Happy New Tax Year

Fred Thompson checks in with a New Years post

With the start of another legislative session, calls for wholesale tax reform are again being heard. Frankly, most state tax-policy specialists are dubious of big reforms. My Georgia State University colleague, Carolyn Bourdeaux, for example, boils the typical reform process down to the following seven steps:

1.     Form a commission

2.     Develop “Principles of Tax Reform”

3.     Hold hearings

4.     Make a proposal based either on the “grass is greener assumption” or the “bold new thinking on taxes notion.”

The former looks like this:

·      If your state does not have an income tax, propose an income tax

·      If your state does not have a retail sales/consumption tax, propose a sales tax 

·      If your state has a corporate income tax, propose a gross receipts tax

·      If your state has a gross receipts tax, propose a corporate income tax

The latter looks like this:

·      If your state relies on personal and/or corporate income taxes, propose the elimination of all exemptions, credits, and deductions

·      If your state relies on retail sales taxes, propose to tax services and internet sales

·      If your state relies on both sales and income taxes, propose to replace them with a value-added tax or mess with local government revenues

5.     If you choose from the first list, your state will probably be no better off than it was before and possibly worse; from the second, you will probably see your proposal go down in flames

6.     Wait 5-10 years until the next fiscal crisis

7.     Repeat.

The fact is that wholesale tax reform is more often than not a mug’s game, especially in Oregon, which has one of the country’s best state and local tax systems. At least that is the consensus among state and local tax specialists. It’s not by any means perfect; what is? But it’s better than what you find elsewhere.

So, instead of talking about wholesale tax reform, what should we talk about? The answers are simple: first, fix the things that need fixing, we know what those things are; second, if the state needs more money, increase the rates on existing taxes; third, funds are inherently limited, set spending priorities and stick to them.

What needs fixing? More than anything else, Patrick Emerson and I have written about the Kicker and its folly here at the Oregon Economics Blog. In what is largely an exemplary state and local tax system, Oregon’s kicker is an embarrassment, or, more correctly, the legislature’s unwillingness to deal with it is simply shameful. There is also the problem of kicking the can down the road with respect to maintaining and upgrading state and local transportation infrastructure, where the best that can be said is that Oregon is probably better than many places, but that still isn’t very good. Moreover, the state has emphasized its needs at the expense of local governments, which, given the network aspects of our transportation grid, is foolishly suboptimal. Finally, the legislature has handed out tens of billions of dollars in business and personal income tax deductions and exemptions, usually with the best of intentions – promoting economic development, conservation, or other worthwhile activities – but tax expenditures are all too often ineffective and excessively costly. Many if not most of these loopholes/subsidies should be repealed (which is, of course, easier to say than to do).

Beyond these measures, if more funds are needed, raise income and business tax rates. By far the worst thing about Measure 97 was the size of the jump it proposed – a 2,500 percent rate increase. It makes sense to consider a more incremental increase in the alternative minimum turnover tax rate, while retaining the offset provision for C-corps.

Boosting taxes requires compromise. Oregonians care about schools and roads, but they are also inherently thrifty, if not actually cheap. At a minimum, support for K-12 and highway spending must be prioritized ahead of other state programs and initiatives. Moreover, cost-saving reforms to the state’s public pension system probably ought to be on the agenda as well. Upholding contracts is one thing, guaranteeing unanticipated windfalls another. If kicker reform, together with other tax increases, are on the table, pension inflation adjustments, especially those which exceed the realized rate of inflation, probably ought to be as well.

Holding broadly valued, highly esteemed programs hostage to special interests is often a winning legislative tactic, but, in the longer run, it’s bad politics, one that the governor acquiesces to at her peril.