It is my distinct pleasure to welcome a guest blogger to The Oregon Economics Blog. Fred Thompson, Director of the Center for Governance and Public Policy Research and Grace and Elmer Goudy Professor of Public Management and Policy at the Atkinson Graduate School of Management at Willamette University, and a much more knowledgeable person than I about tax systems and Oregon's revenue system, has graciously accepted my invitation to chime in about sales taxes in Oregon. He wanted to wait until the end of my poll (and of course I kept extending it), but finally I closed the poll and here is Fred's Blog entry:
For three-quarters of a century, Oregon tax reformers have been almost monomaniacally obsessed with the chimera of the sales tax. And, while it would be nice if we could reduce state income-tax rates by adopting a well-designed consumption tax, preferably a comprehensive value-added tax with an income-contingent rebate, I don’t believe that this would be a panacea. Its benefits would be fairly small and its costs not insignificant. Moreover, I think the likelihood that we would actually be offered the option of a well-designed consumption tax is practically nil.
So why don’t we try to fix some real problems that have workable, practicable solutions?
One problem is that the existing personal state income tax hits a lot of poor people pretty damn hard. Oregon has a flat tax, which levies the same rate on household incomes above a statutorily determined level that varies with the type and size of the household. I think this is a pretty good tax. It meets the twin tests of adequacy and efficiency pretty well and, because of the design of various exemptions, exclusions and credits, turns out to be remarkably progressive. But its progressivity has been eroded somewhat over time as inflation has whittled away the value of the statutory exemption.
One simple fix would be a one-time boost in the exempt amount, combined with indexing it to inflation. Another simple, worthwhile fix would be to increase the EITC refund.
Of course, there is no such thing as a free lunch, Boosting the statutory exemption 50 percent would reduce state revenues about $400 million per annum and increase revenue volatility (greater progressivity almost inevitably means greater volatility).
Which takes us to our second problem. Oregon already has one of the more volatile revenue structures of any of these United States, which causes all sorts of nastiness as we move through the business cycle. The problem, however, is not revenue volatility per se but the nastiness that results from trying to adjust spending up and down to match current revenue flows. Why not fix the real problem? Doing so would in fact require a couple of fairly modest institutional changes. The first would be to base the state revenue forecast on the state’s long-term, sustainable rate of expenditure growth, given existing tax-structures and demographics, rather than short-term revenue growth. By sustainable, I mean making the forecast subject to the "no-Ponzi" condition, the requirement of intertemporal budget balance. The second would be to give the retirement of general-fund debt first priority for the use of Kicker funds.
To make up for some of the revenue lost in making the personal income tax fairer, we should fix the corporate income tax. Actually, this is something we ought to do anyway.
Right now what we have is the worst of both worlds – the statutory rate is relatively high and the tax is easy to avoid. The first condition gives businesses a motive for avoiding Oregon’s corporate income tax and the second the opportunity to do so. The statutory rate should be lowered and the apportionment system returned to one that weights the location of assets, employees, and sales equally in assessing state income-tax obligations.
These are all things that could be done this legislative session. Why not do them?