Oregon's lack of a sales tax may be a factor in Portland's ability to encourage ownership of locally owned businesses and avoid being overrun by big box retailers. Tax Increment Financing ("TIF") through a sales tax makes it easier for government to give away public assets, especially to baddies like Wal-Mart.
In short, a municipality desperate for economic development allows a large retailer to keep the sales tax it collects because the municipality hopes that the economic benefit to the community will outweigh the tax revenues it is giving away. This hope is probably misplaced.
A general definition for TIF:A financing method which uses the additional taxes generated by a completed development to pay for development costs such as land acquisition and site improvements. The difference between the taxes before the development occurs and after its completion is referred to as the "increment".
In the context of a sales tax, though, the state of Illinois provides a better definition:
The department distributes state sales tax collections to municipalities that have tax increment financing (TIF) districts for either state sales tax, state utility tax, or both that produced an incremental growth in retail sales, or gas and electricity consumption. Funds are prorated to each municipality based on its share of the overall TIF net state increment.David Cay Johnson's recent book, "Free Lunch" has case studies where private companies abused TIF.
Well, in many of the big new box stores, when you walk to the cash register to pay for your purchase, you’re required to pay sales tax. But the government never gets that money. Instead, those sales taxes are used to pay for the cost of the store. Now, on one level this means that your community’s police department, fire department and schools and libraries aren’t getting those sales taxes. But imagine for a moment that you own the retail store down the street that’s been there for years. You’re competing against this enormous subsidy that’s going to drive you out of business. In a small town in the Poconos in Pennsylvania, a fellow named Jim Weaknecht ran a little fin, feather, and fur outfitting club. He sold hunting bows and fishing tackle and things like that. One day a big company named Cabela’s came to town. This little town – 4,100 people – agreed to give Cabela’s $36 million to build the world’s largest outdoor goods store. That’s over $8,000 for every man, woman and child in Hamburg, more than the entire city budget for everything -- police patrols, road repair – for more than a decade. Jim Weaknecht charged lower prices. He was run out of business. While he thinks he might have been run out of business anyway, he also says that this isn’t fair. This is not business. This is the government helping the politically connected. I think most people walking into a WalMart, Cabela’s, … a lot of other stores have absolutely no idea that the sales tax money is going to the owners of the store.It is worth noting that TIF can involve income, property or other types of taxes. The key difference with a sales tax, though, is the "free money" aspect: government leaders are likely to view all the sales tax revenue from the new retailer as coming wholly from the new business generated when it is likely that the bulk of the sales tax revenue would have occurred from the current businesses in that sector. In other words, the Wal-Mart or Home Depot is cannibalizing the locally owned businesses.
Furthermore, use of TIF is not limited to big box retailers. Sports teams and baseball stadium fans will use them, too.
In closing, it would be useful for any sales tax proposal to include very strict guidelines when TIF can be used with a sales tax.
Further reading on TIF.
