New Oregon Tax Aims To Succeed After Long History Of Sales Tax Failures

Tom McCall was one of Oregon’s most popular governors, known for protecting coastal beaches and fighting unchecked sprawl during the boom years of the 1960s and 1970s.

But McCall had his flops – particularly in 1969 when a whopping 89% of Oregon voters rejected his plan for a sales tax.

“I knew in my bones that it was going to have a tough time,” McCall said after the election. “Especially when I was down in Brookings on Saturday riding in a parade when I got a couple of boos, which is unusual for me. And then a dog barked at me.”

That was the sixth time Oregon voters rejected a sales tax. But future leaders weren’t deterred: It was on the ballot three more times, lastly in 1993. And all resulted in big losses.

This spring, Oregon legislators passed a $1 billion-a-year tax to help fund public schools.

It’s a gross receipts tax on business. But critics say it amounts to a hidden sales tax. And they’re hoping voters will treat it the same way.

The idea of a gross receipts tax had long kicked around Oregon politics. Former Gov. Barbara Roberts said it was long a favorite alternative for liberals who thought a sales tax hurt poor and working-class people.

“It was pretty traditional back in those times in the '70s particularly for all Republicans to support a sales tax and for Democrats to oppose it as regressive,” said Roberts, who early in her political career served as secretary for a statewide group known as the No Sales Tax League.

But Roberts switched sides after serving on the House Revenue Committee, where she learned that it is “not the name of the tax that makes it progressive or regressive, it’s the details.”

As a result, Roberts supported the 1985 sales tax proposal championed by two rising Democratic stars: then-Senate President John Kitzhaber and House Speaker Vera Katz. Their plan sought to limit the regressivity of a sales tax by, among other things, providing renter relief and rebates for low-income Oregonians.

But it also lost by a big margin. After Roberts became governor in 1991, she faced a more urgent financial crisis: Voters had just passed the Measure 5 limits on property taxes that required the state to take over most support for schools.

Roberts put together an extensive discussion network with voters – which she dubbed the “Conversation with Oregon” – to develop her response.

“We didn’t set out to pass a sales tax,” she said. “That was not my intention.”

Roberts said she couldn’t make her plan pencil out without also including a relatively modest 3.5% sales tax.

“I don’t remember that we ever looked at a gross receipts tax,” she said, “because we thought if the business community automatically says no, we’re not going to get anywhere with this.”

At this point, the business community had a lot of clout in the Legislature thanks to Republican control of the House. In fact, Roberts found her entire plan going down to defeat during a 1992 special session in a dispute over when it would go before voters.

A year later, legislators put their own plan on the ballot, a more conventional 5 percent sales tax. It got clobbered.

That’s where things pretty much stood for years. Lawmakers found it easier to pony up money for K-12 schools when the economy was good and income taxes surged. But economic downturns led to punishing school cuts, big class sizes and poor graduation rates.

As Oregon turned more Democratic in the last dozen years, the idea of finding a new source of school money gained new urgency. And the idea of focusing on gross receipts taxes took hold.

The concept behind the tax is simple: Businesses pay a tax based on how much they sell. In some ways, it’s similar to a sales tax. Both tax consumption, not income or property. And depending on how they’re structured, the line between the two can get blurry.

Gross receipts taxes took center stage in Oregon in 2016 when a coalition led by public employee unions put a super-sized proposal on the ballot: Measure 97 called for a 2.5% tax on sales for corporations doing more than $25 million a year in sales in the state. It would have generated $3 billion a year, far more than previous sales tax proposals.

Unions spent millions of dollars arguing Measure 97 would make big business pay its fair share while focusing advertising on studies showing that business taxes are low in Oregon compared to other states. (Part of that is because of Oregon’s lack of a sales tax, much of which is actually paid for by business).

However, large retailers from around the country spent even more money portraying it as just another version of the tax that Oregonians always rejected. “Its tax on sales is really a hidden tax on every Oregon family,” said one ad.

