Oregon Ranked #13th Best in Business Tax Climate

The Tax Foundation has released its latest Business Tax Climate rankings and once again, Oregon comes out looking pretty good.  The Tax Foundation considers Oregon to be the 13th best in the country, an improvement of two spots from its 2011 ranking.

According to their metrics, Oregon does particularly well in sales tax and property tax, but a little worse in in corporate, individual and unemployment insurance taxes.

Picture of the Day: Taxes

Here is one perspective on US taxes from the left-leaning Center for American Progress which argues that the US is a low-tax country.  I think graph 2 makes the best case in general, and it is not really surprising - we certainly have different notions of the appropriate role of government then, say, Denmark.

Meaningful?  Discuss.

Tax Rates and the Movement of Soccer Stars

Ronaldinho wants to go...where the taxes are low.

January is one of the two international transfer windows that allow the movement of players from club to club in FIFA sanctioned leagues.  There will be a lot of shifting around of players including a number of big stars from clubs in one European league to another.  Thus there will be some multimillionaires moving from on tax regime to another.  Henrik Kleven, Camille Landais and Emmanuel Saez examine the effect of differential marginal tax rates on player movement in a new paper (synopsis here).

They conclude:

Combining the evidence from tax reforms in all 14 countries in our sample, we find that the location decisions of players are very responsive to tax rates. But because labour demand by football clubs is relatively rigid—there can only be so many players in a club and only so many clubs in each National league –- we also find strong evidence of sorting effects. Top-quality players are much more responsive than lower-quality players. In fact, we find that tax cuts to foreigners in a given country attracts top-quality foreign players, but ends up crowding out lower-quality foreign players as well as displacing some domestic players.

How and why do these results matter for public policy? First, they matter for the football labour market. Here, our results clearly call for a reappraisal of the effectiveness of preferential tax schemes to highly paid foreigners. Implementing a favourable tax treatment of foreigners is able to attract top-quality players, which brings in new tax revenue and increases the quality of the League. However, because of sorting effects, part of this new revenue is lost as domestic players are displaced. This implies that preferential tax schemes to foreign players ultimately have limited power to raise revenue in a rigid labour market setting such as the football market. Moreover, these schemes create negative externalities on other countries as they lose their top players, highlighting the need for tax coordination among European countries. In the absence of coordination, as many more countries enact preferential tax treatments, the positive effects of having low tax rates tend to disappear in a pure race to the bottom, detrimental to all.

Second, our results matter for policies much more broadly in the sense that they demonstrate for the first time a clear effect of taxation on international migration and sorting of high-skilled labour. Since football players are likely to be a particularly mobile segment of the labour market, it is of obvious interest to broaden the analysis to other high-income workers. This will be an important topic for future research.

Here is the abstract for the more technical language that will be more pleasing to economists:

This paper analyzes the effects of top earnings tax rates on the international migration of top football players in Europe. We construct a panel data set of top earnings tax rates, football player careers, and club performances in the first leagues of 14 European countries since 1980. We identify the effects of top earnings tax rates on migration using a number of tax and institutional changes: (a) the 1995 Bosman ruling which liberalized the European football market, (b) top tax rate reforms within countries, and (c) special tax schemes offering preferential tax rates to immigrant football players. We start by presenting reduced-form graphical evidence showing large and compelling migration responses to country-specific tax reforms and labor market regulation. We then set out a theoretical model of taxation and migration, which is structurally estimated using all sources of tax variation simultaneously. Our results show that (i) the overall location elasticity with respect to the net-of-tax rate is positive and large, (ii) location elasticities are extremely large at the top of the ability distribution but negative at the bottom due to ability sorting effects, and (iii) cross-tax effects of foreign players on domestic players (and vice versa) are negative and quite strong due to displacement effects. Finally, we estimate tax revenue maximizing rates and draw policy conclusions.

In essence the responsiveness of top players to tax regimes is large. Which makes sense, we are talking about a lot of money. But it works both ways, lower paid players are actually less responsive than average due to sorting - can do better in higher tax regimes because the top talent is more scarce.

Oregon Tax Climate Ranking Unchanged

According to a report released today by the Tax Foundation, Oregon's tax climate ranking among all 50 states remained unchanged from 2010 to 2011 at 14th. Oregon's ranking did fall from 2009 to 2010, from 8th to 14th, after the passage of Measures 66 & 67, but it remains in the top third of all states.

