Friday, December 5, 2008

Income Tax and the Current Economic Crisis

A while back I engaged in a whole series of blogs that tried to investigate the question: should Oregon have a sales tax? I learned a lot from that exercise. But due the particular quirks of the current economic crisis it just may be that we are very lucky to have what we have.

I have heard it stated, by no less than Oregon's Chief Economist Tom Potiowsky, that currently Oregon's revenues are in good shape relative to other states thanks to our reliance on income taxes. Contrast this with Washington which relies on sales taxes and is resorting to fairly draconian measures to deal with their budget crisis.

The basic theory is this: right now consumers are retrenching and consumption spending has dropped dramatically, aided in part by falling home values. Unemployment is rising, but not by nearly as much as consumption is falling. So, this time at least, we are fortunate to rely on income taxes and not sales taxes.

Is this theory supported by the facts? Perhaps. The BEAs national figures seems to support it - personal income is stagnating but consumption is plunging.

Of course, new data out today show Oregon's unemployment surging to 7.3% so this trend might not last for long. I don't think state personal income figures are out yet, so we'll have to wait and see.

Of course time can change everything as well, as we recover from this recession it may be that consumption spending picks up faster than incomes. But given the nature of the bubble that burst, it is hard to say. Also, if federal stimulus includes lots of job creation, Oregon might again be well positioned.

Food for thought. Comments?

4 comments:

Gregory said...

The last recession I lived through (as a working professional) was 2001-2002, which was precipitated by the collapse of the dotcom bubble and the 9/11 attacks. In that recession incomes dropped substantially across the country, while consumer spending remained relatively stable. I wasn't in Oregon at the time, but I recall reading an economist of policy expert arguing in favor of a sales tax in Oregon to diversify the revenue base. I can understand that only if we limit ourselves to analyzing and preparing for the last recession.

Government tax revenues will rise and fall depending on the specifics of the the economy, and the specific type of tax applied. Nevertheless, employment tends to lag the economic cycle by about 5 quarters, so the collapse which started in 2007 didn't start affecting employment numbers until now. If we see a recovery in the middle of 2009 (and we may not), we shouldn't expect employment to improve until late 2010 or 2011 at the earliest. Don't expect 2009 and 2010 to be banner years for Oregon's tax collectors.

Radies Man said...

If you look at government revenue as a three legged stool--the first leg is sales tax, the second leg is income tax, and the third is property tax--then if you're missing one, then the other 2 have to be bigger than normal in order to keep the stool upright.

Now, the question is how to do you increase revenue when you only have 2 instruments to work with? In order to increase income tax collection, you either have to raise income taxes or create new jobs. In this climate, new jobs ain't happening. Oregon already has one of the highest income taxes in the country.

In order to increase income for property taxes, you have to increase home ownership or increase property taxes, which ain't happening either.

Mix those up, add in high unemployment rate that is draining resources from the government and you have a recipe for disaster.

At least with sales tax, you can easily increase it by a 1/2 a penny and people will accept it.

But I'm against taxes in general. Smaller government and less socialization is the way to go.

Spenguin said...

I am looking up information on how the Economic crisis is hitting Oregon because I will be moving there in less than 3 months. i am moving from California and was wondering if I would have an easier time waiting it out in California where I already have a job even though I want to get out as soon as possible, or I should risk it and move up to Oregon but look for a job before hand. You seem to have done some extensive research on Oregon so let me know if you have any hint of an answer.

Patrick Emerson said...

Spenguin,

I don't have any specific advice, it depends on your personal situation. But boiler plate advice would be to hold on to the job you have and wait until the bloodletting has subsided.