Monday, September 17, 2012

Tax Reform in Oregon

I am following with some interest the latest foray in to state 'tax reform' by the governor.  I think it is a good time to repeat what I have said and documented in these pages many times: A sales tax will not provide revenue stability in any significant way.  This is not hard to see, just look across the Columbia and you will see a sales tax dependent state that is struggling with revenues as much or more than is Oregon.  No surprise this as income and consumption are very highly correlated.

What Oregon needs is fiscal stability not revenue stability.  Revenues will never be stable, but our budget can be stabilized through a sensible rainy-day fund.  Other states have them and benefit from them why can't we?  The answer is that whenever we talk about taxes both those that want taxes higher and those that want them lower start jumping in and saying they will withhold support of a rainy-day fund unless they demands are met.  This is stupid and destructive.  

But since still we are talking about tax reform, let's at least talk sensibly.  I don't know what to make of the tortured logic of the Oregonian editorial board this morning
But Oregon is much less tax friendly to small business. The gap arises in large part because of the way small businesses are structured and the way Oregon taxes the two most common types of corporate structure.

Traditional corporations pay corporate income or excise taxes. Those rates top out at 7.6 percent. Many small businesses are structured as what the Internal Revenue Service calls S corporations. These businesses do not pay corporate tax, but owners, whether a sole proprietor or shareholders, pay taxes at the personal income tax rate. Owners of sole proprietorships and partnerships also pay at the individual rate. In Oregon that rate tops out at 9.9 percent.
Um, what? If I am a small businessperson and my income comes from the revenues of my business, why should that income be taxed at a lower rate than someone who works for a third party? They say earlier that:
The amount of taxes paid by businesses varies widely, according to circumstances. For example, Oregon's lack of a sales tax improves its score in tax rankings, but sales taxes are a relatively small expense for many businesses.
But this is nonsense - if I am a small businessperson, I pay an income tax on the income I earn from my business, just like everyone else, but then I don't have to pay a consumption tax so my overall tax burden is quite modest, just like everyone else. Comparing the individual income tax rates to those of C class corporations makes little sense. Those corporations pay lower taxes, but their employees pay income taxes.

Which is really all to say that don't fall into the trap of thinking of a sales tax as that much different from an income tax, you have to think of these two together when thinking of the overall tax burden on individuals.


Jeff Alworth said...

I'd be interested to hear your thoughts on what a balanced, sensible tax structure would look like. Consider this a vote for a post or two on the matter. (And as an economist, your thoughts on the laws mandating a balanced budget would be useful too.)

BJCefola said...

Rainy day funds are a funny thing. Usually what people mean when they say Oregon should have one is "I wish there were an untapped source of funds I could raid", not "I have a pile of money I could spend now for which I would receive immediate political benefits, but instead I will save this money in a fund where it will be put to an uncertain future use potentially determined by someone else."

That said, this is a really good post.