State Business Tax Climate Index Fiscal Year 2011
	2011 Rank	2010 Rank	Change from 2010 to 2011	2009 Rank	2008 Rank	2007 Rank	2006 Rank
Alabama	28	19	– 9	20	23	22	16
Alaska	2	3	+ 1	4	3	4	3
Arizona	34	28	– 6	24	25	29	29
Arkansas	39	40	+ 1	35	37	36	35
California	49	48	– 1	49	49	48	42
Colorado	15	13	– 2	13	10	11	13
Connecticut	47	38	– 9	37	38	39	41
Delaware	8	8	0	10	9	8	9
Florida	5	5	0	5	5	5	5
Georgia	25	29	+ 4	27	28	21	20
Hawaii	22	24	+ 2	22	18	16	24
Idaho	18	18	0	29	21	26	30
Illinois	23	30	+ 7	23	24	31	26
Indiana	10	12	+ 2	14	13	12	12
Iowa	45	46	+ 1	44	46	45	44
Kansas	35	32	– 3	31	31	35	33
Kentucky	19	20	+ 1	34	27	28	38
Louisiana	36	35	– 1	33	34	33	32
Maine	31	34	+ 3	40	35	37	43
Maryland	44	45	+ 1	45	47	24	25
Massachusetts	32	36	+ 4	32	33	34	36
Michigan	17	17	0	21	17	23	28
Minnesota	43	43	0	41	42	43	39
Mississippi	21	21	0	19	22	19	19
Missouri	16	16	0	16	16	15	14
Montana	6	6	0	6	6	6	8
Nebraska	29	33	+ 4	42	40	41	45
Nevada	4	4	0	3	4	3	4
New Hampshire	7	7	0	7	7	7	6
New Jersey	48	50	+ 2	50	50	50	48
New Mexico	33	23	– 10	26	29	25	23
New York	50	49	– 1	47	45	46	49
North Carolina	41	39	– 2	39	41	42	40
North Dakota	20	25	+ 5	30	32	32	31
Ohio	46	47	+ 1	48	48	47	47
Oklahoma	30	31	+ 1	18	19	20	21
Oregon	14	14	0	8	8	9	10
Pennsylvania	26	27	+ 1	28	30	30	22
Rhode Island	42	44	+ 2	46	44	49	50
South Carolina	24	26	+ 2	25	26	27	27
South Dakota	1	1	0	2	2	2	2
Tennessee	27	22	– 5	17	20	17	18
Texas	13	11	– 2	9	11	10	7
Utah	9	10	+ 1	11	12	18	15
Vermont	38	41	+ 3	43	43	44	46
Virginia	12	15	+ 3	15	15	14	17
Washington	11	9	– 2	12	14	13	11
West Virginia	37	37	0	36	36	38	34
Wisconsin	40	42	+ 2	38	39	40	37
Wyoming	3	2	– 1	1	1	1	1

Taxes and Revenue, the Chris Dudley Proposal

Chris Dudley, Republican candidate for Governor, presented his 20-point plan for promoting employment and the Oregon economy. [Funny how these things always miraculously come out to nice round numbers - why not a 19 or 23 point plan?]  Anyway, the key points appear to be decreasing taxes and in particular capital gains taxes, (many of the other points are bromides rather then specific proposals).  This makes sense politically, after the passage of Measures 66 & 67 taxes are an obvious focal point for Republicans.  But do they make sense economically?  Perhaps.

When I first heard the news reports on the plan the sound bite they chose to play was of Dudley trying to make the point that the tax cuts would likely pay for themselves in terms of extra revenue.  To me this sounded like the tired Laffer curve argument that has been discredited for marginal income tax rates as low as we have in the US.

As an aside, if you are wondering about income tax rates and the disincentive to work, most economic studies put the tax rate at the peak of the revenue curve (i.e. after which revenues actually decline when you increase the rate) at over 70%.  Here is perhaps the foremost expert on the matter, Emmanuel Saez of UC Berkeley, quoted in the Washington Post:

The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed

And here is a passage from Greg Mankiw's textbook:

Laffer's argument may be more compelling when considering countries with much higher tax rates than the United States. In Sweden in the early 1980s, for instance, the typical worker faced a marginal tax rate of about 80 percent. Such a high tax rate provides a substantial disincentive to work.

But you should note that Saez's analysis is a static one, not considering the long-term growth effects of tax cuts.  Perhaps by promoting growth in the long-run, over time cutting taxes will promote growth.

