Editor’s Note: Today the Chronicle features the case against Measure 97 as presented by area farmers and heads of regional and state agricultural organizations. On Tuesday, proponents of M97 will discuss benefits of the gross receipts tax proposal.
Farmers in Wasco County are on the move to educate people in large urban centers of Oregon, which usually carry the vote, about how devastating passage of Measure 97 would be to food production.
In Oregon, agriculture is the second largest industry, supporting more than 326,000 full- or part-time jobs and producing commodities valued at about $5.4 billion per year.
So the overall economic loss could be great if the proposed new tax of 2.5 percent on gross receipts — before expenditures are deducted — of corporations with sales over $25 million goes into play.
“If this tax is approved, the viability of our business is in question,” said Jeff Kaser, general manager of Mid-Columbia Producers (MCP), which is headquartered in Moro and owned by 881 farmer members.
In a year when profits are down, Oregon Cherry Growers (OCG) could end up paying more taxes under M97 than it makes in net proceeds, said Dan Ericksen, an orchardist from The Dalles and chair of the OCG board.
If Oregon voters approve Measure 97 in November, the state could join five others in assessing a gross receipts tax — and would have the most burdensome system of all, according to the Tax Foundation (TF), a nonpartisan research group founded in 1937.
The 2.5 percent tax on gross receipts — no deductions for expenses — in excess of $25 million for C Corporations would be the highest rate in the country, save for the tax on radioactive waste in Washington.
TF researchers contend that Oregon would fall from the 11th best to the 17th best ranking in the State Business Tax Climate Index, but its corporate tax structure would fall to 50th — the worst in the nation, according to TF researchers.
Washington has included 31 rates in its gross receipts tax and Nevada 26 rates, seeking to mitigate some of the effects.
In Oregon, there would be one rate applied to all businesses with no consideration for industry structure, such as allowing firms to deduct input costs. And the rate would be much higher than other states.
For example, Delaware charges between 0.0996 and 0.7468 percent. Ohio charges 0.26 percent. Only Washington’s rate is higher, at 3.3 percent, but that rate is only assessed on radioactive waste disposal.
TF outlines that Indiana, New Jersey, Kentucky and Michigan have repealed their gross receipts taxes in recent years, largely due to the ill effects on the economy.
Oregon’s corporate income tax has two brackets: 6.6 percent on corporate income of less than $1 million, and 7.6 percent on income greater than $1 million. Oregon is one of just eight states to also assess a minimum tax on top of its income tax. Firms must complete a second tax calculation and remit the greater of the two amounts.
The minimum tax is tiered based on sales within Oregon. The payments range from $150 to $100,000.
Although there is language in M97 that exempts agriculture cooperatives from paying the tax on sales involving members, Kaser and Ericksen say that key operations needed to sustain their companies will fall outside that exemption.
“This is what happens when laws are proposed that haven’t been thoroughly vetted for unintended consequences,” said Ericksen.
Fuel sales to non-members (taxableunder M97) are essential to cover costs when the grain market is depressed, as it has been this year, said Jill Harrison, MCP controller.
She explained that there are 14 fuel card-lock stations along Highway 97, and these are primarily used by trucking companies, contractors and non-members. Grain seeds from a Wasco plant are also sold to non-members, as are goods at three farm supply stores.
In a position paper, Kaser wrote that $98 million in sales had been made to non-members in the recently completed fiscal year, all of which would be taxable under M97.
The profit margin at MCP is never high, said Harrison, so supplementary sales are necessary to offset market losses.
“We need all of the profit that we can get,” she said.
Ericksen said OCG receives about 5,000 tons of fruit each year from its 60 farm-family members, but 18,000 tons of product needed to fill customer orders for maraschino cherries, dried blueberries and other fruits is purchased from non-members, which would be taxable.
“In addition to the loss of revenue, application of the tax would create an accounting nightmare,” he said.
This year, OCG projects a profit of about $1 million after payment of a 7 percent state corporate tax. If M97 is enacted, Ericksen said gross receipts tax on non-member sales would be $400,000, or about 40 percent of net profit.
Out of the remaining $600,000, he said 35 percent will go to federal taxes.
The problem gets worse, said Ericksen, when there are bad market years such as 2015, when OCG realized only $200,000 in net profits. If there had been a tax on gross receipts, he said $400,000 would still have been owed — and the company would have been in a deficit.
In addition to the looming threat of M97, he said OCG is struggling to comply with other new state laws. The Legislature boosted the minimum wage this spring from $9.25 to $13.50 by 2022. In addition, employers with 10 or more full-time workers are now required to provide up to 40 hours of paid sick leave a year.
Compliance with the phased-in minimum wage increase is costing OCG $333,000 more per year for each of the next five years, culminating in an increase in labor costs of more than $1.5 million annually, said Ericksen.
“The more we cut into net profit, the closer we will be to going negative under M97,” he said.
Kaser said operational costs at most farms have already been streamlined so there will be few places in the budget to make up losses from M97.
He and Ericksen contend that M97 will put Oregon farmers at a competitive disadvantage with states that have lower operating costs.
For example, Ericksen said OCG competes in the maraschino cherry market with Michigan, which has a minimum wage of $8.50 per hour and no gross receipts tax.
“They are already going to have a $4 per hour advantage over us – and that is before any new taxes are imposed,” he said.
Because M97 is written to be broadly applied, the new tax would be levied on equipment, fuel, utilities and supplies, driving up overall production costs, said Zipporah Underhill, a Dufur rancher and wheat grower.
“As farmers, we can’t pass on prices; we are competing in a global market,” she said.
There are more than 34,600 farms and ranches in the state, 97 percent of which are family owned. An ever-increasing burden of regulations is making it difficult for smaller producers to stay afloat, said Jack Hay, who grows wine grapes. “It’s all cumulative and drives down revenue,” he said.
Ericksen said many children are choosing to walk away from the family farm because they can make more money in another profession without the long hours and high risk brought by weather and market conditions that are unpredictable.
“There’s a lot of worry about the wolves being an endangered species in Oregon, but family farms are becoming even more endangered,” he said.
Ken Bailey, owner of Orchard View Farms, the largest cherry producer in the region, said bigger farms may be able to absorb the higher costs that M97’s passage would bring, but many small operations are likely to fold.
“We can probably find a way to make this work, but smaller farmers are getting squeezed out by regulations,” he said.
Measure 97 is a proposal that exemplifies the disconnect between consumers and the less than 2 percent of the nation’s population that grows its food, say local farmers.
Dean McAllister, who serves on the board of the Oregon Farm Bureau, which represents more than 7,000 producers, said the new tax will not only harm agriculture, but all consumers because it applies to the entire supply chain.
“It’s basically a hidden sales tax and it’s going to affect everyone,” said Fritz Ellett, chair of the Wasco County Farm Bureau.
Joining the opposition to M97 from the regional agricultural industry are Columbia Gorge Fruit Growers, with 440 farmer members, and the Oregon Cattlemen’s Association, with 1,750 members in the beef industry, the top agricultural commodity in the state.
“It’s catastrophic when you think of how many places we’re all going to pay this tax,” said Paul Schanno, a Dufur wheat farmer and rancher.