Friday, February 5, 2010

Kicker Reform and Rainy Day Funds

On my way to Corvallis this morning I listened to a podcast of OPBs Think Out Loud show on kicker reform. It was an especially good show, largely because guests Tom Potiowsky and Lane Shetterly did a very good job explaining how the kicker works and how the Task Force on Comprehensive Revenue Restructuring's proposed reform would work. I recommend the show very highly for those wanting to familiarize themselves with the issues.

Two things that were said stuck out to me however:

1. Tom Potiowsky made the claim, when asked about why our revenue volatility is so high, that not having a sales tax is partly to blame. But there is a very large body of evidence that sales taxes are not significantly more stable than income taxes - especially in the short-run. [Just look at the current revenue situation in Washington state] So I was astonished to hear him say this.

That said, the focus was on the fact that we have revenue instability and what to do with it and the solution of a rainy-day fund was emphasized. But I think it is important that people understand that a sales tax is not a solution to revenue instability.

2. Steve Buckstein, of the Cascade Police Institute, made another astonishing claim in saying that kicker reform as proposed would decrease state volatility at the cost of increasing individual volatility. Say what? State revenues that come in in excess of a forecast do so mainly because individual incomes were higher than expected. To not return a kicker to households would actually decrease volatility to both parties. On what basis he made this claim is simply beyond me.

Also, his preferred solution, cutting state spending so money can be diverted into a rainy-day fund without touching the kicker is a pretty weak solution for a state that has, for example, one of the worst systems of public education in the nation.


11 comments:

Chuck Sheketoff said...

Patrick, great post. You are correct that sales taxes are not the answer to stability, just as cutting the best player on the income tax team, the income tax on capital gains, is also a silly idea (we've equated it to the Red Sox sale of Babe Ruth).

As a member of the task force that Lane chaired I was pleased to have taught that lesson to a number of folks who initially talked sales tax=stability but ultimately got behind the real solution to stability -- a better rainy day fund. As I like to point out, if revenue forecasting economists had a bumper sticker it would be "volatility happens" and just as we dam some rivers to prevent flooding from unanticipated heavy snowpack and save water for irrigation during the dry season we need to create a rainy day fund that is adequately funded.

And yes, Cascade's Buckstein is nonsense talk, nothing new there. The kicker prevents Oregon from saving at the most opportune time to save, when unanticipated revenue shows up. They just refuse to acknowledge that.

Ralph said...

If the rainy day fund laws are updated, can someone please advocate that in order to access the money in the fund requires a minimum revenue shortfall in regards to the previous biannual budget. This would help keep in check overspending on the current biannual budget as a way to access the funds.

Patrick Emerson said...

Ralph,

Absolutely and the task force's recommendations have three strict conditions to address exactly this issue. I can't say of the bat of they are the right ones, but they seem eminently sensible.

Chuck Sheketoff said...

The current Oregon Rainy Day fund has three sets of handcuffs on the legislature's use of the money, and the task force regrettably made a political decision not to tamper with them (political because it was based on "that's the deal that was struck in 2007" as if that "deal" should have a permanent life). We explain them in It Better Only Drizzle(PDF):
1. the leg can only appropriate 2/3 of the funds.
2. the base for the 2/3's is the money "at the beginning of the biennium" (so automatic deposits from ending balance from prior biennium don't count because that happens well into the next biennium), and
3. a minority of the legislature can block the expenditure (the measure requires an undemocratic supermajority -- to those who like that, I say let's make your favorite program subject to a supermajority, and I point to California's budget mess and supermajority rule for budgets)

And the fund is capped in size.

Doug Gabbard said...

Be careful how much revenue stability you wish for! Local governments in Oregon depend largely on property taxes, which, thanks to Measures 5 and (especially) 50, have stability in spades. We in local government finance find ourselves wishing for a little elasticity now and then!

Fred Thompson said...

Patrick is correct about consumption taxes. Consumption is almost as volatile as income. More significantly, consumption is highly covariant with income, which means that, where other things are held equal, splitting the tax burden between the two tax bases would only slightly reduce overall volatility – maybe 10-15 percent. The only way to reduce volatility via a consumption tax is to design one that levies heavier burdens on folks who are lightly burdened by the income tax and vice versa. Since folks with high incomes pay the bulk of state income taxes the implication is pretty straightforward – it isn’t possible to reduce the volatility of state revenues without also reducing their progressivity.

Chuck Sheketoff said...

Doug, you are correct. That's why revenue stability shouldn't be the goal...stability of the fiscal system should be the goal, and the only way to get that is to have a reserve for the down times when revenues are down.

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Steve Buckstein said...

Patrick, I went back and listened to the segment. Here are the relevant statements that I actually made on the program:

“Stability is a two-way street. For government to become more stable our personal budgets, our family budgets, have to become less stable.” “There’s only so much revenue being generated in the state. If the state keeps more, we keep less.”

It wasn’t a planned statement; it was an off-the-cuff response to a question on a live radio show. I stand by the second part, but in hindsight I think you’re right about both state and personal income volatility decreasing in the short run under the scenario in question.

But when you say that state revenues that come in “in excess of a forecast do so mainly because individual incomes were higher than expected,” my question is, expected by whom? In this case, expected by the state; not necessarily by the individuals actually doing the work and earning the income. Taking more of their income than the current kicker law allows may make their income less volatile in the short run, but it does leave them with less income than they might expect under the current kicker law. In the long run, I fear that state budget stability achieved this way may reduce the incentives to work, earn and invest, thus harming both the private and public sectors.

Patrick Emerson said...

Steve, fair point and I understand completely about off-the-cuff remarks, there are quite a few I wish I could have said better.

Your point is essentially about the growth of government overall and it is true that we ought to think about what percentage of GDP is an appropriate size for state government if we were to implement a rainy-day fund.

Chuck Sheketoff said...

Steve's point isn't fair, as no one can possibly expect the kicker when they pay their taxes. His line questioning who makes the estimate is bizarre -- the office of the state economist relies in large part on private sector economic analyses. And people really know in advance -- two years in advance -- those big gains that the state's economists can't predict? Hogwash.

And no matter how many times Buckstein claims spending has been growing too fast, note it has been steady.