Capital gains taxes are more nuanced than the tax rate on labor income since capital gains taxes are on often associated with the very investments that we think are good for economic growth, especially in productive capacity.   We want to encourage investments in new businesses and in revenue enhancing productive capacity, and one way to do so is to increase the reward on such investments - by lowering the tax rates.  There are also many other types of investments that fall into this category that are not so obviously growth enhancing like buying and selling stock.  If the share price goes up, the investor makes a capital gain, but this gain does not necessarily represent an investment in productive capacity.

So what is the answer, will this pay for itself?  The first part is pretty clear: in the short-run we should expect tax revenues to decrease.  The second part, the question of whether the cuts will this enhance growth in the state enough over time so as to raise tax revenues to a level higher than they would have been without them, is not clear.  And no good answer exists to this question.

Here is the conclusion form a CBO report on capital gains taxes and growth:

Revenue estimators are often faulted for the way they project tax receipts and prepare legislative cost estimates related to capital gains taxes. But the relationship of realizations and receipts to gains tax rates is neither predictable nor obvious. And while reductions in the overall taxation of capital income can measurably increase economic growth, a cut in capital gains taxes alone is likely to produce much smaller macroeconomic effects. Inaccuracies in projecting revenue and disagreements about the effects of tax changes stem not from a failure to incorporate the behavioral responses of asset holders but from the complexities inherent in the nature of gains and gains realizations.

So in the end, we don't really know, especially in the case of a state as opposed to a country. I think one could target specific investments in new business, new capital, etc. and exclude things like earnings from stock sales and have a smaller short-term revenue impact while getting the growth boost you are hoping for.

And this is getting too long, but my first impression is that the tax credit for businesses who hire unemployed workers is a very good proposal as a temporary measure.

Opinions?

NB: I was trying to decide what kind of picture to use of Dudley and it made me wonder if the Dudley campaign likes the use of Dudley-as-Blazer pics as they create the positive association with the Blazers (in most Oregonians minds, I would think this is positive), or do they want to get away from the basketball player identity and try and make him seem wonkish by showing him in button up shirts and a serious expression. To me, the picture I showed rocks, baby: get that rebound big man!

Beeronomics: Taxes Again

Now the Beer Stimulus Bill is hitting the national media: this time the Wall Street Journal, under the tag "can beer stimulus hop up the economy?"  Ha, I like it when the WSJ gets clever.

Can microbreweries revive the economy? That’s the hope of Sen. John Kerry (D., Mass.) and a bipartisan group of senators who are pushing a plan to cut taxes on the nation’s legion of small brewers in hopes of stimulating hiring among craft brewers.

The plan, which was introduced by Sen. Kerry, would lower the per-barrel excise taxes on small breweries’ first two million barrels of beer per year (that’s 62 million gallons) and would triple the size of what the government classifies as a small brewer — to breweries that produce six million barrels a year from two million currently. Some co-sponsors include Sens. Olympia Snowe (R., Maine) and Ron Wyden (D., Ore.), whose states, not surprisingly, rank high on the list of states with the most breweries per capita (see chart below).

So-called craft brewers are one of the few industries to thrive through the recession. The segment grew from 7.2% by volume last year and 5.9% in 2008. The segment has even become a haven for budding entrepreneurs that have been let go from corporate jobs. “There’s not that many success stories in American manufacturing today and craft beer is one of them,” says Jim Koch, founder of The Boston Beer Co. which makes the various Samuel Adams beers. Mr. Koch — whose company is in Mr. Kerry’s home state — has been leading the charge for a lowering of the excise tax on small brewers.

Mr. Kerry’s office estimates that the tax decreases would free-up some $44 million — small potatoes in a $14 trillion economy — that the senator (presumably) hopes would be redirected toward new brewing tanks or hiring new workers. Sam Calagione, founder of Dogfish Head Craft Brewery in Delaware, says lower excise taxes would half his $750,000 federal tax bill. “It could be employees or capital equipment, but it would all go toward growing the company,” he says.

We do have one quibble. Mr. Kerry’s press release states that “Massachusetts started the small craft beer revolution,” but many other historians say that the current craft brew renaissance has its origins in Northern California, where San Francisco’s Anchor Brewing and the short-lived New Albion Co. kickstarted the movement in the ’60s and ’70s.

