The Policy Unicorn: Or why I am voting Yes on Measure 97

This election seems to be about imperfect choices. Nothing seems to fit the expectations of an increasingly agitated public that is sure in its values, and is disappointed to see them not reflected in the options presented to them. This is not just on the national stage, but also on local and statewide issues. (For example David Roberts’s excellent analysis of fractured progressive politics in Washington State captures this story well.)

Its out there somewhere! (Source: ZehnKatzen Times)

Imperfect choices present themselves in Oregon too with Measure 97. This measure is on the face of it a simple one: raise the corporate tax rates in Oregon to address both a relatively low corporate tax rate and to address years of budget shortfalls. The Measure seeks to do this by creating a new tax rate of 2.5% tax on companies with sales over $25 million. The Measure also focuses solely on one type of corporation: the C corporation. This last point is key.

There are a number of options the owners of corporations can chose from to create their company. C corporations are the simplest. But there are many reasons why the owners of a company do not want a C corporation. The key reason is taxation. C corporations are taxed on their own earnings and then again when they distribute earnings to owners. So many smaller business seek other corporate forms, such as S corporations or LLC. (For more details, check out this article.)

So why would you want to be a C corporation then? Because you want to have more than 100 shareholders – or in other words, want to be publicly traded. You might also want it for other outside investment opportunities where growth is key. (Note: a C corporation might not be public, but might have plans to do so.) This is one spot where Measure 97 creates a problem. A company like Kroger, which we know as Fred Meyers, will be taxed. Safeway will not be taxed because it was taken private in 2014 by Cerberus Capital, and therefore is in a different corporate status. Same business, same products, one will pay 2.5% and the other won’t. In essence Measure 97 gives private equity a free pass to operate in Oregon.

Based on this last point – you might think this Measure is dangerous. I’d normally agree. By exempting private equity firms, we are rewarding yet again the earnings that Mitt Romney and others pile up. (These firms often also distribute their earnings as capital gains to owners, which is taxed much lower than their income tax rates.)

But here is the larger problem: Oregon taxation is broken. The legislature has chosen or failed to address it since the great crises of Measures 5 and 50 that changed our tax landscape. Corporate tax rates have slipped in part because corporations bring more finance expertise to the game than our citizen legislators. Its not even close to an even playing field. Like so many issues in this election cycle we are paralyzed by a desire to find our unicorns. Mythical creatures that sadly do not exist, but still capture our imagination.

Instead, the failings of Measure 97 buoy my hopes. First, by having an uneven application across corporations, it assures there will not be big price swings for the consumer. Kroger will not raise prices when its competitors are not subject to the tax. Second, it is a clear message that something must be done. Measure 97 will likely require a legislative fix. That might be worrying to some, but I am optimistic. Any legislative engagement on tax issues is better than nothing at this point. Finally, it is a chance to remind businesses that they operate in Oregon under a social license. They operate because they are part of a system to provide goods and services. Profit is a reward for this – but it should not be out of sync with the public benefits a well functioning market brings. If profits grow, but the public suffers, that license should be up for review.

For these reasons I will vote yes on Measure 97 and hope you do to.

 

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