Measure 97: Families Weigh Uncertain Costs, Benefits

Short school years. Large class sizes. Untreated drug addictions. A ballooning deficit in state pension accounts.

What if you could tackle several of Oregon’s chronic funding issues in one shot?

That’s what the backers of Measure 97 have in mind with a one-of-a-kind tax engineered to make large corporations pay the bills for several state programs. They say the $3 billion in new cash expected each year would build up the state by forcing businesses to contribute taxes more equitably.

The money doesn’t come out of thin air, though, and it may not be just large corporations paying the bills. Consumers across Oregon will wind up paying, too — even if how much, and for what, remains entirely unclear.

Utilities, for example, have a legal right to pass along higher costs to their customers. But some academics and economists expect consumers will end up paying more for everything from cable TV to gas and groceries.

“I think that’s almost certainly the case and I don’t think anyone really disagrees with that. The issue is: How much?” said Fred Thompson, a professor of public policy at Willamette University.

Because of the way initiative backers wrote the tax, exempting certain businesses while taxing others, some prices may rise more than others. Predictions, though, vary considerably.

'A Giant Step In The Dark'

A study by the nonpartisan Legislative Revenue Office last spring estimated the total cost to a typical Oregon family might be $600 a year in higher prices and, for some kinds of jobs, diminished wage growth. Supporters have countered that prices set nationally are unlikely to change.

“It really is a giant step in the dark,” Thompson said. “There is no tax anywhere in the world that works like this one.”

Ben Unger, the former Democratic lawmaker now leading the Yes on 97 campaign, argues the tax is “designed to be a noticeable reinvestment, to restore what’s wrong.”

“And in order to do that,” Unger said, “everyone knows we’re talking about billions of dollars in reinvestment, not millions.”

Here’s what makes the measure unusual:

• The initiative creates a 2.5 percent tax that applies to most sales in Oregon above a $25 million annual threshold. Few other states have a gross receipts tax like this, and no one has a tax rate this high.
• Most sales taxes, which are similar to a gross receipts tax, exempt wholesale trades, like when a grocery store purchases beer from a distributor. Measure 97 has no such exemption, so that could create a "pyramiding" effect, with new taxes piled atop one another at each level of the supply chain – potentially triggering price hikes greater than the 2.5 percent tax.
• A conventional sales tax charges the tax at the cash register, and consumers see it every time they make a purchase. Measure 97 embeds the tax in the cost of the product, so it's not apparent how much – if any – of the added cost retailers pass on to consumers.
• Sales taxes generally exempt food from taxation. Measure 97 does not, though its supporters insist grocers would not pass their higher taxes to consumers.
• Some businesses are exempt from the tax – partnerships, for example, and companies organized for "public benefit."

If two companies in the same industry are taxed at different rates, what happens to prices? Neither New Seasons nor WinCo would pay the tax, for example, but Safeway, Fred Meyer, Walmart and Costco all would.

Related: Measure 97: How We Got Here

So if WinCo keeps its prices fixed, does that mean Fred Meyer has to absorb the cost of the tax to remain competitive? Or does it mean that Fred Meyer raises prices to cover its higher costs and WinCo matches, taking a higher profit?

At this point, Thompson said, the answers are theoretical. He said academics would love to study Measure 97 in action, but warns consumers may not be pleased.

“I really find it intellectually exciting,” said Thompson, who said he will be voting against the tax. “I just wish these exciting experiments were carried out somewhere else, rather than where I live.”

Oregonians Split

Polls show Oregonians closely split on the measure as they weigh the benefits of boosting state support for schools and other key services against the initiative’s implications for businesses, and its impact on pricing. Though lawmakers will face pressure to spend the new money as directed, that’s not guaranteed.

To Bobbi Harrold Frost, a dairy farmer in Creswell, Measure 97 is a sales tax in disguise. She’s opposing it, worried the tax would compound down the supply chain and eat into her family’s budget.

“It’s like being able to go and visit my husband’s family in Utah at the holidays,” Harrold Frost said. “That’s travel money. That’s plane-ticket money.”

Monmouth retiree Patty Taylor-Dutcher is all in, lamenting the current state of Oregon schools.

“I’m just such a believer in education, because I’ve seen the benefits of education among my own family,” she said. “And I’ve seen the sad outcomes when kids aren’t well educated and aren’t prepared for any jobs.”

Her husband, Don Dutcher, is wary of what the measure would mean for prices. But he said he’s leaning toward supporting it, even if he’s not happy about it.

“I suspect deep down that I will support the measure. But I’m going to be thinking of every reason why I shouldn’t,” he said, right up until he marks his ballot.

Opponents are quick to assert consumers will pay more under Measure 97 – tossing out numbers as high as a 6 percent spike in grocery prices. It’s all guesswork, though, and the measure’s backers scoff at the notion of any price hike at all.

The Yes on 97 campaign points to newspaper ads that show groceries advertising the same prices across states, and say big retailers aren’t likely to create a separate pricing structure just for Oregon and won’t raise prices in the rest of the country to offset a new tax in a relatively small state.

“They set their prices nationally so I doubt it’s really going to have an impact on the consumers,” agrees Roberta Mann, a tax law professor at the University of Oregon who supports the measure. She testified about the initiative’s impact before a citizens commission that voted narrowly to support Measure 97.

Pressed on the measure’s benefits, backers will talk only in general terms. How many more school days each year? How many fewer kids in the average class? Supporters won't even guess. But they insist families will enjoy real, tangible benefits.

“They might notice that their kids are in school a bit more and they might notice they can reach the teacher a little bit more readily because the teacher isn’t trying to juggle 35 to 45 kids in the classroom,” said Tonia Hunt, executive director, Children First for Oregon. “They might notice that they can get into the doctor’s office for preventive care, not just for emergency care.”

Pyramids And Offsets

Yet nothing about Measure 97 is undisputed.

Take the utility taxes: Oregon law allows a regulated utility like Portland General Electric to pass along its costs to customers.

In a filing with Oregon’s utility commission, the utility says it plans to do that if Measure 97 wins — passing along not only the cost of the tax, but also added costs from the “pyramiding” effects as suppliers and contractors hike their own prices to cover the tax.

By the utility’s reckoning, that works out to a 3 to 4 percent increase altogether — $30 a year for a typical electric customer. Of course, the utility has an incentive to make its estimate as high as possible, leaving it to regulators to deny an increase if they find it unjustified.

Related: How Measure 97 Would Impact Oregon Businesses

Still, with taxes driving up costs, it might seem clear that families will pay for that on their electric bills. Not so, Measure 97 supporters insist.

The initiative’s backers say they will ask regulators to offset every penny of the added costs. Regulators can do that, supporters of the measure say, by collecting deferred taxes they feel the utilities should already pay.

Some of the measure's backers, including Gov. Kate Brown, say it should be obvious to voters that they will bear some of the initiative's costs.

Mann acknowledged companies with significant market power and little competition, like Comcast, would probably pass along at least a portion of the cost.

The state study of the initiative’s impacts found the retail and wholesale sectors would bear the biggest impacts from the tax hike, more than $1.1 billion a year. Wholesale taxes alone would increase nearly sevenfold, adding a major new cost to the supply chain for products sold in Oregon.

“It will work its way to consumers,” Mann. “The pyramiding issue is that it just multiplies as it works its way to consumers.”

Still, Mann said, businesses in Oregon pay relatively low taxes. She said she would have structured the initiative differently but will vote for Measure 97 in the absence of an alternative.

“It’s worth a try because these are corporations that are getting away without paying taxes, or paying a low, low amount of taxes,” Mann said.