How accurate is the Measure 97 economic research?

SALEM, Ore. -- Oregon’s chief revenue officer is defending his agency's report predicting that proposed corporate tax Measure 97 would prove harmful to the state's economy, despite sharp criticism from backers of the tax.

Paul Warner, head of the Legislative Revenue Office — a nonpartisan research arm within the state Legislature — said his office’s analysis of the tax is as good as its gets given the available data, though not above criticism.

Warner's report predicts that, among other effects, Measure 97 would slow private sector job growth and boost the average per-person tax bill by $600, with the burden falling mostly on low- and middle-income Oregonians.

Measure 97 would tax so-called C Corporations at 2.5 percent on all Oregon sales above $25 million. It's expected to raise $3 billion annually, if approved by voters during the November 8 election.

Our Oregon, the political group sponsoring Measure 97 has criticized methods used by LRO to study the tax.

The linchpin of Our Oregon's argument is that although fewer than 1 percent of firms doing business in Oregon would be affected by Measure 97, the LRO’s model could not analyze the tax effects on a company-by-company basis.

“It’s true that we didn’t do a firm-by-firm breakdown,” Warner said. “I think it’s a valid criticism.”

What LRO did do is run Measure 97 through its custom computer-generated model. The model has been used by the state since the 1990s to research all kinds of tax proposals, and looks at tax effects on more than 100 unique Oregon business sectors assembled from Census Bureau data.

For its report on Measure 97, LRO analyzed the tax effects on the 40 most affected sectors, which were overwhelmingly wholesale and retail industries.

For his part, Warner said the model used by LRO offers “a pretty reasonable approximation” of Measure 97’s effects.

Our Oregon spokeswoman Katherine Driessen cast shadows over the LRO model, and said she appreciates Warner’s candor on its limitations.

But despite the model's apparent shortcomings, there may be few alternatives. These kinds of computer programs, called computable general equilibrium models, are the best way to test the impacts of a tax, said Dr. Peter Wilcoxen, of Syracuse University.

Wilcoxen, an expert in building these models, said it’s usually not possible to predict tax effects on the basis of single companies. There just isn’t consistent data on the activities of individual firms, he said.

Why it matters

Measure 97 would fundamentally reshape the state tax formula. Money raised by the tax would be moved out of the private sector and into the public sector, meaning more funding for schools and other public programs.

But campaigns on opposite sides of the measure have an interest in the size of the public sector — and their tax bills.

Our Oregon is financed by teacher and public sector unions. Defeat the Tax on Oregon Sales, the opposing campaign, is funded by large corporations, many of which are out of state. In sum, the campaigns have raised more than $10 million, making Measure 97 the richest ballot measure race in state history.

The opposing campaigns are also using research on Measure 97 in the hopes of wooing voters. Our Oregon has paid for its own studies while Defeat the Tax on Oregon Sales has trumpeted the LRO report.

One Our Oregon study, not conducted by economists, looked at pricing among national retail chains. It concluded Measure 97 would not cause price increases.

Warner, the state revenue economist, said the idea that companies would not raise prices in the face of higher tax burdens is “very inconsistent with profit maximization behavior.”

Washington state economist and Our Oregon volunteer Scott Bailey said profit maximization assumptions "don't necessarily hold in real life," and that factors like a company's market share are more important.

Driessen also defended the study, saying, “We don’t think you need an economics degree to look at how pricing works.”

Our Oregon also hired Portland State University economists to analyze Measure 97. Their findings aligned with the LRO, but that conclusion wasn’t reached without tension. Emails show Our Oregon staff unsuccessfully pressured the PSU economists to cast the tax in a favorable light, according to the Oregonian.

Driessen said the emails amount to nothing more than “a very standard editorial process.” In the end, she said, “PSU ultimately decided what went into the report.”

Measure 97 is heading into the election with strong support; 60 percent of registered voters say they'd vote for the tax, according to Portland-based pollster DHM Research.

Send questions, comments or news tips to gfriedman2@statesmanjournal.com or 503-399-6653. Follow on Twitter @GordonRFriedman.


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