I am going to use the opportunity of an opinion piece by Scott Bruun in today's Oregonian to finally talk about something I have been putting off for too long: the state's tax system. Or more to the point: why does Oregon not have a sales tax? The basics are pretty well known to most people by now: Oregon relies heavily on income taxes to fund its government and income taxes fluctuate widely with economic cycles. This cyclical revenue stream lends itself to inefficiencies, prohibiting many long-term investments, forcing closure of half-done programs and causes uncertainty that leads to underinvestment in general. Oregon does not have a sales tax. Sales taxes are sometimes characterized as regressive, but with exemptions of common necessities like food, clothing and medicine sales taxes can be made neutral or even made progressive with means-tested tax rebates. It is simply not at all hard to make sales taxes progressive. More importantly, the incentives with sales taxes are toward greater savings and investment and lower consumption. This is a good thing for the economy. But the best part is that sales tax revenues are much more stable than income taxes. Certainty in tax revenue leads to better planning, better investments and thus better government for Oregon.
Now, the obvious rejoinder is that a sales tax will hurt Oregon retail businesses. First, I don't think that elasticities will be that high to cause much of a reduction in revenues, but whatever reductions there are could easily be offset by a business credit. However, I don't really think this will matter that much in the end to businesses. Look at all of the states that have sales taxes, some go as high as 9% and over, and I don't see much correlation in the health of the economy, the presence of retail businesses and such with the tax rate. To put it another way, do you think that Oregon would look much different today if there had been a sales tax in place 50 years ago? Perhaps we would have better schools and such, but I doubt the retail climate would be much different. But I will search for evidence of the effect of sales taxes on businesses and report what I find when I do a post just on sales taxes soon.
So why all this talk about investment and efficiency? Well, economists know that uncertainty means risk and risky investments require higher rewards. Thus if you increase the risk and keep the reward the same, investment will suffer. So, suppose you think about funding an early intervention program that takes at risk youth during their high school years and tries to keep them out of trouble by offering counseling, after school activities. This might be a great deal for the state, leading to less burden on the criminal justice system, the state health insurance plan for children and increasing college enrollments. But suppose that after two years the plan runs out of money due to a downturn in state revenues. Two years is not enough to see one cohort through high school and so the program has no measurable effect. Well, if you are thinking of funding this program and know that there is a reasonable probability that the funding will fall through, leading to a waste of the initial investment you may devote the money elsewhere even though, if funded, the state will actually save money in the end. Funding and defunding programs is a waste of money and many good programs would end up saving the state in the long run. This is why I think such instability in the state's revenue stream is such a problem and should be fixed.