Unions' corporate tax will act as a sales tax, state says: Editorial

The public employee unions seeking to boost business taxes by about $6 billion per biennium would like Oregonians to believe that Joe and Jane Taxpayer won't be affected. Anyone who's tempted to swallow that argument should read a state analysis of the tax hike released on Monday. It's 20 pages long, but here's the part voters should remember: Initiative Petition 28 "is expected to largely act as a consumption tax on the state economy. Taxes initially borne by the retail trade, wholesale trade and utility sectors are expected to result in higher prices for Oregon residents."

That's right. Supporters claim the tax will be paid "Only (by) the largest corporations doing business in Oregon," but it will be paid in large part by you. It's a hidden sales tax.

The initiative, for which sponsors submitted signatures last week, would tax Oregon sales beyond $25 million per year at a rate of 2.5 percent. The tax would apply only to C-corporations, often large businesses, as opposed to S-corporations, partnerships and so on. Supporters have pointed to this combination of big corporations and big sales to suggest that the burden will be carried by "out-of-state corporations" that aren't paying their "fair share" of Oregon taxes, even as middle-class people struggle.

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But that's not how it will actually work. Raise total state taxes by a whopping 25 percent, and you can be certain of two things: Those targeted will find ways to share the load, and everyone will be affected.

The tax would apply directly to just over 1,000 corporations doing business in Oregon, the Legislative Revenue Office estimates. But its indirect effects would ripple through the economy. That's because much of the tax burden would be passed along in the form of higher costs to smaller businesses that buy goods and services from taxed businesses. And they, in turn, would pass along higher costs to businesses buying goods and services from them. At the end of the line are consumers.

When the effects of the tax are fully felt after about five years, people making less than $21,000 per year would have $372 less in after-tax income than they would without the tax, the state estimates. For those earning between $21,000 and $34,000, the net hit would be $500 per year, and so on. And because the corporate tax acts like a sales tax, the effect would be regressive. Poor people would be hit harder than rich people.

The tax also would have an effect on jobs. Between 2017 and 2022, the private sector would produce 38,200 fewer jobs than it would without the tax. Over the same period, the public sector will produce 17,700 more jobs than otherwise, for a net loss of about 20,000. Exchanging private sector jobs for public sector jobs in this fashion is what happens when you take billions of dollars out of the private sector per year via taxation and allow legislators to spend it.

It also explains why wages would go up under the tax hike: The additional public-sector jobs would pay better than the more numerous private-sector jobs they replaced. The hardest-hit sectors of the economy, by the way, would be retail and wholesale trade.

The tax would have some beneficial effects, of course. Because the state would become somewhat less reliant upon the volatile personal income tax, the system would become more stable. And as long as the state spent the new money well, improvements in schools and other services could over time bring economic benefits. Of course, both of these could be accomplished by a carefully vetted tax package that originated in the Legislature. Such a package, meanwhile, could even include targeted tax cuts and -- gasp! -- perhaps even spending reforms.

Yes, we're talking about tax reform, which has proven notoriously difficult because Oregonians are famously unwilling to create a broad-based sales tax. The irony here, though, is that IP28 would give Oregonians a hidden sales tax unaccompanied by measures that would make the tax system work better or legislators spend more responsibly. It's the worst of all possible worlds.

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