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BENNETT, HARTMAN, MORRIS & KAPLAN, LLP

GREGORY A. HARTMAN MICHAEL J. MORRIS HENRY J. KAPLAN§ NELSON R. HALL THOMAS K. DOYLE♦ ARUNA A. MASIH♦ MARGARET S. OLNEY♦ TALIA Y. STOESSEL♦ RICHARD B. MYERS

ATTORNEYS AT LAW SUITE 500

210 S.W. MORRISON STREET PORTLAND, OREGON 97204-3149

(503) 227-4600 FAX (503) 248-6800

www.bennetthartman.com

ROBERT A. BENNETT (RETIRED) LINDA J. LARK N* * OF COUNSEL ♦ ALSO MEMBER WASH NGTON BAR § ALSO MEMBER NEW YORK BAR

December 5, 2017

Via email: irrlistnotifier@sos.state.or.us The Honorable Dennis Richardson Secretary of State Elections Division 255 Capital Street NE, Suite 501 Salem, Oregon 97310-0722

Re. Initiative Petition 37 (2018) - Draft Ballot Title Comments Our File No. 18093

Dear Secretary Richardson:

This office represents Cyreena Boston Ashby and Terri Steenbergen, Oregon electors and advocates for a Multnomah County initiative to tax the distribution of sugar-sweetened beverages, with revenues dedicated to support children’s health and education programs. We write to comment on the draft ballot title issued on November 20, 2017.

1. Introduction

Initiative petition 37 (2018) (“IP 37”) is the third iteration of a proposal by corporations in the grocery business to enshrine in the Oregon Constitution an exemption from increases in the corporate minimum tax or any other tax. Couched as a ban on taxing the “sale or distribution of groceries,” proponents would have the public believe that they are just trying to prevent any future sales tax on groceries. This is incorrect. The proposal’s definitions of “groceries,” and “sale or distribution of groceries” are inconsistent with the common meaning of the phrases and therefore misleading. Under the measure, virtually all business transactions in the chain of commerce for food and beverages would be exempt from any new ”tax, fee or other assessment” – including any increases in the corporate minimum tax paid by many large corporations – and not just those at the final point of sale. Moreover, the measure preempts local laws, making it unconstitutional for a local government to choose to tax certain products – such as prepared foods at restaurants or sugar sweetened beverages – or otherwise impose fees

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 2 or other assessments related to “groceries.” It is essential that the ballot title not perpetuate the deception but rather plainly describe the actual major effects of the measure. Here, the Attorney General twice issued ballot titles that more accurately described the measure.1 Specifically, the certified ballot title for IP 30 (the first iteration), read:

“Retroactively prohibits state/local taxes on transactions for “groceries” (defined) by producers, processers, seller, consumers.”

Although proponents tweaked the initiative in an effort to remove the words

“retroactive” and “transactions,” because the proposals were substantively identical, the Attorney General properly used the certified ballot title for IP 30 for IP 35. Without even going through the comment process, proponents withdrew IP 35, and substituted it with IP 37. Again, the proposals are substantively similar. Unfortunately, the Attorney General issued a significantly different draft ballot title. This is error. Because the proposal – which would be on the ballot in November 2018 -- prohibits any tax “adopted, approved or enacted” after September 30, 2017, it is still retroactive. Similarly, the key phrase “sale or distribution of groceries” still applies to all transactions in the chain of commerce for groceries, and affects a variety of actors. Thus, the ballot title should continue to use the term “transactions” and specify who will be impacted.

Below, commenters will first review current law, and then discuss how this proposal

would change that law. Notably, the Attorney General agreed with commenters on their analysis of how IP 30 worked, including the fact that it would limit the corporate minimum tax, and also apply to the any state or local tax imposed in restaurants. See, e.g. Attorney General letter accompanying certified ballot title for IP 30. Commenters are repeating that section for the record here. They will then turn more specifically to the draft ballot title for IP 37.

2. Current law The Article IX of the Oregon Constitution addresses state “finance” issues. Section 1

generally authorizes the legislature, or the people through the initiative process, to enact taxes and raise revenue. There is no limit on the type of taxes permitted. That is, either the state or a local government has authority to impose a variety of taxes.

