Measure 97 and the Mirage of School Funding

— Voters are destined for disappointment

 

By John A. Charles, Jr.

Proponents of Measure 97 have consistently claimed that if the measure passes, it will generate an additional $3 billion annually for public education and other social services. Judging from the comments I’ve read in various Oregon newspapers, many people are falling for this argument.

Apparently none of the letter writers have ever watched a legislative appropriations hearing. These are the meetings where a tiny group of senior politicians sit in a back room and decide how to spend billions of dollars. I’ve watched hundreds of such hearings, and the most predictable outcome is that politicians will spend money in front of them on whatever they want.

Let’s just take a simple example. Oregon was one of 44 states that sued the tobacco industry in the mid-1990s to recover the health care costs associated with smoking. Plaintiffs claimed that the tobacco industry had long been imposing uncompensated costs on states in the form of health care for smokers who became sick from use of the product.

The suit was settled through adoption of a Master Settlement Agreement (MSA) with the four largest tobacco manufacturers. As part of the agreement, each state was to receive payments every year from 1998 through 2025.

According to the plaintiffs, the estimated $25 billion of MSA money was supposed to be used for tobacco prevention activities and health care subsidies necessary to treat smoking illnesses. But that was not a formal part of the agreement. Each state was free to use the funds in whatever way its state legislature approved.

In Oregon, total MSA funds received since 1998 have exceeded $1.26 billion. Almost all of it was spent on programs that had nothing to do with tobacco cessation or public health. Only 0.8 percent was appropriated for tobacco prevention programs.

How could this be? They promised!

Yes, Virginia, they promised. But every two years, 90 legislators show up in Salem, and they each have their own priorities. Once you put a pot of money on the table for them to spend, it’s game over.

Almost no one in the Capitol remembers what the MSA was, and, furthermore, they don’t care. They only care about spending money for the stuff they want right now.

Measure 97 is a horrible tax proposal, for many reasons. It unfairly targets a small subset of all businesses directly, but hits all businesses and all of us indirectly. It taxes sales but not profits. It would be the largest tax increase in Oregon history.

But if voters ignore these concerns and approve it anyway because they think it will increase funding for schools, they are destined for bitter disappointment.


John A. Charles, Jr. is President and CEO of Cascade Policy Institute, Oregon’s free market public policy research organization. This article originally appeared in the September 2016 edition of the newsletter, “Oregon Transformation: Ideas for Growth and Change.”

Like a Sales Tax on Steroids

Now that the massive Gross Receipts Tax measure IP 28 will be on Oregon’s November ballot, we likely will see many estimates of its impact on the state economy.

An economic research center at Portland State University just came out with its report on the measure, funded by the measure’s sponsor, union-backed Our Oregon.

Too bad that the sponsors picked a center headed by a respected former Oregon State economist who said publicly in March that their proposal would be “like a sales tax on steroids.”

Dr. Tom Potiowsky now chairs the PSU Economics Department and directs the Northwest Economic Research Center at the university. While the new PSU report doesn’t include the “sales tax on steroids” language that he personally used in March, it does confirm that such taxes “share many characteristics with sales taxes, and thus a greater burden on lower income households.”

The report also finds that because the tax will increase the cost of doing business in Oregon, it will destroy some 13,500 private sector jobs by 2027, while the added tax revenue will enable government employment to grow by 33,600 positions over the same period.

So, the tax will most hurt those least able to afford it, and will shift employment from the private to the public sector. Not bad for a sales tax on steroids.

A Sales Tax by Any Other Name…

Public employee union backers of Initiative Petition 28 have turned in more than enough signatures to place their massive 2.5 percent gross receipts tax measure on Oregon’s November ballot.

While supposedly dedicating most of the $6 billion per biennium additional tax revenue to public education, health care, and senior services, in reality legislators would be under pressure from powerful lobbyists in the Capitol to substitute at least some of this new revenue for money they would otherwise dedicate to those services. In short, the loudest voices in Salem, not voters, will ultimately control where this extra tax money goes.

While the unions portray their measure as making large, out-of-state corporations pay their fair share of Oregon taxes, the nonpartisan Legislative Revenue Office has released a detailed report giving a much more balanced perspective, which includes:

■ IP 28 will increase state and local taxes by $600 per year on average for every man, woman, and child in Oregon, totaling over $6 billion each full biennium.

■ IP 28 will dampen income, employment, and population growth over the next 5 years. In fact, it is expected to reduce employment growth by more than 20,000 jobs over the next five years, with private sector job growth slowing while public sector job growth accelerates in order to spend all that new tax money.

