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The campaign will feature a pair of intractable issues not on the ballot but inescapably central to the discussion: The structural funding crisis in Oregon's retirement program for public employees, and its chronically low level of support for public education.

(Michelle Brence/The Oregonian)

By Dana Tims & Mike Rogoway | The Oregonian/OregonLive

Oregon could be headed for the biggest change in its tax structure in generations with a November ballot measure that would begin taxing many businesses based on sales rather than just profits.

The tax would fall most heavily on retailers and wholesalers, according to a widely anticipated analysis out Monday from the state Legislative Revenue Office. The report found it would function much like a sales tax by pushing up the prices Oregonians pay at the cash register.

Initiative Petition 28, as it is known until it gets a formal ballot number, could generate upwards of $6 billion in new state tax revenue in each two-year budget cycle. As a percent of income, it would vault Oregon from the middle-of-the-pack in business taxes to among the nation's highest.

It would reduce employment growth by more than 20,000 jobs over five years, but boost average overall wages by shifting work from private sector jobs to better-paying government jobs. The measure would dedicate most of the additional revenue to public education, health care and senior services.

Seven years after a bitter fight over measures 66 and 67, which hiked taxes on businesses and personal income, Oregon is gearing up for months of political combat over IP 28.

The campaign will feature a pair of intractable issues not on the ballot but inescapably central to the discussion: The structural funding crisis in Oregon's retirement program for public employees, and its chronically low level of support for public education.

"This is the big battle for us in the fall," said Paul Gronke, a political science professor at Reed College in Portland. "There's a lot of money and momentum behind it and huge forces arrayed against it, as well. It's a good way for this debate to be fought. May the best side win."

Key findings from the analysis of impacts of the proposed tax.Assuming the measure qualifies for the ballot - backers turned in more than 130,000 signatures, knowing they need only 88,184 - the ensuing fight promises to dominate the general-election campaign.

Monday's legislative report paints the landscape for the debate. It describes the measure as a series of trade-offs, bringing financial stability to the state's coffers and providing additional state revenue in exchange for diminished economic activity.

"IP 28 essentially acts as a consumption tax, pushing up the price level but only modestly affecting the real economy," according to the report. "It is important to note that these results do not indicate IP 28 will trigger a decline in Oregon's current economic activity but rather it will modestly dampen the state's projected growth in employment, income and population."

Oregon business taxes, now about 38 percent of all state tax revenue, would rise to more than 45 percent under IP 28, the report finds. The effects vary considerably by industry and business:

Taxes paid by Oregon retail businesses totaled $70 million in 2013, according to the report, but would have been $605 million had the new tax structure been in place.

The finance and insurance industry would have paid $351 million, up from the $75 million the sector actually paid in 2013.

The manufacturing sector generated $42.2 million in state taxes in 2013. That total would have been $203 million under IP28.

Even within industries, though, certain businesses would pay more than others under the proposal.

"Corporations that manufacture tangible goods in Oregon and export to markets outside the state will be relatively unaffected," according to the report, because Oregon's underlying business tax structure exempts them. Intel, for example, makes billions of dollars worth of microprocessors in Hillsboro every year but sells virtually all of them in other parts of the world.

A manufacturer that sells products within the state, though, might pay considerably higher taxes.

That tax structure does not work the same way for services businesses like a software company. According to the report, IP 28 will allocate their sales to Oregon, even if a customer is outside the state.

Oregon tech companies rarely take positions on statewide matters, but the Technology Association of Oregon announced earlier this month that it will oppose the measure. The organization said its 31-member board, which includes executives from Intel, Puppet, Urban Airship, Smarsh and Zapproved, voted unanimously to fight the initiative.

Oregon businesses are open to tax reform, according to Diane Fraiman of Voyager Capital, a venture capital firm that has helped fund Portland's high-tech renaissance. But Fraiman said IP 28 comes without identifying why the state needs $6 billion, specifically, or how to spend that sum.

"I have no doubt that the Legislature can spend lots of money," she said. "But in my world, where would you ever write a check to fund a business that has no plan?"

Underlying the debate is Oregon's chronic inability to address its $22 billion unfunded liability to the Public Employee Retirement System and a longstanding gap between what the state pays for public education compared to the funding levels in most of the nation.

After the Oregon Supreme Court threw out PERS reforms last year, new forecasts indicated public-employee retirement costs will consume $1.6 billion in the state's next two-year budget cycle. That's roughly equivalent to a quarter of the money the tax measure would raise.

With further PERS reform apparently off the table in Salem, projections indicate Oregon can expect cost increases of more than a half-billion dollars in upcoming budget cycles, which could gobble up as much as 9 percent more of the proposed new taxes each time.

Meanwhile, Oregon schools continue to lag the nation in many performance metrics. That's what's driving much of the support for the tax measure.

"Given the needs, we've reached the moment where we can't wait any longer," said Katherine Driessen, spokeswoman for A Better Oregon, the coalition of educational non-profits and public employee unions backing the measure. "We felt it was time to let voters have their say."

Oregon ranked 37th in the nation for per-pupil school funding in 2013, according to the most recent data from the National Center for Education Statistics. The state funded its schools 15 percent below the national average that year, according to the data, but its position has likely improved somewhat since then as Oregon added full-day kindergarten and boosted overall education spending as it emerged from the Great Recession.

Prior efforts at bridging the divide between budget hawks with an eye on PERS costs and education boosters seeking to improve the state's schools have come to naught. And that's left Oregon facing a divisive fight over the next five months, which could chart Oregon's course for decades to come.

Some political leaders hold out hopes that a legislative compromise can still be crafted to head off a battle that could leave scars and ill feelings for a long time. But with many legislators focused on their own re-election efforts, it appears increasingly unlikely a mediated solution will be feasible.

"It's a long shot politically," said Sen. Mark Hass, D-Beaverton, who as chair of the Senate Finance and Revenue Committee stands behind a less ambitious revenue plan that also would have led to far less acrimony. "Unfortunately, the rhetoric on both sides is escalating."

He warned that the measure's complexity and nuances will likely be lost on most voters, and that further consideration in the legislative arena would be preferable to the ballot measure.

"We're going to get the biggest tax policy debate in decades over bumper stickers and sound bites?" Hass said. "That's just no way to run a state."

-- Oregonian reporters Ted Sickinger and Betsy Hammond contributed to this article.

-- Dana Tims

503-294-7647; @DanaTims

-- Mike Rogoway

mrogoway@oregonian.com

503-294-7699

@rogoway