1 Chief Petitioners withdrew IP 30 before the deadline for seeking review by the Oregon Supreme Court. While commenters believed that the certified ballot title for IP 30 was a vast improvement over the draft ballot title, they continued to believe that the ballot title failed to adequately describe the proposal’s preemption of local authority.

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 3

At the state level, Oregon’s primary source of general revenue is through an income tax on individuals and an income or excise tax on businesses. See, ORS 317.010(5) (defining “excise tax”); ORS 317.061 (imposing tax on taxable income). However, many corporations are able to avoid reporting taxable income through a variety of accounting practices. Those corporations are then required to pay a “corporate minimum tax” that is calculated based on the volume of sales in Oregon. ORS 317.090(2).

The failure of corporations doing business in Oregon to pay their fair share of taxes has

been the subject of significant policy debate. In 2016, education and other public service advocates sponsored Measure 97, a ballot measure that would have increased taxes paid by corporations with sales above $25 million. Corporations in the retail and grocery business – who typically only pay the corporate minimum tax, were some of the most vocal opponents and largest contributors to the “no” campaign. https://ballotpedia.org/Oregon Business Tax Increase, Measure 97 (2016) . After corporate interests spent almost $30 million, Measure 97 was defeated. However, as part of their campaign, corporate leaders acknowledged that they needed to pay more taxes, and promised to come to the table during the 2017 legislative session. Legislative proposals included raising the corporate minimum tax, but ultimately did not pass. In July, the Northwest Grocery Association filed the first iteration of this initiative. http://www.opb.org/news/article/oregon-sales-tax-groceries-ballot-measure-initiative/.

At the local level, city, counties and special district impose other taxes or fees, including

property taxes, hotel occupancy taxes (also knowns as transient lodging taxes), business income taxes, and sales taxes. Regarding taxes on food and beverages, both the City of Ashland and the City of Yachats tax the sale of prepared foods. Ashland City Code, Chapter 4.34; Yachats City Code, Section 3.12. The tax is levied anywhere prepared food is offered, which includes caterers, certain institutions and restaurants. Ashland Code 4.34.020; Yachats Code 3.12.020. As the need for services rises, along with tight budgets, other jurisdictions are considering a local sales tax. See, e.g. http://www.ontariooregon.org/SalesTaxDiscussion.cfm (summary of city discussions regarding potential sales tax).

In addition, local jurisdictions can adopt taxes to further a specific policy. For example,

in Multnomah County, citizens have filed an initiative to impose an excise tax – paid by distributors -- on sugar-sweetened beverages. That initiative then earmarks funds raised by the tax to support children’s health and education programs. A copy of the initiative and the certified ballot title can be found at https://multco.us/elections/information-initiative-referendum-and-recall-petitions (MultCoInit-04). Commenters are advocates for this localized approach and fear that, if enacted, IP 37 would preempt their policy initiative. Accordingly, as discussed below, they believe that the ballot title must plainly alert voters to this loss of local control.

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 4

3. What this Initiative Does

A. How it works

Under IP 37, no state or local government may impose or collect a “tax, fee or other assessment” on the “sale or distribution of groceries” or for the “privilege of selling or distributing groceries.” Section (1). This ban applies retroactively to September 30, 2017. Section (4). Key to understanding the reach of the proposal, it is essential to unpack the definition section.

The proposal’s key (and most deceptive phrase) is “sale or distribution of groceries.” 2 That phrase defines the scope of activity which cannot be taxed under this constitutional amendment. IP 37, section (3)(b) reads:

(a) “Sale or distribution of groceries” means any transaction for the sale, purchase,

distribution, or transfer of groceries sold, distributed, transferred to, or purchased or received from, any individual or entity that:

(A) Is licensed, registered, or inspected under the Food Safety Modernization Act, U.S. Food and Drug Administration, U.S. Department of Agriculture Federal Grain Inspection Service, or any successor agency or program that provides for the safety of groceries; or

(B) Is license and inspected by the State Department of Agriculture’s Food Safety Program or Commodity Inspection Program or any successor agency or program that provides for the safety of groceries; or

