed just once, when the consumer buys it. The sales among the dairy, packager, distributor, and grocery are not taxed under a traditional sales tax.
A gross receipts tax is worse than a sales tax because it is charged on every step of the production cycle. The tax repeats this process multiple times in the production cycle, so the farm, the packager, the distributor, and the grocery must pay a tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. d on their sales. When the consumer finally purchases the product, the price is higher than it otherwise would have been due to the previous taxes paid. Each tax results in a slightly higher price. By the consumer’s final sale, the price has increased due to the previously-assessed taxes.
If M97 is adopted in November, Oregonians should prepare to pay more for everything they purchase, including necessities like food, electricity, and water.
Be sure to read the other three installments in our four-part series on Oregon’s gross receipts tax initiative:
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
Oregon’s Gross Receipts Tax Would Be Regressive