Measure 97 wound up losing big — although the 41% “yes” vote it received was far better than a sales tax ever did.

Senate Finance Chairman Mark Hass, D-Beaverton, was not a fan of Measure 97. He said it was unfair to business and poorly written. He had always preferred a sales tax – even introducing one in the 2013 legislative session that didn’t go anywhere.

“Oregon will never have a sales tax,” he said. "It’s just not in our DNA. So, if we don’t have that third leg of the stool, what’s the solution?”

Hass saw an opportunity in the defeat of Measure 97. Business leaders had told him they would be willing to look at a much more modest tax hike. And Nevada’s Legislature had also passed a gross receipts tax after voters had previously rejected a much bigger proposal.

“I talked to someone in Nevada who said, ‘Mark, you have Nike up there,’” Hass said. “Nike has never paid taxes to Nevada but now every time they sell a sneaker in a mall in Las Vegas, they pay .43%.’”

With that model in mind, Hass and his colleagues found an opening after last year’s election, when Democratic Gov. Kate Brown won re-election and Democrats gained a three-fifths majority in each house of the Legislature. That’s the threshold needed to raise taxes.

The Democrats fashioned a gross receipts tax that has several elements reminiscent of a sales tax. Like the typical sales tax, their gross receipts tax includes exemptions on things like food and health care. The rate – .57% – was also much lower than Measure 97.

Legislators also allowed businesses to write off some of their costs, a step designed to reduce the impact of what’s known as “pyramiding.” That’s when taxes are levied at several stages, such as when a producer sells to a wholesaler and then to a retailer. Finally, the measure trimmed income tax rates to reduce the impact on consumers.

The proposal included enough concessions that the state’s largest business lobby, Oregon Business & Industry, stayed neutral. The governor signed it into law on May 16.

Still, the bill was unanimously opposed by Republicans. Nicole Kaeding of the business oriented Tax Foundation in Washington, D.C. said that the new Oregon law is a big improvement on Measure 97.

But Kaeding said she still believes the measure has the major flaw of other gross receipts taxes. It piles up taxes as businesses sell products and services to each other before reaching the retail marketplace.

“It is not a transparent tax,” she said, arguing that it’s hard for taxpayers to understand the impact on their wallets.

“While businesses might write checks to taxing authorities, that revenue comes from elsewhere. It comes from shareholders, it comes from consumers, it comes from their labor force,” she said. “At the end of the day, those taxes come from people.”

Hass, the state senator, countered that sales taxes can also pyramid. Some states tax most business-to-business sales, which can make the pyramiding even worse since sales tax rates tend to be much higher.

Jim Scherzinger, who ran the Oregon Legislative Revenue Office during the sales tax wars of the 1980s and ‘90s, says there is broad agreement among economists about the ultimate impact of the new tax.

Depending on the ability of a business to pass on the tax, he said, the cost is shared by business owners (in the form of lower profits), workers (who could see their wages and hours affected) or consumers (who could face higher prices).

However, Scherzinger said, the uncertainty of how the tax is passed along could be a political plus in the minds of voters.

“They are more concerned about the taxes that are imposed directly on them,” Scherzinger said, “than they are on the ones that come back to them as a worker or a consumer.”

That ambiguity could help this tax survive when so many sales taxes have failed in the past. For one thing, legislators always felt obligated to pass on sales tax proposals to voters knowing it was too much of a political hot button not to ask their approval.

This time, the gross receipts tax contains no such referral to voters. It could still wind up on the ballot, however. One business group, Oregon Manufacturers and Commerce, recently filed to refer the issue to the ballot. It needs to collect nearly 75,000 signatures from registered voters by the 90th day after the end of the legislative session.

If that happens, we’ll see if a new generation of political leaders meet the same fate on taxes as Tom McCall and so many other Oregon governors.