Stop me if you’ve heard this one before: “Businesses don’t pay taxes; they just pass the cost of taxes on to—“
OK, so you’ve heard that. Most recently, you probably heard that from the opponents of Measures 66 and 67. One of their arguments is that Measure 67 in particular is nothing more than a sales tax, because businesses will raise their prices to cover the tax.
That notion is a myth that needs to be busted. Either the opponents have never taken an economics class or, more probably, they assume you haven’t.
Businesses will stick consumers with any increase in costs — labor, supplies, rents and taxes — if they can get away with it. But that’s a big if.
Let’s go back to Econ 101, where you learn about supply, demand, pricing curves and economies of scale. (I know, it was a boring class, so we’ll just go over the Cliff Notes.) Essentially, businesses have two goals that have to be balanced against each other: 1) charge as much as they can for their products or services and 2) acquire as many customers as possible.
Say I have a burrito stand downtown. If I price my burritos at $1 (and the quality is as good as any others), I’d have so many customers, they’d be lining up for blocks. But I’d go broke because $1 wouldn’t cover the cost of ingredients, rent and other expenses. At about $3 per burrito, I’d break even but make no profit. From what I’ve observed, burrito stand operators can make a living with a $4.50 – $5 burrito. If I charged $10 for a basic burrito, I’d make a lot more money per burrito, but I’d go out of business because I wouldn’t have enough customers, if any.
What happens then if the price of beans jumps 50 percent? I could figure out how much more money it takes to make a burrito and tack that onto my price, maybe bump it up a quarter or fifty cents. Since all other burrito carts are subject to the same price of beans, they also raise their prices — all except Enrique down on the next block. He keeps his prices lower and gets more customers. He’s not losing money, because the extra volume makes up for the lower margin. So that forces me to lower my prices as well. Eventually all the burrito stands end up back at the same price and have to figure out some other way to make up the lost profit.
In a competitive free enterprise environment, businesses will do anything to avoid losing market share. They will take losses for awhile, or cut costs or reconfigure their business model and offer different products or services. In fact, they are constantly doing all of this. Raising prices, especially in a down economy, is going to cost market share unless they can come up with compelling reasons to charge more.
So what’s going to happen to businesses if they can’t raise prices and their taxes go up? Are they going to lay off workers? Go out of business? Probably not if they have survived the past year.
You’ve heard about, and very possibly experienced, the Great Recession of 2009. Depending on which economists you trust, it is either over or it isn’t. For the past year, however, businesses have already been laying off employees, cutting other expenses and scratching out a buck any way they can.
Recessions are like long juice fasts in which businesses purge toxic elements from their systems. When businesses are in growth mode, they often have to hire people they wouldn’t otherwise want to employ. Recessions give them an opportunity to trim the deadwood. Recessions force businesses to rethink every part of their operations and that makes them better. Most companies have cut hours and employees over the past year to the point they can’t cut any more and operate efficiently.
I have a friend who is vice president of a moderately sized company that manufactures and markets upscale tile. A year ago, he had to go through the horrific process of laying off a fifth of the company’s employees due to rapidly declining sales, since demand for its products was affected by the implosion of the housing market. He absolutely hated having to cut so many jobs. A few weeks ago, however, he told me the company finished the year with a decent profit despite a $2 million drop in sales. And the company president and owner took his annual month-long vacation to Cancun as usual.
The leasing agent for a firm that owns a big chunk of southeast Portland property recently mentioned that Starbucks sent him a letter demanding a 25 percent reduction in its rents (the firm leases to Starbucks in two locations). He said the same letter had been sent to every Starbucks landlord in the U.S. Given that Starbucks was closing down hundreds of stores, the company had a lot of leverage behind its demand.
Starbucks’ stock price has nearly tripled in the past year. Intel’s shares are up more than 50 percent. Stock prices for most of those banks we all bailed out are up double or better. In fact, most of the market has recovered from the precipitous fall it took 15 months ago. The big corporations are making big profits again. These are the companies that will pay the most under Measure 67. Some of the biggest will pay hundreds of thousands of dollars more, and it will come out of those profits.
