Yes, Really. Measure 97 Would Raise Prices
July 28, 2016
Last week, the Tax Foundation released an analysis that showed prices would increase in Oregon if Measure 97 (M97) is adopted by voters in November. The Legislative Revenue Office (LRO) predicts an increase of 0.9 percent, due to the proposed tax increase. 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.
The Mix of Goods Selected: The authors state they are comparing the prices of everyday goods, but do not justify why these specific goods were chosen, nor if they are representative of prices of all items sold at retailers. There is no justification as to why their basket of goods contains cereal, duct tape, a child’s bike, or nails.
The list contains duplications across retailers. The authors compare Honey Nut Cheerios, Bullfrog Mosquito Coast sunscreen, and a Sony digital camera at both Target and Walmart. It makes little sense to compare the same good at different retailers, especially if trying to prove that this phenomenon is robust.
Similarly, the authors do not show these items are the most likely to have varied prices across states. If the price of Honey Nut Cheerios is consistent across 50 states, it does not logically follow that all goods would be consistently priced.
In Fact, Prices Do Vary: The authors state that the price of many of these goods are the same across the 50 states, but they fail to include an important point: sales taxes. According to the report, a child’s bike costs $49.99 at Toys “R” Us in all 50 states, but that doesn’t reflect the actual cost of the bike to consumers. In Bellevue, Washington, the bike would actually cost $54.74, compared to $52.99 in Arlington, Virginia, or $53.11 in Chicago, Illinois. Ignoring sales taxes ignores much of the variance in final prices for consumers.
Misunderstanding Taxes: The report misuses a number of tax terms. For its measure of taxation, it uses a calculation of state business tax burdens. This is a broad measure that includes 11 types of taxes, including non-corporate taxes such as individual income taxes on pass-through businesses. It is a much broader measure than taxes on C corporations. Oregon ranks low on this measure, because of the state’s low property taxes and absence of a sales tax, not because corporate income taxes are low. The authors, however, seem to misunderstand their own data and use “corporate taxes” and “business taxes” interchangeably. These two terms are not synonymous.
Because the authors are using a broader measure of business taxes, are we to assume that all taxes impact prices equally? If that is true, this is a remarkable departure from the economic literature. Gross receipts taxes are one of the most distortionary types of taxes available and would impact prices for consumers in a much different way than a sales tax, for instance.
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.” The study issued by the NERC mirrors the broader economic literature on how gross receipts taxes impact the economy. In fact, the NERC report even cites a previous Tax Foundation study on gross receipts tax. This new report does not match the previous research on the same question.
National Pricing Strategies: The only point that this report seems to conclusively prove is that many large retailers use a national pricing strategy for name-brand goods. In many cases, the prices are actually suggested by the manufacturer, with the explicit goal of eliminating price differences across states and retailers. In fact, there is a large economic literature on how retailers and manufacturers set prices on name-brand product, none of which is discussed in this report.
Similarly, this report only looks at current prices. If there is a large shock to corporate taxation, like a new 2.5 percent gross receipts taxes, it is quite possible that prices in one or more states could increase as a response.
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.
There are a number of factors that influence exactly how a price is altered due to a gross receipts tax (or other corporate taxes). The NERC study, which Our Oregon requested, summarized the issue well: “what determines the presence of tax shifting [meaning price increases] is very complicated with factors that include: market structure, unrealized gains, industry cost conditions, price elasticities, type of tax, and political jurisdiction criteria.”
Listing the price of 25 products at five retailers does not make any attempt to control for these important factors, and it isn’t a solid analysis. The authors defend their report by arguing that 1,000 data points were used. As any introductory statistics student can tell you, the number of data points doesn’t make a good report; the quality of the data is what matters.
For more information on how prices would increase under M97, click here.
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