Friday, January 8, 2010

A Counterproductive Tax

This example comes from my home state of Oregon but I suspect the foolishness behind it is not limited to a single state. I hope readers from other states will look at their laws to see if any are just as silly. I'm sure every state has greedy politicians who are willing to pass bad tax laws if it will give them more money to play with.

We are facing a referendum called Measure 67. This is a tax passed by our legislature and which voters placed on the ballot by petition. It includes a poorly conceived and regressive sales tax in a state where voters have consistently rejected sales taxes. Our legislature, ironically one of the most liberal in the country, has imposed higher taxes on small corporations than on large ones. Furthermore they want to tax the same income several times in many cases. To see how this would work we have to examine the provisions of the measure.

Oregon Measure 67 imposes a minimum tax on corporations, the amount dependent on gross sales rather than on profits. A company can lose money and still owe a hefty tax bill. Though the legislature did not use the term “sales tax,” this is clearly a tax on sales and I regard it as a back-door attempt to sneak a sales tax past the voters.

Interestingly, even if a corporation has no sales it will owe taxes. The measure specifies a minimum tax of $150 on corporations with sales of less than $500,000. A start-up with no sales will pay a sales tax!

This sales tax increases with corporate sales but stepwise, in fixed increments rather than as a percentage of sales. A company with $500,000 of sales will pay the same tax as one with$999,999 of sales.

The tax increase with sales also tops out at a tax amount of $100,000 on sales of $100 million or more. At that level, sales the tax phases out and does not increase further. A company with billions of dollars in sales will pay no more tax than one with sales of only $100 million. I find it amazing that such a provision is in a measure claiming to tax large corporations their fair share.

As written, the measure can also tax the same sale several times. Because this sales tax is not limited to retail sales, it would be paid any time a corporation sells anything. To see how this leads to multiple taxation consider the following example:

Corporation A makes a component which it then sells to Corporation B. Corporation A would of course pay sales tax on the gross amount of what it sells.

Corporation B then assembles that component into a module which it sells to Corporation C. Corporation B must pay sales tax on the entire amount of the sale, including the portion paid to Corporation A which was already taxed once.

Now Corporation C includes that module in a final product which it sells to the retailer, Corporation D. Corporation C must pay tax on the entire amount of the sale, including the portion it paid for the module and what Corporation B paid for the component. The sale price of the component has now been taxed three times.

Finally Corporation D sells the product to its customers, again paying sales tax on the entire value of its sales. That value includes the cost of the component from Corporation A, the module from Corporation B, and the product from Corporation C plus the cost and profit (if any) involved in the retail sales. The component has now been taxed four times. The added value of the module has been taxed three times, and the added value of the product twice.

Now suppose there is a competitor, Corporation E, which sells the same product but makes the component and module in house (or more likely overseas). Corporation E pays the sales tax only once since it need not buy from anyone else. In fact it may even have a retail arm allowing it to sell directly to customers and thus avoid being taxed for both its sales and the retail sale. If it has that power it is likely a large company, perhaps with total sales well over $100 million so it will also benefit from the regressive nature of the tax which phases out at sales of that amount.

This measure, by intent or by accident, favors big corporations at the expense of smaller ones. In fact Corporations A, B, C, and D would do well to form a conglomerate so they can both avoid multiple taxation and benefit from the regressive nature of this sales tax. While claiming to force large corporations to pay their fair share, Oregon Measure 67 in fact discriminates against smaller corporations for the benefit of the large ones.

I urge my fellow Oregonians to defeat this badly written sales tax. I also urge citizens of other states to keep an eye on their own politicians and not allow them to sneak bad laws past the voters.

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1 comment:

OregonGuy said...

Well done.

Thank you.