- Associated Press - Tuesday, October 25, 2016

PORTLAND, Ore. (AP) - Big retail chains are spending millions of dollars to fight Measure 97, the ballot initiative that would establish a 2.5 percent tax on Oregon sales over $25 million to help fund education and other state services.

Grocery stores are particularly active in the fight, and it’s easy to understand why: They do huge volumes of sales in an industry with famously thin profit margins.

Measure 97 is a one-of-a-kind tax, though, with unusual exemptions and applications. And the state’s largest grocery chain, Safeway and Albertsons, is exempt.

The grocers, who share a common owner, have given $1.8 million to defeat the initiative - as much as any other contributor to the “No” campaign.

That raises an obvious question: Why are Safeway and Albertsons spending so much to fight a tax that affects their rivals but not them?

The answer says a lot about the tax, and about the fate Safeway and Albertsons.

Measure 97 is highly unusual in that it taxes certain types of businesses and not others. The tax applies to companies registered as C-corporations, which are often large businesses, but does not affect a “benefit company” or S-corporation.

There are many distinctions among the various types of companies, and different tax implications for each corporate status. But for our purposes think of it this way:

C-corps frequently have many investors, like a publicly traded corporation.

S-corps have few owners. Sometimes that’s a family-owned business, but it can also be a large business controlled by one person or company.

A “benefit company” is a special category of business under Oregon law, established to create public benefits in addition to profits for the owners.

Costco, another leading opponent of Measure 97, is a C-corp. So is Fred Meyer, owned by a publicly traded company called Kroger Co.

Portland grocery New Seasons is a kind of benefit corporation, called a B-Corp, but is not registered as a “benefit company” under Oregon law. It may still be exempt from the taxes, though, if it’s an S-Corp. (New Seasons’ status isn’t public, and the company declined to clarify its status.)

Safeway and Albertsons are, apparently, S-corps. The grocery chain did not respond to repeated requests for comment, but the main organization campaigning against Measure 97 confirmed that the stores would not pay the tax because of their corporate status.

It’s not completely clear why Measure 97’s authors (the measure’s supporters are public employee unions) chose to exempt some businesses from the tax, or how it chose which companies to exclude. The measure’s supporters did not respond to messages seeking comment.

The initiative’s authors may have been trying to protect smaller businesses and target larger companies, which might be in a better position to afford the new tax. But using corporate classification turns out to be a blunt instrument.

Safeway and Albertsons illustrate why. They have 125 stores across Oregon, more than twice as many as their closest rival, yet would pay no tax under the initiative. Compare that to Costco: if its 10 Oregon stores perform on par with its companywide average, the retailer would pay more than $40 million annually in additional state taxes under Measure 97.

The fact that the initiative taxes some businesses and not others adds complexity to one of the great uncertainties around Measure 97 - how much of the tax companies will pass along to consumers.

Measure 97’s authors insist consumers won’t pay anything more, that companies will eat the entire cost. Opponents say that’s unrealistic, and that some portion of the tax is sure to flow downstream to shoppers.

As the state’s largest grocery chain, Safeway and Albertsons have enormous pricing power. Since they are exempt, they could squeeze competitors who do pay the tax by keeping their prices constant. Or, if the tax prompts rivals to raise prices, Safeway and Albertsons could increase their profits by matching the price hikes.

And that takes us back to the original mystery: Since Measure 97 gives Safeway and Albertsons a competitive advantage, why are they fighting it so hard? The grocers just gave another $900,000 to help fund the opposition.

In the statement from the measure’s opponents, they say Safeway and Albertsons strongly oppose Measure 97 “because national and local suppliers that would be subject to the tax would increase the company’s costs, triggering higher prices to its customers or adjustments in its workforce to remain competitive.”

That highlights another unusual feature of Measure 97: Unlike other taxes on sales, it applies to both retailers and wholesalers. Economists warn it could trigger a “pyramiding effect,” layering costs upon costs that drive down profits while forcing up prices.

It makes sense that Safeway and Albertsons would want to avoid those costs - except its rivals would also be subject to the pyramiding effect, plus the direct cost of the tax. Measure 97 would still be a substantial advantage for Safeway and Albertsons relative to its rivals.

So there’s obviously something else going on.

The answer, as you may have guessed, has to do not with what Safeway and Albertsons are today, but what they might become.

Albertsons was sold in 2013 to an investment firm called Cerberus Capital Management. Then last year, Cerberus bought Safeway.

Big investors like Cerberus don’t buy supermarkets because they’re eager to get into the competitive, low-margin grocery business. Cerberus specializes in troubled companies.

It bought Safeway and Albertsons to shake up the businesses, cut costs, package them together and sell them at a profit - either to another investment group or, more likely, through a public stock offering.

New owners likely would be ineligible to continue the S-corp. tax status, which would make Safeway and Albertsons subject to the tax. So the groceries may be fighting Measure 97 knowing the Oregon tax would depress the value of the business to prospective new owners.

“When they take it public it’s not going to be an S-corp,” said Frank Dell, chief executive of Dellmart & Co., a management consulting firm specializing in food and consumer products. He said Safeway and Albertsons’ opposition reflects long-term planning for a tax whose effects would resonate for years.

“They’re thinking down the line,” Dell said, “and they should be thinking down the line.”

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Information from: The Oregonian/OregonLive, http://www.oregonlive.com

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