Oregon’s Measure 118: The Turnover Tax Is the Worst
Alex Brill | AEIdeas
Next week, Oregon voters will weigh in on a tax-related ballot measure with concerning repercussions. Measure 118 would impose a three percent turnover, or gross receipts, tax on corporations with revenues above $25 million and disperse the tax revenues as an annual “rebate” to residents. This tax will burden households, distort supply chains, and could have a negative impact on the healthcare industry.
Generally speaking, a turnover tax applies to businesses much the same way as a retail sales tax. Consider a fully integrated bread business that grows and mills its wheat and other ingredients and bakes and sells bread directly to consumers. If this bread business were to become subject to a three percent turnover tax, it would face a tax that is equivalent to a 3.1 percent retail sales tax. For example, if the business sold a loaf of bread for $10.31, the tax would be equal to 31 cents, or three percent the total price.
A major difference between a sales tax and gross receipts tax, however, is the treatment of business-to-business transactions. Sales taxes only apply to the final sale to consumers while gross receipts taxes apply at every point along a supply chain, resulting in an effective tax rate far greater than three percent.
The cascading nature of a turnover tax creates significant distortions, and the burden would vary significantly by industry. One study of this type of tax in Washington State found effective tax burdens that ranged from 140 percent to 670 percent of the statutory rate. And since the burden rises as the number of business-to-business transactions rises, companies would have an incentive to integrate to avoid cascading.
It is reasonable to assume that this tax would, much like a retail sales tax, be passed forward in the form of higher prices. Higher prices would reduce the real value of all earnings in Oregon. And while the proceeds from this tax would be returned as a rebate to consumers, higher prices would erode its real value.
Higher prices would also burden businesses that are not directly subject to the tax. The exemption for businesses with gross receipts less than $25 million looks like a courtesy to smaller businesses. In reality, small businesses generally buy their equipment and supplies from bigger businesses, those who will be passing along higher prices. Additionally, while a turnover tax generally encourages vertical integration that would otherwise be inefficient, this exemption threshold discourages otherwise efficient mergers between smaller firms.
In some cases, the impact would be more complex. Consider, for example, the healthcare industry.
When a doctor takes commercial health insurance, the total price paid for his or her service is a combination of a patient’s copay and a negotiated reimbursement rate (price) established with the insurer. If Measure 118 goes into effect, doctors will do their best to negotiate higher rates from these insurers by explaining that their costs have gone up. If doctors are successful, insurers will then pass along the additional cost as higher insurance premiums.
When a doctor treats a Medicare patient, reimbursement is set by the government based on established formulas and data inputs, including provider cost reports, surveys results, and numerous assumptions about the time and intensity of each procedure. These rates are set at the national level and adjusted locally by geographic practice cost indices (GPCIs), which include the local cost of labor, rent, and purchased services. If doctors in Oregon see their input cost rise as a result of the new tax being paid by their suppliers, eventually Medicare reimbursement rates in Oregon will adjust upward as well, shifting part of the burden of the tax to the federal government.
However, if a medical practice is directly subject to the tax, there is no mechanism whereby the physicians can pass along the tax burden to the Medicare program. For example, physicians who administer drug to Medicare patients are generally reimbursed at the average price paid for that drug nationally plus 4.3 percent. Tack on a three percent gross receipts tax and the expectation that prices may have gone up for medical practices generally, and these physicians can end up losing money on each patient they treat. This could ultimately reduce the supply of these services in the state.
Economists have long understood that a gross receipts tax is bad tax policy. The late economist Richard Bird called it “by far the most distorting form of sales tax economically.” He continued,
Governments that impose turnover taxes have little idea of the effects of such taxes on either allocation or distribution. Of course, neither do taxpayers know what’s really going on – a result that some politicians may applaud but that anyone interested in fiscal accountability should presumably deplore.
Hopefully voters in Oregon will see the foolishness of this policy and reject Measure 118.
Read the blog post here. Find other articles about the presidential election here, here, here, here and here.
