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MEASURE 97: INCONSISTENT, INEFFECTIVE

PAMPLIN MEDIA GROUP: JAIME VALDEZ - David Chown runs family-owned Chown Hardware as operations and finance manager, in shared ownership with his brother.David Chown is in charge of operations and finance for Chown Hardware, while his brother Fred is president and in charge of sales and marketing.

Consequently, David is on the front line in dealing with his company’s reaction to the prospect of a gross receipts (over $25 million) tax if Measure 97 passes. This family-run business does around half its sales in commercial hardware, selling (for example) door fixtures to big customers such as Portland Public Schools, Legacy Hospitals and Hoffman Construction. The rest of the business is retail, selling bathubs, lights, showers, door handles and locks to high end homeowners, especially in its showroom on Northwest 16th Avenue and Flanders Street.

Q: How would the proposal affect Chown Hardware’s tax bill?

A: “We’re over the $25 million mark in total sales, but we’re $20 million in Oregon sales. Initially we’d be affected by utility and gas prices going up. As soon as our sales went over $25 million, which they will, even just because of inflation, we’ll have to pay this tax. We only have to grow 20 percent to get there and that’s only a couple of years from now. We’re a C Corporation so we’ll be subject to the tax.”

Q: Could you restructure the company to avoid it the tax?

A: “We are on a method of accounting, LIFO accounting, inventory accounting, that the IRS says if we ever change our corporate structure we’d be subject to a very large tax on our inventory, which would be close to half a million dollars. What I know is no business can pay a 2.5 percent tax on sales, especially when a lot of their competitors don’t have to. LLCs and S Corps won’t have to pay the tax, so we’d be at an instant disadvantage.

“We have lots of competitors: American Direct out of Kansas City (commercial hardware), Clark Security Products out of San Diego, and Ferguson who are a major competitor in plumbing supply...whether they’d have to pay, I don’t know.

“But there are lots of small business we compete with who wouldn’t have to pay, such as locksmiths, or George Morlan Plumbing. The real rub is it doesn’t treat businesses equally, it only taxes C Corporations, and the minority in Oregon are C Corporations.

“The real pain will be for ordinary people, because food bills are going to go up, everything in the supply chain can be taxed, 2.5 percent on top of 2.5 (percent), on top of 2.5 (percent), so 3 percent is easily in the range of what the tax will probably raise prices. Everyone will pay it, businesses and individuals.

“Our total profit margin is around two and a half percent. If we go over $25 million in sales, we’ll lose money on every sale. So if nothing else, it would force us to not grow and not hire people. We’d probably move some business out of state, focus on growing our Bellevue, Washington location, because the tax here would make it unprofitable to grow. That’s people I can’t hire, and wages increases I can’t give to people.

“The Legislative Office in their model said wholesale and retail trades would be hit hardest. We have a lot of wholesale business, and it’s always run on a thin margin. We have contracts with Portland Public Schools, Legacy Hospitals, Hoffman Construction...we supply a lot of hardware for doors, locks and hinges, paying attention to fire codes and egress codes. Doors are the moving parts of the building and there’s a lot of code associated with them, and that’s our specialty.”

Q: Are there any other costs?

A: “Our biggest cost is salary. We always pay attention to the cost of living, and try to make sure our people are paid appropriately. There would be wage inflation that goes along with this. Being on the edge of the Pearl District the rents are some of the highest in the city. My brothers and I own the building — our parents built it in 1948 and bought the property in the 1950s and 1960s — and half of the next block. So the business pays rent to us. So there’s rent, advertising, office supplies, janitorial, security, outside contractors if we need work done on the building, the list goes on.”

Q: Have any other states enacted similar legislation?

A: “There’s a handful of states that have a gross receipts tax, but nothing like this. They’re all a minute percentage. The Washington Business Occupation Task is about a tenth of 1 percent and has different rates for different types of businesses, and every business has to pay it. So it’s a level playing field. This (Measure 97) is a lab experiment, there’s no other state with anything like it.

“I first heard about it four months ago through the Portland Business Alliance, where I’m on the board. It’s a major alarm within the Alliance because of what it will do to the economy: it will raise prices immediately, make Oregon businesses less competitive, and result in a lot of pain for everybody. Businesses would probably have to cut their staff. Nobody really knows what the dynamic effects will be, but it will be a negative effect on the Oregon economy. “

Q: Wouldn’t there be an upside to the revenue going to schools and seniors?

A: “I don’t know if there are better ways to raise the money, but there’s no guarantee the money will get to the schools. It’s like dumping $3 million into the legislature and saying ‘Here, spend it how you want.’ You’re supposed to identify a need.”

Q: What if the measure were absolutely dedicated to schools and seniors?

A: “It still wouldn’t work because the way it raises money is damaging to the economy. You can’t use a bad idea to solve a problem, you have to have an idea that works. This is going to result in way more pain than gain.”

Q: What can you do about it before November?

A: “It’s important to report the real life effects and have people be aware. It sounds good, it sounds like free money that big business and out-of-state businesses are going to be throwing money into the state coffer, but people need to understand the businesses are not going to be paying for it, the people of the state are.

“This is the issue that’s important to us. For example that we’re not just against taxes, we backed the gas tax, and we have in the past backed school measures. But this is the issue for us this year.

