Assaulting “Corporate Profits” Will Hit Average Oregonians

CascadeNewLogoBy Steve Buckstein

A union-backed group is planning to put an initiative on Oregon’s 2016 General Election ballot that would result in the largest tax increase in Oregon history. Designed to tax sales of large corporations doing business in Oregon, Initiative Petition 28 may raise more than $5 billion every biennium, increasing Oregon’s General Fund budget by twenty-six percent.

Voters should realize that this proposal is not simply a way to capture revenue from big business. Actually, it’s a way to hide the fact that most of this new state revenue will come out of the pockets of average Oregon consumers and workers. That’s because neither large nor small corporations have a magic pot of money from which they can painlessly bestow more to government. All corporate money ultimately belongs to some individuals, and it is generated by selling goods and services to other individuals.

The tax measure in question basically will impose a 2.5 percent gross receipts tax on most corporate sales above $25 million in the state, on top of other business taxes. While that can be seen as just two-and-one-half cents on every dollar of sales, what percentage of corporate profits does 2.5 percent represent?

A 2013 national poll found that Americans believe the average company makes a 36% profit on sales after taxes. The actual median and mean profit margins of 212 industries nationwide are 6.5% and 7.5% respectively.

So, imposing a 2.5 percent tax on gross sales actually represents at least one-third of the average company’s profit margin. It’s closer to 80 percent of the profit margin of that big company some Portlanders love to hate—Walmart—which only earns about 3.1% on every dollar of sales.

Thinking that corporations will take such huge financial hits without passing most or all of them on to workers and consumers is a little like believing that shooting a loose cannon on a dark night will somehow hit the target.

Proponents of this huge tax increase know full-well that they won’t be blamed when consumer costs rise and workers see pay and/or benefits restricted. The tax will be hidden from them. They’ll blame those evil businesses that they think are gouging them, without looking into the real culprits.

If the proponents were honest, they’d propose taxing consumers or workers directly to raise the extra money they want to fill government coffers. But that wouldn’t poll well, so it’s not likely to happen.

Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.

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Posted by at 05:00 | Posted in 2016 Election, Economy, Initiative & Referendum, Oregon Government, State Budget, State Government, State Taxes | Tagged , , | 32 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Jack Lord God

    I can see exactly where this is going. Get support, or at least apathy concerning the tax by non business owners and small business owners thinking it doesn’t apply to them. Slowly start ratcheting down the threshold so more and more business’s pay. Eventually all business pays the gross receipt tax. Surprise mom and pop store, that thing you thought didn’t affect you now if affecting you greatly.

    And when the state has all this new money do you really see more problems fixed than before? How has that plan been working out so far?

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  • Eric Blair

    Steve — your math may be bad?. a 2.5% tax on Walmart, would not equal 80% of the profit margin.

    For the sake of simplicity, Walmart makes $100.00 in gross receipts… at a %3.1 profit.. they would make $3.10.

    $I00.00 with a %2.5 gross receipts tax.. would leave Walmart with $97.5 gross receipts.. 3.1% of which is $3.02 — approximately %9 of the profit margin. Not %80. Unless I am missing something.

    • Eric, it is tricky, but I believe my math is correct. If a company has a 3.1% profit margin on $100 in gross sales, you’re correct that equals $3.10 in profit. The gross receipts tax measure takes 2.5% of that same $100 in sales, or $2.50 in tax irregardless of any profit. It would take $2.50 even if the corporation lost money on that $100 in sales.

      $2.50 in tax equals 80.6% of the $3.10 profit, leaving the corporation with a $0.60 profit on $100 in sales.

      • Eric Blair

        Except… the taxes will be subtracted from the gross receipts… from which the profits will then be calculated. You simply subtracted the tax amount from the profits…and it doesn’t work that way. You have the order completely mixed up.

        • guess who

          So in your feeble mind, taxing gross sales does little to change profits even if profit margins are a fixed percentage of gross sales. My question to you would be where does the $2.50 come from.

          • Eric Blair

            It changed profits by 9%… although I think there is something that I’m missing. But, I’m willing to bet that I’m much closer than Mr. Buckstein’s 80%

        • thevillageidiot

          you are confusing gross/net Sales/profit. obviously you do not own a business.

          • Eric Blair

            No.. I haven’t confused them at all. I think there are some problems with my math.. but I think my numbers are much closer to reality than Mr. Buckstein’s. If you tax gross receipts, then there is obviously less for profit… but… not at the numbers that Steve is reporting.

        • Eric, if you’re math were correct, which it’s not, then why wouldn’t the measure’s proponents set the tax rate at, say, 25% rather than 2.5%? By your math that would still leave over a $2 profit on every $100 of gross sales for a company with a 3% profit margin.

          It gets even more complicated as tax years go by, but all it takes is the first year this measure would apply to demonstrate that it will virtually wipe out profit of any company on sales of over $25 million in Oregon and whose profit margin is near the 2.5% rate.

          If the profit margin is 2.5% or less before the measure, then no tortured math will give the company a profit that it wouldn’t have otherwise.

          Your errors, however, point out that the public may be easily fooled into believing that the measure won’t significantly harm the finances of any company, large or small. Perhaps that’s why the proponents crafted it in such an opaque manner.

          • Eric Blair

            And I would argue that your errors point out the lengths that conservatives will go to promote their agenda — regardless of the truth.

          • I meant to reply to this comment of yours in my comment above. Find an economist you trust and ask them how Gross Receipt Taxes really work.

