Monday, January 18, 2010

The Auto Business: Oregon's Plan To Tax Money Losing Businesses Could Kill Off Many Struggling Dealerships

The auto industry in all parts of the country is in a real funk right now. Dealerships are closing right and left as sales continue to struggle along. At the same time, many states, like Oregon are in real economic mess right now with an unemployment rate running at 11.1% and many businesses falling like flies because of gross business revenue declines in the 10-20% range. Because of declining tax revenues because more than 1 out of every ten Oregonians are without work, the state legislature has decided that new taxes on business right in the middle of the worst economic crisis since the Great Depression is a viable path towards keeping government agencies such as schools, police, fire and other services economically solvent.

But what has so angered many low profit businesses such as auto dealerships and grocery stores, who operate on very slender profit or loss margins is a new tax of 7.9% on businesses grossing $500,000 or more dollars a year, whether or not the business is a profitable enterprise or not. Usually, the rent a business pays is equal to about 8% of gross revenue, so a new tax on unprofitable businesses is the equivalent of doubling their rent. Certainly, this only force many struggling auto dealerships and other lower profit margin businesses to close their doors. It should also only worsen the job loss situation in Oregon, and tie Oregon with Hawaii for having the having the highest personal taxes in the United States.

Oregon's tax raising ballot measures 66 & 67 have been opposed by auto dealers and grocers associations by the state's largest newspaper, THE OREGONIAN. Part of the problem is that from November 2007 to November 2009, as Oregon's economy shrank due to the serious recession, 131,500 private sectors jobs disappeared while government increased the number of workers by 5,100 and even raised many wages or benefits packages while some businesses experienced huge revenue shortages due to falling sales.

In some cities, like Detroit, Michigan, for example, large grocery retailers such as Safeway and others have abandoned the city, leaving only small grocery stores to supply the demand for groceries by hungry residents. These small stores have to use armed guards to protect grocery deliveries to the stores from robbery by hungry persons. This is almost like a scene from a MAD MAX movie. Many home prices have fallen down to just $5,000 in the city as well. Even in cities like Atlanta, Georgia, nice homes in good neighborhoods near golf clubs have declined in value from $450,000 down to just $50,000 recently.

Part of the marketing by the side supporting the Oregon ballot measures has been especially deceptive. The ads portrayed those who earn more than $250,000 a year as wealthy jet setters just at time that so many Oregonians struggle to pay basic bills. However, the tax will really impact individuals earning over $125,000 as well as Subchapter S type businesses who are currently losing money. Businesses are the engine that drive jobs and the economy. Yet in the middle of such a serious economic downturn the legislature thinks that the only solution is to further impact the business community with more taxes on top of their own problems with declining sales and business revenue losses.

The fact of the matter is that all Oregonians, not just higher income earners or businesses will only pay for these huge new business tax increases with higher rents, electric bills, grocery prices, etc., right in the middle of this poor economy. Government services such as schools, police, fire, etc. are certainly essential to an orderly society. However, taxing a struggling business community right now could really accelerate Oregon's economic and revenue problems. The federal government on the other hand, offered financial help to the struggling banking and auto industries. But Oregon is going in the opposite direction, by wanting to tax struggling businesses.

If the federal government would have allowed the banks to fail, then the national economy would have been very interesting. Since banks offer credit cards to individuals, and many households hold credit card debts of around $20,000 or more, debt collectors might have bought this credit card debt from failed banks and then demanded full and immediate payment from households. Debt collectors could have seeked court judgments for immediate payment, and collected any assets from households such their homes, automobiles, jewelry, etc. The U.S. could have had a huge problem with persons made homeless because of the collapse of banks, leading to credit card collapses. Many Americans live on credit cards because their incomes are tight right now. It's not good, but the fact is that they do.

So where does this leave Oregon? Certainly it has serious revenue problems. But can a struggling business community afford $733 million in additional taxes with thousands of more job losses or a new wave of business failures or greatly increased prices for consumers. Certainly, the tax proposals will be very inflationary right in the middle of times when the real problem is that consumers don't have great amounts of money to spend.

Can auto dealers in Oregon survive is measures 66 & 67 pass? Certainly, some will. But many others will have to close their doors or else raise prices by around 10% or more just to stay in business. Ultimately, all of the people of Oregon will pay the costs if the ballot measures pass, either in higher prices or lost jobs.


At 9:47 PM, Blogger Scott Crawford said...

Hey Paul, It's Scott (Maletis driver)

I agree with your facts and opinions about measure 66 and 67. It's appalling and unbelievable that people can not see the entire picture. Oregon needs to simply tighten their belt financially and get more creative with their current revenues.


Post a Comment

<< Home