Sunday, July 25, 2010

The Oregon Budget Mess - Myths and Reality

In an otherwise very solid piece on the Oregon budget crisis by Harry Esteve in The Oregonian, there are a few high profile misfires.  I am most disappointed in this list which I think is misleading:

Eight reasons Oregon is in deep budget trouble
1. Recession: Unlike past economic troughs, this one was too deep, too vicious to muddle through with nips and tucks.
2. No sales tax: Our heavy dependence on income taxes to pay for schools and state programs leaves us vulnerable when jobs dry up.
3. Failure to apply spending brakes: Lawmakers went on a spree in 2007 that came back to bite them.
4. Dinky savings accounts: The state's first-ever rainy day fund, established in 2007, was all but depleted within two years.
5. Ballot measures approved by voters: Property tax limits, longer prison sentences, kicker rebates and mandatory parks spending leave little wiggle room when income stalls.
6. Public employee benefits: Most state employees get fully paid medical insurance. And the retirement system, despite rollbacks and changes for newer employees, still has old guaranteed returns and present retirement contributions that add up to soaring future costs.
7. Federal stimulus: It saved jobs for two years, but now it's going away and the economy did not recover fast enough to replace it.
8. The kicker: If the economy takes off faster than state officials anticipate, Oregon could be sending money back to individuals and corporations while cutting schools and services.

#1 is clearly correct, this is the worst recession since the great depression, there is no way to escape its downward pull.  But #2 is simply wrong.  As I have illustrated in this blog through a rather extensive bit of research, a sales tax would not solve anything as consumption and income are very highly correlated.  Sales taxes are almost as volatile as income taxes.  It is the shift away from property taxes that contributed most the the current volatility of state revenues - which is alluded to in #5.  [Though Ironically de-coupling property taxes from market values helped a tiny bit as the housing crisis hit] #6 is also misleading.  I don't know of a full accounting for all state employees, but the relatively generous benefits I get as a state employee are more than outweighed by the much lower salary I get relative to my peers.  I accepted a salary that was 25% below a competing offer when I moved back in 2006.  I had a very, very strong preference for living in Oregon, but we are at a competitive disadvantage amongst those without such preferences.

I do agree most strongly with #4 as you all well know.  In fact I think a good rainy-day fund built into the kicker would render the kicker question (#8) moot.   I think this is the #1 priority for the state legislature going into the next session.


Jeff Alworth said...

Nice post. I may follow up with something at BlueOregon, leaping off where you stopped short. More criticisms:

- Three is justifiable only if you ignore the fact that our terribly volatile system, which produces booms and busts, had before '07 produced two fairly serious busts. The "spending spree" was merely an effort to get back to some level of reasonable spending.

- Four is again misleading. Part of the "spree" maligned in #3 was the creation of the savings account. The savings account isn't the failure, the failure is in not having one already.

I'll echo your point on six, as well, and add that this trope is merely lazy and/or unsophisticated thinking. State workers cost money and you pay for them one way or another. Reporters too easily default to the position that it's state workers and their bullet-speed gravy train that cause all the problems when, as the very article demonstrates, that's only a small piece of the problem.

Chuck Sheketoff said...

I have a number of criticisms of the story, among them are that the "first ever rainy day fund" was the education stability fund, also immediately depleted and like its sibling enacted in 2007 by design too small. Second, Harry seems to swallow hook, line and sinker the ECONorthwest/Oregon Business Council claim that our fiscal problem is due to a "fact" that incomes are down - which is a per capita analysis and ignores the income gains at the top, and is based on "personal income" which excludes capital gains income. An analyis of wages and earnings by income group would look very different. The focus on a statistic that does not include capital gains and is presented in a per capita fashion is very convenient, cuz ECO and OBC call for a new tax loophole that would primarily benefit the wealthy: reduced taxes on income from capital gains, as if cutting taxes can raise state revenues.

Fred Thompson said...

Good post! Tom Hughes, one of the voting members of the Revenue Restructuring Task Force, notes that one of the main causes of our revenue volatility is capital gains volatility and that we could fix a lot of our problems by changing the way the state recognizes this revenue. This would allow us to build a pretty big rainy-day fund and at the same time greatly reduce the adverse effects of the kicker.

Jeff, if the state economist's 10 year revenue projections are correct (I am not entirely convinced -- while it is easier to estimate a long term trend than to forecast a year or two into the future, don't like the model he uses), then we have a spending problem, which means that we exceeded a reasonable spending level.