Oregon’s ‘Rebate’ Proposal Is a Backdoor Tax Increase

W ill voters in the deep-blue State of Oregon vote for a regressive sales tax? Maybe, if they are too ignorant of economics to understand the ballot measure.

The “Oregon Rebate” would provide about $1,600 to every man, woman, and child in the state, funded by a tax that would disproportionately hit lower-income earners, even though the public largesse would reach the richest people in the state. The tax would slow down economic growth in Oregon by a small degree, distort economic decisions as businesses minimize their tax burden, and lure fraudsters in droves.

Voter confusion would begin with the concept of a business tax. The measure seeks to increase taxes paid by most corporations that earn more than $25 million in revenue, which makes it sound progressive and supposedly socks it to the rich. But, in reality, it would add something like a sales tax, which would be passed on to consumers. Oregon has a corporate-income tax with a small minimum. Ballot measure 118 proposes to increase the minimum corporate tax to 3 percent of revenue: Corporations would be expected to pay whichever was greater, the minimum or the tax as computed with the current income-tax schedule. Most corporations would pay the new minimum, based on their sales in the State of Oregon, and pass it on to consumers through higher prices. The state’s Legislative Revenue Office used a large economic model to estimate that prices would be pushed up by 1.3 percent.

Oregonians have voted down a general sales tax nine times over the past century. Sales taxes tend to be “regressive,” meaning that they collect a higher percentage of income from poor people than from the rich. Calling the current proposal a corporate tax sounds progressive, but, as a nonpartisan think tank concluded that the proposed tax structure “would result in a larger relative burden on low-income households and slower long-term revenue growth for the state.” Proponents of the rebate and tax tout the economic benefits that would result from the spending of the rebates, as if we lived in a world where Keynesian stimulus grows the economy. Oregon’s current economic constraint is its labor force, as many people are moving out of state because of high taxes, high housing costs, crime, and homelessness. And much of the rebates would fly out of state, as they are taxable by the federal government, and some would be spent out of state, such as on vacations, for example.

The new tax would also distort businesses’ economic decisions. It can pyramid atop transactions. A large farm operation in eastern Oregon may grow wheat and sell — with a tax — to a grain elevator. The wheat might be barged down the Columbia River, another taxable transaction. The sale of grain to a mill would be taxable. The sale of flour to a noodle maker would be taxable. The sale of noodles to a food wholesaler would be taxable. The sale to restaurants would be taxable. And the trucking companies that may be used could be taxable. If the restaurants are part of a chain with a revenue over $25 million, the sale to diners would be taxable. Under these conditions, business-operations decisions would be made not solely on efficiency but also on tax minimization.

Companies of marginal profitability might close some of their locations or downsize. Some would stop selling products with low profit margins or leave the state altogether. This would be most true of companies that make a large volume of sales with low profits and are unable to pass on their higher costs to customers. This would, in part, cause employment losses, combined with higher prices. Other businesses would likely reorganize themselves for tax avoidance. C-corporations or S-corporations would consider becoming limited-liability companies or partnerships. Businesses with multiple operations would consider breaking themselves up into several smaller corporations, each with revenue below the $25 million threshold. Accountants are already sharpening their pencils to find the best business structures.

How helpful would the rebate be to people? Recent studies by researchers at prestigious universities looked at an experiment with monthly stipends. They found that unconditional benefits caused people to be less likely to work, or to work fewer hours. Physical-health improvements were nil, and mental-health gains ended after one year.

Moreover, fraud would likely be rampant if the measure were adopted. Oregon has had a huge problem with false claims for unemployment insurance and the state’s new family-leave benefit. Rebate recipients would be required to have spent 200 days in the state in the past year, but auditing claims would be terribly difficult. Certainly, cellphone and credit-card records could be reviewed, but doing so at scale to prevent $1,600 in individual losses would be uneconomic for the state.

Beyond these important details, the “Oregon Rebate” proposal suffers from a problem that many economists are inaccurately accused of: a focus on money. Life satisfaction is not simply about buying stuff. Work brings both a paycheck and a sense of accomplishment for having earned it. That’s not just for movie stars and corporate executives. Many people working in greasy restaurant kitchens, construction sites on hot days, and busy stores with bad bosses report taking pride in their jobs.

What would the path for Oregonians who seek a higher standard of living look like? In days past, they would progress up a workplace ladder or work more hours or start a business. In the future, however, given such measures as the rebate proposal, they might simply lobby for more handouts. The long-run effects of such a change in attitude would be catastrophic. Money can be taxed only if at least some people are working, and some of them working extra hard or extra diligently or extra creatively. A future focused on handouts may be voted for by people too ignorant of economics to understand how the world works.