Fred Thompson checks in with a post on IP28.
Monday morning (May 23) the Legislative Revenue Office
released its report
on Initiative Petition 28 – the proposal to levy a 2.5 percent tax on the
Oregon sales of C-corporations in excess of $25 million. The LRO report is the
closest thing to an authoritative, unbiased assessment of the proposal that we
are likely to see. Its big takeaway is that IP28 would increase state revenue
by a lot, about $6 billion in the next biennium. So, if you think that Oregon
needs a lot more ($3 billion a year) of your (mostly) money for education,
health, transportation, and other programs and activities, or, in the alternative,
you think the grasping hand of the state is already getting too much of your
hard-earned cash and dumping it down various rat-holes, that’s pretty much all
you need to know.
If, however, you are concerned about the nuances of tax
policy, this report should be of considerable interest, insofar as it addresses
a couple of additional questions: who pays, and with what consequences for the growth
and economic welfare of the state?
With respect to who pays, the main takeaway is that about
2/3s of IP28’s total tax burden, $2 billion, will be shifted forward to Oregon
consumers. This is an amount equal to nearly one percent of all the goods and
services produced in the state. As a point of comparison, that would be
equivalent to a retail sales tax on goods of about 6 percent, although IP28’s
effects would be more uneven and its incidence harder to suss out.
This is so, because the businesses that are responsible for
collecting/remitting the tax account for less than 60 percent of the state’s
commercial value-added, altogether about 25 percent of total state product.
Consequently, one percent across the board implies an average effective burden in the taxed sector of approximately 4
percent. However, the actual burden would vary greatly across final products,
with some drugs and packaged foods bearing burdens in excess of 7.5 percent,
while most services and products would weigh in at less than one. Not surprisingly,
the LRO punted on this issue, spreading the tax hike across the economy like
peanut butter.
Who Pays for IP28 (OR Households)?
The LRO further argues that most of the remaining 1/3 of the
total will be shifted out of state. Remarkably, it estimates that the U.S.
Treasury will eat the lion’s share of this remainder, about $700 million, with
the balance of the annual burden of IP28 split between capital providers (75-80
percent or >$200 million) and employee wages (20-25 percent, >$40 million).
Like the LRO’s estimate of IP28’s dead weight loss (about $.5 billion), given
their other assumptions, this estimate of the hit to federal corporate-income-tax
receipts seems on the high side to me, but is entirely possible.
Which takes us to the other big takeaway from the LRO
report: that the dead weight loss associated with IP28 is nearly $.5 billion
per annum and is likely to increase over time, that it will cost 38 thousand private-sector
jobs. This is huge – it’s about the number of jobs Oregon’s business workforce added
last year. Since the LRO is working with a DGE model, this loss will be almost
entirely recouped by increased government sector activities (of presumably
equal or greater value?), so arguably, from the standpoint of the economy as a
whole, it isn’t a big deal. Nevertheless, it seems hard to square with the
notion that, while IP28 will hurt some businesses and help others, its net
effect on capital suppliers will be trivial.
Many will say that the LRO report rebuts the claim of the proponents
of IP28 that its burden won’t be passed along to consumers or, if passed on to
consumers, since the businesses responsible for collecting/remitting the tax
are all big national corporations, they will pass 99 percent of the mark-up on to
customers out of state.
The second of these hypotheticals is clearly wishful
thinking. In the first place, it violates two basic premises of economics: that
businesses maximize free cash (after tax and interest) flows and that cross
subsidization is contrary to profit maximization. Maybe these reasons are
convincing only to economists, but they work fine for me. More persuasively,
perhaps, this hypothetical is flatly contradicted by commonplace fact.
Businesses everywhere add retail sales taxes and excises (like cigarette and
gas taxes) to their prices, which vary accordingly from state to state. Where
value-added taxes exist, businesses incorporate them directly into their prices,
and, where jurisdictions levy different rates, as in Europe and Canada, prices
reflect those differences. It is even the case that prices in Washington State vary
according to their B&O Tax rates, the closest analog I know of to IP28.
The first hypothetical is trickier. The LRO doesn’t really show
that most of the burden of IP28 will be shifted forward to final consumers; it
simply assumes that, because it is a fairly broad-based tax on sales, that’s
how it will behave. I sympathize: IP28 is sui
generis – we have absolutely no experience with a tax exactly like IP28,
from which we could extrapolate likely outcomes. None! In no other country, in
no previous time. As I noted, the best analog to IP28 is probably Washington’s
B&O tax; IMHO the LRO worked from the next best analog, Ohio’s gross
receipts tax, owing to the availability of recent data.
The problem is that this may
not be good enough. Big businesses have a lot of expertise when it comes to
managing costs. They deal with cost increases like IP28’s all the time. What this
means is that they find ways to avoid or mitigate costs, pass them on to
others, customers or employees, or, if the business is worth it, and they
cannot avoid the costs or shift them to others, eat them, but there is no
guarantee that their Oregon business will be worth it, especially where
low-margin, high-turnover businesses are concerned.
Nevertheless, if businesses cannot avoid the tax by means of
smoke and mirrors or pass it on to their customers, as the LRO presumes, the
real economic effects of IP28 will probably be bigger than predicted, and
mostly negative; the revenue increase from IP28 could also be substantially
smaller – i.e., more pain, less gain.
I am a cautious guy. I don’t like giant leaps into the dark,
which is what IP28 is. Moreover, Oregon is already running one big policy
experiment, the minimum-wage boost, which could interact with IP28 in a variety
of ways, mostly adversely. Of course, as
Paul Warner, the head of the LRO, reminds us, state tax policy rarely if ever
outweighs the main determinants of economic performance – the business cycle,
exchange rates, productivity growth, etc. All true. So, maybe, my anxiety is
misplaced. But some states – Kansas, Wisconsin, Oklahoma, Michigan – have experimented
with big tax changes and managed, as a consequence, to shoot themselves in the
foot.
 |
| Sen. Mark Hass |
There
are smart ways to boost state revenue: eliminate the PIT kicker, enact a carbon
tax, broaden the weight-use-mile tax to comprehend passenger cars, adopt a real
gross receipts tax (treating it as an alternative minimum tax for
C-corporations) or a value-added tax, etc. This is not one of them. Besides,
Oregon’s economy has performed relatively well over the past quarter century,
much better on average than the rest of the U.S. Why tempt fate?