(C) Operates as a farm stand, farmers market, or food bank. Thus, all transactions in the chain of commerce for any “groceries”3 that are regulated by a program providing for the “safety of groceries” are exempt from taxation. As reflected in the draft ballot title, this includes producers, processers, wholesalers and retailers. It also includes restaurants. Although inspection relating to the sanitation of restaurants (places where food and drink are consumed on the premises) is done by county health officials under the auspices of

2 IP 30 used the phrase “sale of groceries,” but the reach of the proposal to all transactions in the chain of commerce for groceries is the same. . 3 IP 37, section (3) also gives “groceries” a slightly narrower definition than the term is commonly understood. In this proposal, “groceries” refers to “food and beverages intended for human consumption.” However, “groceries” also include household items that may be purchased at a store primarily selling food and beverages. Webster’s Third New Int’l Dictionary (unabridged ed 2002), p. 1001. Accordingly, as discussed below, the term must be placed in quotations when used in the ballot title.

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 5 the Oregon Health Authority, (“OHA”), the Oregon Department of Agriculture (“ODA”) has broader responsibility for ensuring the safety of all “food products or commodities of agricultural origin.” ORS 616.010. The definition of “food establishments” and “selling of food” is very broad for purposes of ODA authority and licensing requirements, and would include restaurants but for a specific exemption under ORS 616.711. See also, OAR 603-025-010 (12) (defining “food service establishment”) and OAR 603-025-0030(1) (“In addition to the provisions of OAR 603-025-0020 a retail food establishment shall comply with the Oregon Department of Agriculture Retail Food Code, 2013”). Both agencies have adopted the “Food Code” promulgated by the U.S. Food and Drug Administration. OAR 603-025-0030. Finally, the statutes themselves make clear the overlapping jurisdiction and need to cooperate. See, e.g. ORS 616.015 (ODA and OHA must cooperate); ORS 624.121 (ODA on Food Service Advisory Committee). Thus, ODA inspectors inspect deli’s, sushi counters, and cafes located in grocery stores, even though those types of facilities would be inspected by OHA inspectors if they were a stand-alone facility. Oregon Retail Food Code 2013, Section (58)(c). The second key phrase is “tax, fee and other assessment.” Section (3)(c) defines that phrase broadly:

“Tax, fee, or other assessment” includes, but is not limited to, a sales tax, gross receipts tax, commercial activity tax, value-added tax, excise tax, privilege tax, and any other similar tax on the sale of groceries.”

Thus, virtually any tax in the food production and grocery industry, except for a pure income tax, would be prohibited. See, IP 37, Section (2)(a)(B). In addition, the definition includes the terms “fee or other assessment.” This is important to note. “Fees” and “taxes” are not identical, which means that they both must be called out in the ballot title. See, e.g. Nesbitt v. Myers, 328 Or 400, 404 (1999).

B. Actual Major Effects of IP 37

IP 37 applies to “taxes, fees, or other assessments adopted, approved or enacted on or after October 1, 2017.” What this means is that any new tax or fee imposed between now and the election would likely have to be reimbursed. This includes any increases in corporate minimum taxes paid by corporations who have “grocery” sales as that term is defined in the measure. Moving forward, IP 37 would continue to cause a loss of revenue. This impact on the corporate minimum tax is a major effect that must be included in the caption and other portions of the ballot title.

Of particular importance to commenters, IP 37 would also constitutionally limit the

authority of local governments to engage in tax policy. If enacted, IP 37 would invalidate some

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 6 local taxes that are levied on “grocery” transactions, and eliminate local authority to enact any new taxes in that area. Again, this would result in loss of local authority to enact taxes or fees and raise revenue as of September 30, 2017, including the proposed tax on the distribution of sugar-sweetened beverages in Multnomah County. This preemption of local laws is a real and important effect that must be identified in all portions of the ballot title.