          • Eric Blair

            What you are arguing is that if a company has a decline of 2.5% in their gross receipts, that they will lose 80% of their profits (as in the example of Walmart).

            Around 5 or 6 states have a gross receipts tax (including Washington). Are you arguing that their profitability is significantly worse than Oregon’s?

            There are reasons to not like a gross receipt tax such as tax pyramiding and vertical integration of businesses… but I have not read one article that claims that they significantly cut into profits – at the rate that you claim.

            However, please reference an economist that would make the claims that you make about a 2.5% gross receipts tax cutting as deeply into profits as you claim.

          • What I’m arguing is that profits will decline as I set out unless the corporation passes some or all of the Gross Receipts Tax onto customers, employees and/or others. The corporation will clearly pass the tax off if they can, so it will hit individuals who have no idea that the tax they might have voted for will actually hit them.

          • Eric, I don’t know how else to explain this to you. Perhaps you should find an economist you trust, liberal or conservative, who is familiar with how Gross Receipt Taxes actually work. You deserve to know how the math really works.

          • thevillageidiot

            if you keep both sides of the equation equal. A simple way of looking at this is Gross sales – costs = profit margin. Then along comes the tax on gross sales. the equation becomes Gross sales – (costs + tax of gross sales) = profit margin – Tax of gross sales. To pay the tax on gross sales it must come out of the profit margin in order to keep both sides of the equation equal the profit margin is now .6. now what the business will do is increase prices and reduce costs if possible (offshoring jobs to a lower labor cost facility as an example) which will increase the profit margin but not quite back to the previous level. throw in inflation (reduction in the value of your money) and the consumer gets hit twice. This is the broken window theory and the unseen costs. also keep in mind that a manufacturer may get taxed the 2.5% on gross sales to an outlet (store) which will also get taxed 2.5% of gross sales to the consumer. unless it is written such tat that does not happen. Like Steve said it is complicated.

          • Good points. The measure does seem to be written so that the 2.5% tax applies to every sale in the chain from the manufacturer through sales to consumers. The tax can thus “pyramid” and end up representing several times 2.5% on the final consumer sale.

    • Jack Lord God

      This is a common mistake people who don’t run a retail business make. Where they go wrong is in forgetting all taxes, or any discount or sale price can only be paid out of the profit, not the total price of the sale or sales.

      Say you have an item you buy for $100, and sell for $200. You are making 100% on the item (keep it simple, and assume no overhead etc.)

      Now, if you run a 50% off sale, guess what, That $200 item now sells for $100 and you are making nothing, since its off the gross.Run a 25% off sale? Now you are selling the item for $150, but you still paid $100. So that 25% off cost you 50% of what you made selling the thing. 50% off cost you 100% of what you made on it.

      Think of a sale as the same as a tax on the gross.

    • MrBill

      Sorry Eric, but I think your math is off as well. However, this doesn’t mean that if passed, companies like WalMart or others will see their profit margins evaporate. They’ll maintain their profit margins by passing the costs on to consumers who will foot the bill through higher prices.

      The sad thing is that a lot of people will support this because they think the tax will provide extra revenue at the expense of someone other than themselves. If they understood that this tax really falls on them, they might be less supportive.

  • HBguy

    Here’s a question for Mr. Buckstein. What if we did away with all personal income tax and only taxed business activity. That would then be passed onto consumers as many suggest, so we’d privatize tax collections, and people would only be taxed on their consumption, not their savings.
    Maybe we’ve got this entirely backwards?

    • Your proposal would move in the opposite direction from a transparent tax system, where the incidence of the tax is obvious.

      Only tax business and nobody will know for sure whether consumers, employees, shareholders, suppliers or other economic actors are really paying the taxes. The Gross Receipts Tax does a good enough job of hiding who pays the taxes by itself; we don’t need to put all taxes on business activity unless you really want to fool most of the people most of the time.

      • HBguy

        I thought that all taxes were passed onto the consumer? I read that here all the time? So it’s not employees or shareholders or suppliers paying the tax it’s consumers. Or is that wrong. In which case your argument in your article is wrong isn’t it?

        • No, I never said all taxes were passed on to consumers. Read my post again and you’ll see that I mention more than once that both customers and employees are at risk for bearing business taxes.

          I did leave off other groups such as owners and suppliers simply for brevity here, but I did mention shareholders, suppliers and other economic actors in my response to your earlier comment.

  • Eric Blair

    I’m not confident in my math or understanding, so I’m going to have to admit that I’m wrong on this one. I would say that I’m going to avoid all discussions that involve math… but we all know I’d be lying. 😉

    • Eric, don’t be too hard on yourself. This proposal is meant to be opaque and the math is anything but transparent. It gets even more complicated once we move beyond the first year the tax is imposed. How to explain all this in a way the average voter can understand is the challenge, and that’s what I believe the sponsors are counting on.

      • Jack Lord God

        I think you have the aspect of the voters not really understanding the issue quite right being purposeful by the legislators Steve. As an example does anyone in their right mind think that all citizens understand their bus fare is only paying a part of the cost? That a big chunk of the rest is made up by business transit taxes?

        A gross receipts and a transit district tax are different things, but the purpose is the same – to use a multi layer system whose purpose is to obscure funding mechanisms from the general public.

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  • Ted

    These fat cat CEO types have so much money they often don’t even know what to do with it. They may as well give to Oregon….instead of some stupid REIT or other scheme to make even more.

    • Ted, why would you think that anyone doesn’t know what to do with their own money? What if someone said that about your money? Would that justify taking it from you for some undefined government purpose?

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