Friday, January 8, 2010

Fred Thompson on Measures 66 and 67

Fred Thompson checks in with his take on 66 & 67:

Most of the public debate about Measures 66 and 67 is not very edifying.

Will passing Measures 66 and 67 cost a lot of jobs? Probably not.

They may retard the expansion to full employment and, once there, reduce average job quality, but people who want to work at the compensation levels offered will; others will drop out of the job market or go elsewhere, but 70k? I don’t see it. Moreover, proponents of these measures are almost certainly correct when they argue that cutting state spending would cause more fiscal drag than the tax increases would.

I am especially skeptical of Bill and Randy’s estimates. Even if their analytical assumptions were valid (and I am not persuaded that they are), their estimates would still be off by a factor of two, maybe more. Here, I am talking about their willingness to take the state’s revenue estimates at face value. That is na├»ve. Measure 67 has two main components: a substantial increase in the minimum corporate income tax and an increase in statutory rates on corporate income. The primary effect of the increase in the minimum tax would be to reduce the ability of corporations to defer tax liabilities.

Accelerating tax payments will increase state tax receipts considerably in the near run, but the discounted present value of all future increases is likely to be small. The increase in the statutory rate will motivate businesses to find new ways to recognize revenue in jurisdictions with lower rates and, if yes on 67 wins, Oregon will be surrounded by them. My hunch is that the estimate of the revenue gain from increasing statutory rates is at least 20 percent too high.

The problem with 66 opponents’ analysis of the effects of the increase in personal income tax rates is double counting. They assume both that the tax will be collected and that a lot of folks with high incomes will find ways to report their incomes in jurisdictions with lower rates, some by moving away (or just not moving here). Both assumptions cannot be true.

Will the fiscal policy effects of Measure 66 be worse than those of Measure 66. Probably. What I don’t like about 66’s personal income tax increases, both in the statutory rate and through the reduction in the federal tax exclusion, is that they are permanent. Most economists accept some version of the permanent income hypothesis.

Consequently, we believe that most of a temporary tax cut will be saved, while most of a permanent tax cut will be spent, which is why a dollar of government spending provides more fiscal stimulus than a dollar tax cut. The opposite is true of tax increases. Temporary tax increases mostly reduce savings; permanent ones mostly reduce consumption, therefore more fiscal drag. Not good. At least not at this time.

Is Federal tax deductibility regressive? Not very.

In Oregon It applies only to the first $10K of federal taxes paid for a married couple filing jointly and the first $5k on an individual filer. The effect of raising this cap from $3K and $1.5K a few years back had little effect on the progressivity of the state's income tax, although it may have slightly reduced the progressivity of the state and local tax structure as a whole. The adjustment to the Federal tax exclusion in Measure 66 is distinctly progressive, tacked on to a marginal rate increase, even more progressive. And all of this piled on top of a state tax structure that is already arguably the nation’s most progressive.

If these measures fail, will Oregon have to cut vital services? Probably not.

Oregon’s Constitution requires the enactment of a balanced budget, not a balanced budget. Were the choice between raising taxes or cutting spending, raising taxes is probably the better option, but that is not the only alternative. Oregon's Constitution requires the Governor to submit and the Legislature to enact a balanced budget. They did. If Measures 66 and 67 are rejected by the voters, the state may legally borrow to make up the shortfall, just as it did in 2003 and 2004, when broader tax increases were rejected by the voters.

Wouldn’t that cause the interest rates the state pays on the bonds to jump? It could. But we could fix that by dedicating future kicker funds to repayment of state debt.

I’ll probably hold my nose and vote for 67 and cross my fingers and vote against 66.

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