They have done pretty well, considering. Many of the rest of us haven’t. It’s only fair they pick up a bit more of the tab on public education and the other essential services that these ballot measures will protect.
The burrito stand? Under Measures 66/67, it will pay $150 minimum tax — or less than a penny per burrito.
{ 6 comments }
As an econ major perhaps we took different courses, but where in your studies did the increase of taxes during a recession provide anything more than a temporary, and short term gain?
What if your burrito store came to its customers of the past 12 months and said, look folks I’m glad you enjoyed your burritos at the price you paid for them, but I’m going to be short on my 2010 budget because I haven’t efficiently trimmed budgets (rather I’ve increased payrolls) as most self sustaining businesses have, and therefore am going to retroactively charge you for the burritos you bought in 2009, plus the ones you bought in 2010.
You are discussing fairness yet missing the key points to what defines a fair system.
So lets take the decision to make the taxes retroactive (has a constitutional question even been raised yet on the prospects of legal constraints in retroactive taxation?) aside and focus on the core elements. Raising taxes.
This is a short term solution. It is not a long term solution. Any economist worth her weight in salt will tell you this. Most taxes such as the alternative minimum tax come out as only supposed to impact the rich, and be short term. This is never the case. Once Salem or DC get ahold of new money they can’t let go, regardless to their political sidings.
The safest bet for Oregon’s long term future is to lower personal income taxes. These taxes are very hard to bear for small business owners such as myself who are registered LLC’s — all business income flows directly to our household and we will pay the additional taxes as a result, both for 2009 and 2010. We have no long term data showing sustained increases taxation leading to sustained increases in government revenue. Quite the opposite actually. If we want to benefit the business owners and employees of Oregon we need to reduce taxes now, and reap the long term benefits.
I won’t even get into the notion of trying to tax businesses on their gross sales regardless of any income.
The key thing here (as you note) is that this raises the minimum tax to $150. Any business that can not absorb $140 a year (as the old minimum was $10) has bigger problems than this tax increase. $150 won’t be the difference between hiring a worker or not (as argued by the bill opponents).
Oregon’s minimum tax was set in the 1930s and is one of the lowest in the country.
As for the issue of the tax increases being retroactive, the Oregon legislature passed the bills in the spring of last year and businesses had plenty of time to prepare for them. It was the anti-tax fairness crowd that forced an election on these measures.
I don’t think that if this is approved that it would stop here. Where/when will the state start living within its financial means? Lean times, leaner spending, good times, spend, but put some aside for times such as these.
And the fact that it is retroactive, it might not hurt a company as much, but I wouldn’t know, but I know that if I had to come up with the back taxes as an individual or couple, it would be with difficulty. Will the state make accomodations for those who will struggle to pay the new tax bill?
I think, and I am sure that some will see it as simplistic, but if we as responsible adults, have to live within our budgets, then so should our state.
nonlinegirl: The arguments against raising the corporate minimum tax by $140 dollars are less about the direct financial impact it will have on the entities and moreso the long term consequences of maintaining a fiscally irresponsible state and local set of governments in Oregon.
Why stop at $140, why not make it $500? Where does the slippery slope end? Should a corporation making a profit in Oregon experience a 20% increase in corporate taxes? The $140 is not at issue, it is a side issue and just another surcharge to doing business in Oregon.
Most Oregon businesses will just accept this as another cost of doing business. Some will pass the costs onto their customers. A minority will leave the state.
Raising taxes does not increase revenue in the long term. Nobody is prepared to argue this case and it should be the talking point of the argument against measure 66/67.
It was not a coincidence that the lowest upper bracket marginal rates in US history preceded the economic boom in the 90s.
Measure 67 does not raise the corporate minimum tax to $150. It would raise the corporate minimum tax to an amount starting at $150 and ending as high as $100,000 depending upon Oregon sales.
C-corps will only have to pay this if they have no taxable income (or their taxable income does not result in enough tax to meet the minimum tax). While S-corps and partnerships will have to pay $150 in addition to the tax their shareholders and/or partners pay on their income. The minimum tax has nothing to do with profits.
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