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Last November, Portland voters overwhelmingly passed a tax on large retail companies as part of an effort to reduce carbon emissions and increase energy efficiency for its most neglected residents.
Critics now say City Hall is picking its own pocket—and raiding social services—via the measure that several city officials championed.
At issue is whether large construction companies constitute "retail businesses." If they do, the new tax will increase the price of public works projects—including affordable housing, schools and a new water treatment plant.
"It would impact public works in a way that I don't think anyone anticipated this ever doing," Dan Drinkward, vice president of Hoffman Construction, tells WW. "We believe there are unintended consequences of a rule-making process that was not in line with what the measure said or what proponents of the measure said during the campaign and what was sold to the voters."
The city's attorneys and bureaucrats say the measure was clear. It did not exempt construction companies and they have no choice but to abide by the will of voters.
The city's Revenue Division has written draft administrative rules for the measure, and has decided construction companies will indeed be considered retail companies.
Ballot Measure 26-201, passed 65 to 35 percent in November, will add a 1 percent charge on the city business license tax for retail businesses with at least $1 billion in sales nationally and $500,000 in the city. Supporters of the measure said it would raise $30 million a year.
The issue of whether construction companies would be subject to the tax came up during the campaign.
An analysis by the consultant ECONorthwest, paid for by an opponent of the measure before the election last fall, found the measure's revenues would depend on the way "retailer" was defined, and that if the definition was broadly construed, it would raise up to $79 million.
Supporters told the Portland Tribune in October that the analysis was attempting to "scare voters however they can."
But the city's draft rules would indeed tax construction companies.
Drinkward says this defies the common understanding of what a retailer is. "It all comes back to the fact that we're not a retailer to begin with," he says.
In a May 16 letter to Drinkward, Portland Public Schools estimated the tax will add $2 million to the renovation costs for Lincoln High School.
"Under the Clean Energy Surcharge, as it's currently defined, millions of dollars will be diverted to a city tax program instead of where the public intend their tax revenue to go, which is to modernize our aging school buildings," wrote Erik Gerding, a senior project manager in the district's Office of School Modernization.
Construction contracts can pass along costs to buyers. And executives warn that small companies, which don't have to pay the surcharge, are not going to get the work instead of the big companies, because of the complex nature of public projects.
"Small companies can't do that work," says Drinkward. "You have to bond it. To bond a $200 million project, you have to be a very substantial company. A mom-and-pop can't do it."
Mayor Ted Wheeler's office said May 21 that the mayor asked the Revenue Division, which is in charge of collecting the taxes, to consider excluding construction companies.
"The mayor asked the Revenue Division to review this issue and ensure that the administrative rules reflect the intent of the ballot measure and ensure that administrative rules do not adversely impact schools or affordable housing," spokeswoman Eileen Park told WW then.
But subsequently the Revenue Division was advised such a change could only be approved by the City Council.
A May 30 memo to city revenue director Thomas Lannom, from senior deputy city attorney Kenneth A. McGair, obtained by WW, says the Revenue Division does not have the authority to exempt sales to governmental entities from the tax or exempt "construction activity." (The memo also says construction equipment companies and insurance companies cannot be exempted.)
"The administrative rules drafted by the Revenue Division did not 'include' (or exclude) construction companies," Lannom tells WW. He says the ballot measure clearly included any company with sufficient sales—unless it was specifically mentioned on a list of exemptions. "That list," he adds, "does not include construction."
The mayor's office says it is still determining what the next step might be.
The office of City Commissioner Chloe Eudaly, who supported the measure, briefly weighed supporting an exemption to the clean-energy surcharge for sales to public agencies and nonprofit housing developers, but decided it supported keeping the rules the way they are.
"The language in the measure is clear that construction is included," says Marshall Runkel, Eudaly's chief of staff. "After further consideration, I'm not sure if the public agency and affordable housing safe harbor makes sense."