■ IP 28 will hit lower- and middle-income Oregonians harder than it will affect high-income earners. In other words, it is a regressive tax.

Perhaps most telling, the Legislative Revenue Office concludes that IP 28 will act largely like a consumption tax. It estimates that roughly two-thirds of that $6 billion per biennium tax increase will be passed on to Oregon consumers in the form of higher prices. Another name for a consumption tax is a sales tax.

The reality that IP 28 would effectively be a sales tax should be a lesson for all Oregonians that businesses generally don’t pay taxes, people do. Even the largest corporations are made up of people, namely employees, and sell their goods and services to other people, namely customers. It is largely these two groups of people who pay so-called business taxes like the one that IP 28 would impose.

The backers of IP 28 certainly understand that it is really a tax on people, not corporations. But, it is harder to get voters to approve a tax measure when they think it will hit them with rising prices at the store and fewer job opportunities. Better to promote the fiction that big faceless corporations have some magic pots of money that they will simply hand over to state government and public employees without any consequences for the rest of us.

Public employee unions back IP 28 because most of the tax revenue it would generate will go into the pockets of their members. Once the rest of us realize that this money will come primarily out of our pockets, we might not be too excited about voting for this massive new money grab.


A version of this article originally appeared in The Coos Bay World on June 1, 2016.

If Gambling Is a Problem, Who Is Responsible?

Governor Kate Brown opposes a plan by the Coquille Indian Tribe to build a casino in Medford.

In her public statement, the Governor said she opposes the addition of any more casinos because “even a single additional casino is likely to lead to significant efforts to expand gaming across Oregon to the detriment of the public welfare.”

Her concern for the public welfare is touching, but if one simply “follows the money” associated with the state’s own gambling franchise—the Oregon Lottery—it’s clear that the Governor has little regard for the health of Oregon citizens.

The Oregon Lottery is a state-run monopoly using a network of 3,939 retailers to offer players a wide choice of games, including Scratch-its, Keno, Powerball, Win for Life, Mega Millions, Lucky Lines, and Pick 4.

In addition, the Lottery has approximately 11,925 Video Lottery terminals deployed throughout the state. These terminals accounted for 71.5% of total sales in 2015 and are highly addictive. According to the Oregon Health Authority, roughly 90% of problem gambling in Oregon is associated with Lottery video machines.

In 2015, Oregon earned $1.2 billion from the state Lottery. In January, Powerball mania resulted in record sales of $36 million in one week. An Oregon Lottery spokesman said, “Any time sales go up, that’s a good thing for our beneficiaries.”

Who are these beneficiaries? By law, 57% of net Lottery revenues support public education. Activities loosely defined as “economic development” get 27%. State parks and salmon enhancement programs split 15% of revenues.

Those activities account for 99% of all Lottery funds. The last 1% gets allocated for problem gambling. The state estimates that 81,800 adults and 4,000 adolescents have a gambling addiction.

If Governor Brown were so interested in the “public welfare,” she would be advocating for an increase in the percent of Lottery funds dedicated to the 86,000 problem gamblers. This would at least give her some moral high ground to stand on before criticizing a casino proposed by the Coquille Tribe.

But despite total control of the legislative process by the Democratic Party, the Governor has not made this a priority.

Oregon’s misuse of tobacco tax money is even more egregious. Oregon was one of 44 states that sued the tobacco industry in the mid-1990s regarding the health care costs associated with smoking. As a result of a Master Settlement Agreement (MSA) with the four largest tobacco manufacturers, each state was to receive payments every year from 1998 through 2025.

According to the plaintiffs, MSA money was supposed to be used for tobacco prevention activities and health care subsidies necessary to treat smoking illnesses, but that was not a formal part of the agreement. Thus, each state was free to use the funds in whatever way its state legislature approved.

In Oregon, total MSA funds received since 1998 equal $1.26 billion—yet only 0.8% of the money has been used for tobacco prevention activities.

The Governor’s hypocrisy associated with the use of tobacco and gambling profits is embarrassing. She should clean up her own house before she starts lecturing any of the Tribes about their casino expansion plans.


This article originally appeared in The Coos Bay World on May 24, 2016.

A Sales Tax by Any Other Name

Public employee union backers of Initiative Petition 28 appear to have turned in more than enough signatures to place their 2.5 percent corporate gross receipts tax on Oregon’s November ballot.

