Commentary: Sales Tax & HB 3427

On May 20, 2019, the Oregon Legislature passed House Bill 3427, a gross receipts tax put in place with the intention of garnering further funding for education programs throughout the state. Having come into effect this year, HB 3427’s primary actions are two-fold: first, a tax of $250 and 0.57% of gross receipts for businesses that have gross receipts of over $1,000,000 in Oregon; second, a reduction in the lowest three rates of income tax in order to combat the bill’s potential regressivity and impact on low-income households. With HB 3427’s imminence comes a good opportunity to examine the dance – or rather, danse macabre – between Oregonians and sales tax propositions for nearly a century.

The age-old analogy used to describe state taxes is the “three legged stool” – the legs being income, property, and sales tax. While the ideal for any state would be to have a balanced portfolio drawing from all three forms of tax, this balancing act has proved to be challenging for politicians in all parts of the country. A stable tax portfolio has proved especially difficult in Oregon, where the mere proposal of any sort of sales tax has tanked the popularity of many state leaders – an example being former governor Tom McCall. General sales tax propositions have been vehemently rejected in Oregon a total of nine times, with over 70 percent of voters denying the law each time.

Due to the missing and maligned “leg” of sales tax, many Oregonians have felt the burden of increased property and income taxes, which along with the absence of a sales tax, has made for a catch-22 in terms of policy. Since  a sales tax effects much more than those who would initially be paying it, it cannot be viewed in a vacuum. Its sibling, income tax, also has to be accounted for.

“Overall [earned income tax’s] worst problem is that it booms in a good economy, grows like a balloon… but like a balloon, if it’s pricked by things we can’t control in Oregon, it collapses like a balloon,” said former state representative Vicki Berger during a forum with Portland’s City Club. “And when you have education and healthcare dollars on the line, it has immediate negative impacts on Oregonians… We have been through this cycle before.”

The volatility of the earned income tax, while having the potential to make up for the absence of a general sales tax, is far from ideal. While the income tax system does make attempts at progressivity by offering earned income tax credits to lower income households, the system’s potential for negative consequences during an economic downturn make it a poor solution for long-term societal health on both local and statewide levels. However, it should be noted that Berger’s stance is one that considers corporate tax to be a “strawman” which hurts Oregonian businesses and damages employment rates and income tax. It’s also possible that revisions to other parts of Oregon’s tax structure – such as the state’s rebating surpluses back to taxpayers, known as the “kicker” – could go a long way to addressing tax instability during slow economic periods.

A sales tax, along with drawing the ire of voters, could hamper the growth of many smaller businesses that would struggle to take the hit to their finances. “That would be another nail in our coffin,” said Matt Ashland, owner of Matt’s Cavalcade of Comics. “We have a hard enough time navigating all the red tape of Oregon’s tax laws as it is.”

Impact on Lower Income
In addition to the negative effects on local businesses, sales tax is often cited as highly regressive, disproportionately affecting those of lower income. This is due to its uniform nature. For example, a state with 3 percent sales tax would charge all individuals an additional $3 on a purchase of $100. This additional fee has a greater effect on one’s finances the lower their income is.

With financial instability in sales tax’s absence, and regressivity with a sales tax, the state finds itself in quite the bind. Enter House Bill 3427, which looks to tackle both the problems of high earned income tax and the absence of a sales tax. As mentioned above, the gross receipts tax introduced by the bill only comes into play once a business has reached a gross receipts total exceeding $1 million within Oregon. This allows smaller, local businesses to continue operations without being hit by a general sales tax.

To combat potential regressivity, HB 3427 scales back income tax percentage for the state’s lowest three rates. Whereas before the rates were 5, 7, and 9 percent, the rates will each be lowered by 0.25 percent, becoming 4.75 percent, 6.75 percent, and 8.75 percent respectively. This will ease the burden of earned income tax on middle and low income households, while keeping to the progressivity of the tax plan, as the highest rate which only applies to high income households remains at 9.9 percent.

For example, an individual making $35,000 a year would fall into Oregon’s lowest income tax bracket. Previously, this person would lose $1,750 to income tax. With the change introduced by HB 3427, that individual would instead be taxed for $1662.50, keeping an additional $87.50 for the year.

While welcome, the money saved on income tax may have to be spent as a result of HB 3427’s gross receipts tax, as consumers will likely see a rise in price from retailers and grocers. This is because the gross receipts tax potentially hits every level of production and sales. For example, a farmer selling eggs will be taxed, as will the company that packages and sells the egg cartons to grocery stores, as will the grocery store itself. This leads to the grocery store marking up the price of eggs, ultimately affecting the consumer who just wants to make a nice omelet.

In the same City Club forum, Viki Berger compared Oregon’s convoluted tax system to the “Gordian Knot,” an unsolvable knot encountered by Alexander the Great. The knot, with both ends hidden and lashed to a chariot pole, could not be solved by conventional means. Instead, Alexander the Great cut the knot with his sword in order to undo it – an unconventional answer to an otherwise unsolvable problem. The two-fold nature of the bill, introducing a form of non-sales-tax sales tax while also taking steps to address the problem of regressivity that said sales tax will likely bring, represents an approach to statewide taxing that is certainly unconventional, whether that winds up for better or worse.

Opinions are those of the writer, and not necessarily those of the paper or its staff.

Commentary by Thomas Nguyen