4. The Ballot Title A. Caption

ORS 250.035(2)(a) provides that a ballot title include “a caption of not more than 15

words that reasonably identifies the subject matter of the state measure.” The caption is the “cornerstone for the other portions of the ballot title.” To comply with the statute, it must identify the proposal’s subject matter in terms that will not “confuse or mislead potential petition signers and voters.” Kain/Waller v. Myers, 337 Or 36, 40, 93 P3d 62 (2004) (quoting Greene v. Kulongoski, 322 Or 169, 174–75, 903 P2d 366 (1995)). As the court has emphasized, the "subject matter" is the "actual major effect" or effects of the measure. Lavey v. Kroger, 350 Or 559, 563, 285 P3d 1194 (2011). “To identify the ‘actual major effect’ of a measure, this court examines the proposal’s text to determine the changes that the proposed measure would enact in the context of existing law and then examines the caption to determine whether the caption reasonably identifies those effects.” Rasmussen v. Kroger, 350 Or 281, 285, 253 P3d 1031 (2011). Finally, when identifying a proposal’s subject, the court has repeatedly stated that it will not hesitate to look beyond words of measure if those words obfuscate measure's subject. Bernard v. Keisling, 317 Or 591, 596, 858 P2d 1309 (1993).

The Attorney General drafted the following caption:

Amends Constitution: Prohibits state/local taxes on sale/distribution/purchase of “groceries” (defined) enacted after September 2017.

This caption fails to meet the statutory standards. First, it uses the four words to

describe the retroactive effect (“enacted after September 2017”), which then requires it to omit information about the affected actors, rending the statement misleading. For example, voters will not understand that the proposal reaches taxes or fees that may be imposed on the sale of prepared food at restaurants, since the term “groceries” generally refers to items purchased at a retail outlet – a grocery store. See, e.g. local sales tax on prepared foods in place in Ashland and Yachats. 4 Relatedly, the phrase “sale/distribution/purchase” is under-inclusive, because it

4 Both of those taxes apply to food establishments that are inspected by ODA, as well as restaurants inspected by OHA. Thus, even if restaurants are not included in the definition of “sale of

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 7 does not reference the receipt of groceries, a term that is relevant to taxes and fees on end-users such as restaurant patrons. The phrase “enacted after September 2017” is also under-inclusive, since the proposal uses the phrase “adopted, approved or enacted.” It also obscures the retroactive effect, a point which is critically important for voters to understand. Finally, by only mentioning “taxes,” the caption is under-inclusive. Nesbitt v. Myers, 328 Or 400, 404 (1999).

More fundamentally, the draft caption fails to adequately identify the impact on local authority. While it is true that the proposal prohibits “local” taxes and fees, the larger point is that by enacting the measure, voters are preempting local laws. To correct these deficiencies, we propose the following alternative.

Amends Constitution: Retroactively prohibits “groceries” transactions (defined) from certain taxes, fees; preempts local laws; exceptions

This alternative uses the term “transactions,” which is the neutral and operative term used in the definition of “sales or distribution of groceries.” It signals to voters the measure’s reach to all business transactions relating to groceries. It covers both taxes and fees and uses the phrase “preempts local laws,” which more clearly describes the actual effect of the constitutional amendment

B. Result of “Yes” vote

ORS 250.035(2)(b) requires that a ballot title contain a “simple and understandable statement of not more than 25 words that describes the result if the state measure is approved.” The purpose of this section of the ballot title is to “notify petition signers and voters of the result or results of enactment that would have the greatest importance to the people of Oregon.” Novick v. Myers, 337 Or 568, 574, 100 P3d 1064 (2004). Typically, the “yes” vote result statement builds on the caption.

The Attorney General issued the following draft “yes” vote result statement:

“Result of “yes” Vote: “Yes” vote amends Constitution; prohibits state/local taxes enacted after September 2017 on sale/distribution/purchase of, or on sellers/distributors of, “groceries” (defined).

groceries” – a position commenters believe is wrong – IP 37 would still result in the preemption of portions of those taxes and a commensurate loss of revenue.

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 8

This statement suffers from the same shortcomings as the caption. It fails to adequately highlight the loss of local authority, oversimplifies the retroactive effect and obscures the reach of the proposal to taxes that may imposed on food that we do not think of as “groceries The following alternative demonstrates that it is possible to correct these deficiencies.

Result of “Yes” Vote: “Yes” vote amends constitution; retroactively prohibits taxes/fees on “groceries” transactions (defined) by producers, processers, wholesalers, sellers (including restaurants), consumers; preempts local laws. Exceptions.