While the unions portray their measure as making large, out-of-state corporations pay their fair share of Oregon taxes, the nonpartisan Legislative Revenue Office (LRO) just released its more balanced perspective, which includes:

■ IP 28 will increase state and local taxes by $600 per year on average for every man, woman, and child in Oregon, totaling over $6 billion each full biennium.

■ IP 28 will dampen income, employment, and population growth over the next 5 years.

■ IP 28 will hit lower- and middle-income Oregonians harder than it will affect high-income earners. In other words, it is a regressive tax.

■ Finally, the Legislative Revenue Office concludes that IP 28 will act largely like a consumption tax. It estimates that roughly two-thirds of the $6 billion per biennium tax increase will be passed on to Oregon consumers in the form of higher prices.

Another name for a consumption tax is a sales tax.

Public employee unions back IP 28 because most of the tax revenue it would generate will go into the pockets of their members. Of course, that revenue will come out of everyone else’s pockets.

Who Profits from Gambling?

Governor Kate Brown opposes a plan by the Coquille Indian Tribe to build a casino in Medford.

In her public statement, the Governor said, “even a single additional casino is likely to lead to significant efforts to expand gaming across Oregon to the detriment of the public welfare.”

What she actually means is she’s opposed to more gambling if it’s not run by state government.

During the current two-year budget cycle, Oregon expects to earn $1.2 billion from the state Lottery. In January, Powerball mania resulted in record sales of $36 million in one week. A Lottery spokesman said, “Any time sales go up, that’s a good thing for our beneficiaries.”

The hypocrisy of Oregon politicians about gambling and other so-called “sinful” activities is tiresome. We are constantly lectured to avoid smoking, drinking, and gambling because those activities are bad for us; but as soon as legislators get a cut of the action, it’s full steam ahead.

Now that recreational marijuana is legal and taxed, politicians are suddenly enjoying a new profit stream. Can marijuana advertising be far behind?

As soon as our governor starts reining in the state Lottery, I might take her concerns about tribal casinos seriously. Until then, she should stop pretending to be a voice of morality.

Enjoy the illusion that you’re not really paying taxes, when you cash that expensive refund check

Are you happy getting three extra days to file your income tax returns this year?

For nearly eighty percent of us, it doesn’t matter much because we are expecting refunds. No check writing for us. Why? Because the withholding system almost encourages over-withholding, thus giving the impression that we don’t pay taxes, the government pays us!

Try a little experiment. Ask ten of your friends how much they paid in taxes. Chances are, eight of them might say something like, “I didn’t pay anything, I’m getting money back!”

This happened because my hero Milton Friedman had one of his few bad ideas when he proposed the withholding concept while working at the Treasury Department during World War II. The government needed money fast to finance the war effort, and as Friedman said years later:

“It never occurred to me at the time that I was helping to develop machinery that would make possible a government that I would come to criticize severely as too large, too intrusive, too destructive of freedom. Yet, that was precisely what I was doing.”

Of course, by over-withholding we’re just giving the government an interest-free loan. But psychologically, doesn’t it feel nice getting that refund check?

So, enjoy the illusion that you’re not really paying taxes when you cash that expensive refund check. You paid dearly for it!

How Much of the Year Do Your Taxes Cost?

If every penny earned since the beginning of the year went to pay federal, state, and local taxes, Americans would have to work until the middle of April just to cover their tax bills. Tax Freedom Day is a calendar-based illustration of the cost of government which divides all taxes by the nation’s income. By this calculation, Americans typically work more than a hundred days a year, and pay about a third of their earned income, to all levels of government.

But this is only what Americans actually pay, not what government spends. If annual federal borrowing were taken into account, representing future taxes owed, Tax Freedom Day wouldn’t occur until May. That’s more than two weeks of federal government spending paid for by borrowing.

Americans pay more in taxes ($4.85 trillion) than they do on food, clothing, and housing combined. The saying goes, you should “work to live, not live to work.” But the more government grows, the more Americans are working less to live and more to pay for runaway government spending. That leaves fewer resources to invest in the real engines of economic growth: private sector businesses that create jobs and produce goods and services for a market fueled by Americans’ hard-earned purchasing power.

Don’t Steal the Kicker

Would you like to pay $284 less in Oregon personal income tax next year? That’s what the average taxpayer may save if Oregon’s constitutional kicker law is allowed to take effect.

The kicker law requires that if actual state revenue for a biennium exceeds the official economic forecast by two percent or more, the entire surplus is returned to those taxpayers who earned it. It now appears that the state will collect $473 million more than projected and thus have to give all that money back to taxpayers, in the form of a 6.7% credit on their tax bill.

