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The controversial $3 billion corporate tax initiative Measure 97 went down in defeat.

The controversial $3 billion corporate tax initiative Measure 97 went down in defeat.

The defeat follows a hard-fought campaign that broke Oregon's spending record for ballot initiatives and pitted business interests against the state's largest public employee unions. 

Measure 97 would charge certain C corporations a 2.5 percent tax on their gross annual sales in Oregon above $25 million. The measure called for the state to spend the new revenue on education, health care and senior services.

Pat McCormick, a spokesman for the campaign to defeat the tax, said Measure 97 "fell of its own weight when people understood what it would do" and now it's up to state officials to come up with proposals to balance the state budget. "The business community does have members that are very much committed to finding routes to go forward," McCormick said.

Supporters of Measure 97 were still figuring out how to respond Tuesday night. Ben Unger, executive director of the union-affiliated group Our Oregon which backed the measure, suggested a different tax proposal might have fared better with voters. "Clearly, we learned the tonight that the details weren't right," Unger said. However, when a reporter asked if the tax rate proposed in Measure 97 was too high, Unger said "I would be surprised if you talked to very many voters that found that that was the problem."

State economists in the nonpartisan Legislative Revenue Office estimated the tax would raise at least $6 billion for every two-year spending cycle, a 33 percent increase in tax revenue going to the state's current $18 billion general fund budget. That would have been the largest tax increase in Oregon's history, at least by dollar amount, according to Legislative Revenue Officer Paul Warner.

Those potential tax hits — and the promise of new revenue for government services — spurred businesses and public employee unions to the highest level of campaign spending in Oregon history.

As of Friday, opponents reported raising $25.9 million, while supporters reported $16.4 million. The previous record for the costliest Oregon campaign was set in 2014, when opponents of a measure to label genetically modified foods spent nearly $21 million with supporters spending $8 million.

Measure 97 started out with 60 percent support in a poll taken a year ago. A poll in September found the same level of support. But by mid-October it had eroded down to 46 percent and by the end of the month only 40 percent of respondents to one poll said they'd vote for it.

The central debate throughout the campaign was whether corporations or consumers would end up paying the cost of the tax — and how much.

A study by economists in the Legislative Revenue Office found businesses would pass on part of the tax in the form of higher prices, and a typical Oregon family might wind up paying $600 a year. Grocery stores and other low-margin businesses said they would be forced to raise prices, because the 2.5 percent tax would obliterate their slim profit margins.

Supporters of the measure said no economic modeling — including in a study they funded, by Portland State University economists — could accurately estimate the impact of the measure.

The backers argued it was too different from gross receipts taxes in other states. And they offered state-by-state shopping comparisons to show that different tax rates didn't result in different prices.

But Measure 97 opponents also pointed to a written opinion from a lawyer for the Legislature that said lawmakers could spend the revenue as they wanted simply by passing budget bills, despite language in the measure calling for the money to be spent on early childhood and K-12 education, health care and services for seniors.

Gov. Kate Brown, lawmakers, public employee unions and the business community now face the challenge of coming together after the bruising battle to address the state's ongoing challenges.

Voters' rejection of Measure 97 means the governor and lawmakers must now pass a tax increase, budget cuts or some combination to fill a projected $1.35 billion budget shortfall in the next two-year budget. That estimate was based on the amount of money needed to preserve existing services and programs.

---Hillary Borrud

The Oregonian/OregonLive