“We were very disappointed in the Governor (Kate Brown) backing it. Giving money to the campaign No on 97 to get the word out makes more sense than lobbying politicians, because it’s going to be on the ballot. The voters have to be educated on the measure. Social media is a great way to get the word out. We’re on Facebook and different social media. Hard to say whether it works, it just raises general awareness.”

Q: What can you do? Lobby politicians?

A: “The Alliance is Portland-focused, so we’re not going to go after every member of the house. We haven’t talked to customers or staff about it yet. I’m not going to inject this into a customer relationship, that’s not why they come in here. Probably at some point during the campaign I’ll communicate with our employees the effect it will have on our business, because they’re stakeholders.

Q: Can you survive?

A: “For Powell’s it’s an existential threat. Will it make us go out of business? Probably not. But it will keep us from growing our business, and from hiring the people we want to hire, and force us to cut expenses and shrink the business.

“What you won’t see, because it’ll happen so quietly, you won’t see businesses coming to Oregon. They’ll probably locate somewhere nearby, like Vancouver. The Oregon economy will either grow very slowly, or shrink. It’s not necessarily like a nuclear bomb explosion, but it’s going to keep the economy from being healthy. I can’t pack up my storefront and move to Vancouver and expect my customers to follow us. We’re limited in how we can respond.”

Q: How about raising prices?

A: “When our competitors don’t? (laughs) They would win the work and we wouldn’t. I can’t just raise my prices in a vacuum. Residential customers who come in the showroom are working off what they want and what they like and the sales support and expertise. But if they come in here and the same product is available for less elsewhere, being a nice guy and a great helper only goes so far. Commercial customers are working off numbers. They are very price sensitive, they have budgets too. They’ll go elsewhere and I don’t blame them. That’s what Costco does: they have very low prices and everybody knows it.”

Q: How does this jibe with your personal politics?

A: “Yes I want better schools. Oregon has the fourth-worst graduation rate in the country. Education is important, and so is caring for seniors — I am one, almost, I’m 63. I don’t mind taxes being spent on worthwhile things like that, but it really has to be raised in a way that is consistent and targeted. And this is inconsistent not targeted and not effective.

“Taxes have to be distributed fairly throughout the population, but this targets just one type of business and affects the people who can afford it least. Any tax would be better than this one, even a sales tax, because you can exempt things like food and medicine. And a sales tax is only applied once, at the end. So even though none of us like paying a sales tax, a general sales tax would be much more effective and fair than this (Measure 97). Income taxes are spread out with some rationality. Property taxes seem to throw a lot of money on something that isn’t producing a lot of income, but even that is at least more fair, in that it’s spread throughout the population in a more equitable way.

Chown Hardware

Where: 333 N.W. 16th Avenue, Portland

Phone: 800- 452-7634

Web: {obj:16882}

WHAT IS MEASURE 97?

The Business Tax Increase Initiative (Measure 97) is on the November 8, 2016, ballot in Oregon as an initiated state statute.

A “yes” vote is a vote in favor of increasing certain corporate taxes by establishing a 2.5 percent tax on corporate gross sales that exceed $25 million.

A “no” vote is a vote against establishing a 2.5 percent tax on corporate gross sales that exceed $25 million and retaining the existing corporate tax structure.

The measure would establish a minimum tax of $30,000 plus 2.5 percent of gross sales that exceed $25 million. It would remove the current minimum gross sales tax rate, which is around 0.1 percent and capped at $100,000. Corporations with a high enough income are taxed according to their income in lieu of the gross sales tax. The income tax rate for qualifying businesses is 6.6 percent of taxable income up to $1 million and 7.6 percent of taxable income above $1 million. These rates apply when the result is greater than the minimum sales-based tax. The income tax on high-income corporations would be retained if the initiative passed.

According to the Oregon Legislative Revenue Office, for example, a corporation with less than $20 million in sales would not be affected by the change. A corporation with $70 million dollars in sales would see a 23-fold increase in its tax obligation.

Background

Business tax revenue in Oregon largely derives from levies on gross sales receipts rather than income. In 2013, only $500 million of the $6.2 billion the state collected in business taxes was from corporate income. Only five other states have taxes based on gross receipts, and, if the measure were to pass, Oregon would have the highest rate. The gross receipts tax rate in Washington ranges from 0.138 percent to 1.5 percent. Similarly, Ohio has a 0.26 percent gross receipt tax. These rates compare to 2.5 percent in Oregon as proposed under Measure 97. The new gross sales receipts rate would not supplant the existing corporate income tax structure as discussed above. Whichever rate amounts to a higher tax payment would apply: either the 2.5 percent on gross sales or the 6.6/7.6 percent on income.

Source: Oregon Business Tax Increase, Measure 97 (2016)

According to Preston Mann, Communications Director, Oregon House Republican Caucus:

Section 3 would not bind a future legislature in its spending decisions. If Measure 97 becomes law, the Legislative Assembly may appropriate revenues generated by the measure in any way it chooses. In this instance, section 3 of Measure 97 purports to limit the ability of the Legislative Assembly to spend certain tax revenues for purposes other than those listed in the section. This would impermissibly attempt to limit by statute the plenary exercise of the legislative power vested in the Legislative Assembly by Article IV, section 1, of the Oregon Constitution. A statute such as section 3 may not limit the constitutional power of the Legislative Assembly to pass subsequent laws. Any such limitations must be in the Oregon Constitution. Therefore, any subsequent law enacted by the Legislative Assembly that spent the tax revenues in a way that is contrary to section 3 would be a valid enactment of the Legislative Assembly.”


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