This alternative builds on both our proposed caption and the certified statement for IP

30. It includes the information about impacted entities, with the addition of “restaurants.” At the same time, it makes clear that the proposal would preempt local laws. We urge that it be adopted.

C. Result of "No" vote

ORS 250.035(2)(c) requires that the ballot title contain a “simple and understandable statement” of up to 25 words, explaining “the state of affairs” that will exist if the initiative is rejected, that is, the status quo. It is also essential that the law described in the “no” vote result statement concern the subject matter of the proposal. Otherwise, the description could mislead voters about the effect of their vote. Nesbitt v. Myers, 335 Or 219, 223, 64 P3d 1133 (2003). Finally, it is generally impermissible for the “no” result statement to simply state that a “no” vote rejects the “yes” vote. Nesbitt v. Myers, 335 Or 424, 431, 71 P3d 530 (2003).

Here, the Attorney General issued the following draft “no” vote result statement:

Result of “no” Vote: “No” vote retains current Constitution; state/local governments may adopt/amend taxes on transactions for, or sellers/distributors of, “groceries” (defined), including corporate minimum tax.

This statement fails to provide voters with sufficient or understandable information

about the status quo. Voters must understand the taxing authority that would be prescribed by the proposal, at both the state and local level. This requires that the statement specifically mention the corporate minimum tax, as well as the local taxing authority. We propose the following:

Result of “No” Vote: “No” vote retains current constitution; allows state, local governments to adopt taxes and raise revenue, including

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 9

corporate minimum, other taxes based on “groceries” transactions (defined).

D. Summary ORS 250.035(2)(d) requires that the ballot title contain a summary which accurately

summarizes the measure and its major effects in a concise and impartial manner. The goal is to provide voters with enough information to understand what will happen if the measure is approved and the “breadth of its impact.” Fred Meyer, Inc. v. Roberts, 308 Or 169, 175, 777 P2d 406 (1989). Typically, the summary begins with a description of current law, which then allows voters to understand what would be changed – i.e., the proposal’s major effects.

The Attorney General drafted the following summary:

Summary: Amends Constitution. Currently, state/local governments may adopt taxes; corporations subject to state minimum tax based on Oregon sales. Measure prohibits state/local governments from adopting, approving or enacting, on or after October 1, 2017, any “tax, fee, or other assessment” on sale/distribution/purchase of, or on sellers/ distributors for privilege of selling/distributing, “groceries” (defined), by individuals/entities regulated by designated federal food safety agencies, or operating as farm state/farmers market/food bank. Measure prohibits “sales tax, gross receipts tax, commercial activity tax, value-added tax, excise tax, privilege tax, and any other similar tax on sale of groceries.” “Groceries” defines as “any raw or processed food or beverage intended for human consumption.” Alcoholic beverages, marijuana products, and tobacco products exempted. Other provisions.

While this proposal generally does an adequate job describing how the proposal works, it fails to clearly describe the proposal’s impact on local taxing authority – i.e., the fact that it preempts local laws. We propose the following alternative, which omits detail regarding food banks, etc., and adds detail regarding the measure’s actual major effects:

Summary: Amends Constitution. Currently, state/local governments may adopt taxes; corporations subject to state minimum tax based on Oregon sales. Measure prohibits state/local governments from adopting, approving or enacting, on or after October 1, 2017, any “tax, fee, or other assessment” on transaction by producers, processors, wholesalers, sellers (including restaurants), and consumers for

The Honorable Dennis Richardson Ashby/Steenbergen -- IP 37 (2018) Comments December 5, 2017 Page 10

“groceries.” “Groceries” defined as “any raw or processed food or beverage intended for human consumption,” excluding alcohol, marijuana and tobacco products. Measure prohibits “sales tax, gross receipts tax, commercial activity tax, value-added tax, excise tax, privilege tax, and any other similar tax on sale of groceries.” Major effect is to limit the corporate minimum tax paid by certain grocery businesses, preempt local taxing authority. Other provisions.

This alternative is easier to follow and plainly tells voters the effects of the proposal. We urge that it be adopted.

5. Conclusion

Thank you for your careful consideration of these comments.

MSO: Enclosure cc: Clients

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