Mark Thoma on Sunday had an Op-Ed piece in the Oregonian treading over some old territory for this blog: suggesting a sales tax. I only wish Mark had
The conclusion: sales taxes are not much less volatile than income taxes and the two are highly correlated. They may add a tiny bit to stability but they won't solve the problem. We need only to look at our neighbors to the north to see that sales taxes are not then answer to volatility questions. Sales taxes cratered a bit before income taxes, but they will likely recover faster too.
While in the long term we may want to think about appropriate revenue levels it is important to remember that trying to tax our way out of a recession is only a recipe for prolonging the recession. We need to be very careful during this recession to be sure that any new temporary taxes are used to preserve only the most essential services and avoid the temptation to enact a host of new taxes to fill the budget gap.
The real problem looking to the future is not revenue instability but spending instability. Mark is right about this: a permanent rainy-day fund is an absolute necessity. A rainy day fund that is 5% of state GDP and filled by withholding kicker refunds until the fund is full. 5% of GDP is, admittedly, a lot and I'd settle for less (3%?), but 7-8 billion would come in pretty handy right now, wouldn't it? The fund can be invested conservatively and excess returns can be refunded to taxpayers as well. It is true that strict rules will have to be enacted to assure that the rainy day fund is not used in the sunshine. But such rules are relatively simple to write down and enact.
What is important now is to think about the appropriate level of revenues in the long term. I don't know the answer to this off hand, but I do know that Oregon is a relatively low-revenue state. According to the Tax Policy Center of the Urban Institute and the Brookings Institution we raise about $3,360 per person in Oregon which places us 35th in a ranking of states. Compare that to Washington which collects almost $4,000 per person and California, which collects more than $4,500 per person.
This leaves us with some serious issues, most notably the abysmal funding of K-12 education. From the Tax Policy Center's data on expenditures we can see that in a list of state expenditures on K-12 schools Oregon is 41st in the nation at $1,394 per person. However, overall expenditures on all services in Oregon is $6,866 per person which puts us in 22nd place which begs the question, why are we so low in school funding? By the way, the difference in the revenues and expenditure numbers is, I assume, mostly federal transfers for things like medicaid as well as timber payments and the like.
I am far from ready yet to say that revenues should increase, and we know we have no sales tax, but what about corporate taxes which have received so much attention? Are they really so low? Again, according to the Tax Policy Center a little less than 2% of all state revenues comes from corporate income taxes which places us 3oth among states. Per capita, according to the Tax Foundation, we are in 39th place with $109 raised in corporate income tax per person.
Finally two last points about sales and corporate taxes. We are one of the very highest income tax states, meaning that adding a sales tax would have to involve a lowering of the income tax without overburdening Oregon households. Also as companies have to compensate employees for high taxes to keep them from fleeing to other states, income taxes can be seen as an indirect tax on businesses. Food for thought.
This is intended to start a discussion and exploration into these issues and, as always, I welcome your thoughts, opinions, knowledge, etc.