Well, not if State Representative Tobias Read of Beaverton has anything to say about it. He’s introduced House Bill 3555 that would suspend the kicker and send all that money to schools and the state’s rainy day fund. The bill requires a two-thirds super majority vote in both houses of the legislature, something that hopefully will be very hard to do.

Read says that his bill “gives us an opportunity to invest in the things that reflect our values as Oregonians….” Apparently, “our values” don’t include things like carrying out the intent of the voters when they put the kicker in the Oregon Constitution. “Our values” apparently also don’t include letting people keep as much of their own money as possible to spend on the things that they think will benefit their own families.

Government-Imposed Minimum Wage Increases Don’t Work for Oregon Small Businesses

The concept that everyone should earn at least some government-mandated minimum wage is politically very appealing. It’s almost the classic example of taking from the few and giving to the many. “The few” in this case are portrayed as rich businessmen who could never spend all the money they have, so what’s wrong with making them pay their workers a little more? Now, proponents of raising Oregon’s minimum wage are trying to convince us that somehow such policy is actually good for small business owners.

A recent report from the Oregon Center for Public Policy claims that a higher minimum wage works for small businesses by giving them “more of what they need most: customers with money.”

In reality, raising the minimum wage would only benefit small businesses if owners didn’t mind depleting their own savings or investment funds in order to support higher labor costs. Otherwise, they would have little choice but to raise prices, which would harm all their customers, especially those on the lower rungs of the economic ladder.

And, because minimum wage laws actually cut off those lower rungs on the economic ladder, younger, less educated, and less experienced workers will be even less likely to get or keep the very jobs they need to be customers in the first place. They may spend their unemployment checks, but those checks won’t go as far once prices are raised to cover the higher labor costs that a boost in the minimum wage imposes.

The argument that a higher minimum wage pumps more money into the economy assumes that the resulting pay increases are somehow “new money.” In reality, much if not all of that “new money” will be offset by a corresponding loss of savings or investment funds that otherwise would contribute to more economic growth and hiring more workers.

Just because low-wage workers are likely to quickly spend any wage increases doesn’t mean that on balance that’s good for small business. Taken to its logical conclusion, that would mean small business owners, and everyone else, should never save and invest for the future, but immediately spend every dollar they earn also. If this behavior really benefitted the economy, why are we seemingly so concerned about the dismal rate of saving and investing for retirement among Oregonians? Couldn’t small businesses benefit even more by encouraging everyone to spend all their income right now?

Another set of arguments for raising the minimum wage include the assumptions that higher wages “motivate employees to work harder;” “attract more capable and productive workers;” “lead to lower turnover, reducing the cost of hiring and training new workers;” and “enhance quality and customer service.”

While higher wages may lead to the benefits stated above, if business owners believe that is the case then they should be willing and eager to raise wages whenever possible. The fact that minimum wage proponents want to force business owners to reap these benefits weakens their case.

Finally, there is a real irony in the campaign to boost Oregon’s minimum wage. Minimum wage laws conspicuously leave out a class of individuals who don’t get a paycheck from someone else, but hopefully get one from themselves. Self-employed people, small business owners, and entrepreneurs trade a steady paycheck for the opportunity to be their own boss. They often risk everything―their homes, their savings, all their assets―to build a business that might someday earn them a much higher paycheck than they could ever earn working for someone else.

But, while building a business, many entrepreneurs actually earn less than the minimum wage. They may actually have negative earnings, dipping into savings or borrowing money to keep their doors open and pay their employees. And yet, if these risk-takers hire anyone to help them make their dreams come true, government says they must pay those workers at least $9.25 per hour in Oregon today, and perhaps as much as $15 per hour in the near future.

So, while business owners are free to do a lot of things, and take a lot of risks, one thing they cannot do is hire anybody for less than the minimum wage, even if they are earning less than that themselves. Of course, this may not be a winning argument politically.

It’s easier to demonize supposedly “rich” business owners than to tell workers and job seekers the uncomfortable truth that to be employed in a successful business they must produce as much or more value than they wish to be paid.

Proponents of raising the government-mandated minimum wage know that they have little to lose and much to gain politically by telling young, less educated, and less skilled workers that they deserve to be paid more, and it’s only greedy business owners standing between them and the higher wages they desire.

Let’s just hope that if another bump in Oregon’s minimum wage results in some workers losing their jobs and others not getting hired in the first place that they place the blame for their troubles where it belongs―not on employers, but on those who promised them higher wages but couldn’t deliver because economic reality stood in the way.

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