Tuesday, February 9, 2010

Economist's Notebook: Taxes and the Rainy-Day Fund

A rather depressing sense of self-satisfaction seems to have consumed the state democrats after the passage of Measures 66 & 67. But celebrating their passage as a major political victory, and allowing their passage to become an excuse not to immediately address the revenue instability that necessitated the new taxes, is a serious mistake. The taxes were not a victory to celebrate but a disheartening sign of the disfunction of the state's revenue system. The fact that we had to pass them should be seen as a defeat, not a victory, and as a condemnation of our stewardship of the state's finances. To allow these new taxes to take our eyes off of real reform is to squander an opportunity to permanently fix what's wrong with the states revenues. Everyone is (or should be) upset, and motivated to fix what is wrong.

One of the main reasons for this lack of urgency, I believe, is the sense that these new taxes were carefully targeted, so that there is little real effect on most Oregonians - that we get a free lunch. But this ignores one of the most basic lessons in economics: TAXES DON'T STAY WHERE YOU PUT THEM.

Even a tax on the wealthiest households don't stay there. Research has shown that employer's pay is based on real wages net of taxes - so businesses will end up compensating highly paid employees for the new taxes - which increases their cost of doing business, which will end up in higher prices and lower share performance, both of which affect everyone. [This is the reason, by the way, why income taxes do not turn out to be very effective in addressing income inequality] New taxes on businesses will have the same effect, eventually making their way into higher prices and lower quantities which means - yes - jobs. The point is all Oregonians end up paying these new taxes in some small way and so we should all be upset that we got to this point in the first place.

I supported the new taxes and still do: they were necessary in my opinion and the net effect should be minimal. But there will be effects, make no mistake. I would have preferred them to be entirely temporary because of this.

So it is time for the state legislature to stop wallowing in self-satisfied complacency and get a permanent rainy-day fund passed this year. I have been very critical of the Governor in the past, but he is spot on this time in trying to get this moving now. Because whether you voted for or against Measures 66 & 67 you shouldn't be happy - you should be motivated for real reform.


Torrid said...

Why should the taxes have been temporary? That would have been a move which would replicate what you're complaining about here--a measure that doesn't affect the broken tax structure. The code has been tilted further and further towards the top end for 20+ years; 66/67 were tiny steps toward restoring some balance. A temporary tax would just put us back where we were before. The reason not everyone needed to shoulder the burden this time is becuase most of "everyone" has been picking up the slack of the wealthy minority for years.

Fred Thompson said...

Send to the Oregonian, Patrick. This is pretty compelling.

Chuck Sheketoff said...

Patrick, all of the business groups wanted, in some form or other, the corp minimum tax change to be permanent. And the permanent portion of Measure 67 -- increased rate on taxable income in excess of $10 million, is all dedicated to the state's rainy day fund. So what's your beef with that?

That said I stand with you in saying that now is the time to create a better (we already have two) rainy day fund. How ironic will it be if the corporate kicker kicks because the Leg reforms the runaway BETC?!

Patrick Emerson said...


You are right, there are aspects of the permanent increases I have no beef with (the corporate minimum, for example). I do have a beef with the permanent part of 66. But mostly I would have liked to see permanent changes to the tax system discussed within a broader discussion of tax reform and revenue stability. That said, I am well aware that I live in a ivory tower world where the messy political realities don't intrude.

Jeff Alworth said...

There's a certain rhetorical purpose to downplaying these measures, but we shouldn't overdo it. The fact that they're permanent means future legislatures will have a bit more breathing room. These were listed as $700 million measures, but actually, the'll net the state billions in coming years.

While I agree with you that we need to start over with an entirely new revenue model--and especially that now is the IDEAL time to do such a thing--I thought the measures were about as close as you ever get to perfect legislation. They restored progressivity, addressed some long-standing taxing embarrassments, and will in fact support critical services.

Move forward, but don't lament this nice success.

Chuck Sheketoff said...

I don't think we need to start over with a new model..M67 put some of the income back into the corporate income tax, and what's needed now is a better review of why that tax is so anemic - but the Leg has been unwilling to look at the structural changes, such as the change to single sales factor apportionment, which alone saved Intel about $50 million a year! If we had a better reserve and a better way of taxing corporations who have seen their profits rise far faster than our tax collections , we'd be fine at the state level. At the local level we have much bigger challenges due to Measures 5 and 50. A little fine tuning to keep up with technology change like move from phones to cable would help, but bigger changes are needed. And the two big system changes that need to happen is to take the power-to-the-minority-for-raising-taxes out of our constitution and initiative reform that makes it harder to propose or refer so that we can restore power in the Legislature.

Patrick Emerson said...

Jeff and Chuck,

Forgetting the permanent parts for the moment, my main point was that it is lamentable that we had to resort to tax increases in a recession at all. With a substantial rainy-day fund we could have had a counter-cyclical counterweight built right in.

Nobody is asking, but if I were king it would be fixed at 5% of state GDP. Much higher than most suggestions. That would give us about $7.5 billion, which would have probably covered, but only just the current combined shortfall when all is said and done.

Chuck Sheketoff said...


If we are putting a number in the constitution, percent of gross state product or personal income is a heck of a lot better...and yes, the numbers that the Task Force recommended are too low (I got 'em raised, but not high enough)....If OCPP did its study today we'd be recommending even higher figures than we did two years ago. Also, keep your eyes on the constraints on spending from the reserves...as we pointed out they undermine the use of the funds, masking the amount that's really available.

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