My main quibble is why is the assumption that any extra revenue would be reinvested and not taken as profit?  The idea that a tax break means more workers hired is silly.  The number of workers are the result of the optimal number needed to produce the beer demanded by the market.  I made this same argument when Measures 66 & 67 were being debated. In any case  here is the cool interactive chart:

Number of Brewers, by State

State	Total Brewers	State Residents per Brewer
Alabama	5	932,380
Alaska	14	49,021
Arizona	26	250,007
Arkansas	4	713,848
California	221	166,320
Colorado	103	47,956
Connecticut	16	218,828
Delaware	7	84,548
Florida	39	469,957
Georgia	16	605,359
Hawaii	8	161,025
Idaho	16	95,239
Illinois	41	314,672
Indiana	28	227,743
Iowa	18	166,809
Kansas	17	164,831
Kentucky	7	609,892
Louisiana	4	1,102,699
Maine	31	42,466
Maryland	21	268,267
Massachusetts	38	170,999
Michigan	70	142,906
Minnesota	22	237,291
Mississippi	1	2,938,618
Missouri	29	203,848
Montana	27	35,831
Nebraska	15	118,895
Nevada	16	162,510
New Hampshire	15	87,721
New Jersey	18	482,370
New Mexico	16	124,022
New York	56	348,041
North Carolina	33	279,467
North Dakota	1	641,481
Ohio	42	273,474
Oklahoma	7	520,337
Oregon	93	40,753
Pennsylvania	75	165,977
Rhode Island	5	210,158
South Carolina	14	319,986
South Dakota	5	160,839
Tennessee	14	443,921
Texas	36	675,749
Utah	14	195,459
Vermont	19	32,698
Virginia	32	242,784
Washington	100	65,492
Washington DC	3	291,031
West Virginia	6	302,411
Wisconsin	66	85,272
Wyoming	10	53,267

Beeronomics: Taxes

This was brought to my attention (with the comment "must be an election year"):

Beer-brewing in Oregon generates more than $2.3-billion every year. Senator Ron Wyden proposes a federal tax cut for small breweries in hopes of expanding the industry even more.

...

"The fact of the matter is...Oregon makes beer, and beer makes good paying jobs for our people," explains Oregon Senator Ron Wyden.

Senator Wyden is proposing a major break for small breweries: taxes on the first 60,000 barrels would be cut in half. Ninkasi expects to produce 32,000 barrels this year, so this tax cut would save them more than $100,000.

"We started with a very small pool of resources to build a brewery, so to reduce the amount of federal tax by half would be a third of that bottling line cost or three full-waged employees a year," says Jamie Floyd, Ninkasi Owner. "Those are pretty big significant additions to the brewery."

Oakshire Brewing doubled their production this year to 4,000 barrels and, as a fairly new business, could definitely use the tax break.

...

Ninkasi and Oakshire are 2 of 78 brewing companies around the state generating more than $2 billion a year. Senator Wyden says he sees the potential for the industry's future growth and more job opportunies as well.

"Obviously there is so much economic hurt in our state right now that I'm making my special focus those industries that we can really look at as having an opportunity to generate good paying positions and employment," concluded Wyden.

Senator Wyden says the tax cut proposal has bipartisan support. He hopes to pass the bill before the end of the year.

Tax Burden by State

Click on the graph to go to an interactive version.



This was created by Catherine Rampell of The New York Times

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.

A State and Local Tax Primer

NOTE: Apparently the figures are too hard to see so scroll down for a Scribd version of the original document.

A couple of weeks ago I wrote an initial post trying to better understand the facts in the Oregon tax debate so that I, and my readers, can make informed judgements about the suggested changes to Oregon's tax structure.  It is a pretty complicated thing to make any real blanket statements about, so I decided to do what any good economist does - go to the person with the comparative advantage.  In this case, Fred Thompson.  Take it away Fred:

A STATE AND LOCAL TAX PRIMER

 

Most states are in fiscal hot water, regardless of their tax structures

Figure one shows the year-over-year quarterly changes in state revenues from major tax sources for all fifty states. Because this is a sum, it tends to smooth out inter-state variations owing to differences in tax rates and bases, income recognition policies, and the like. The figure also suggests that the portfolio effect from relying on a variety of tax types is pretty small.

Figure 1

 

State tax revenues are volatile; Oregon’s are more volatile than most.

Figure 2 shows year-over-year quarterly changes in total state revenues over the past ten years. While the fluctuations are less dramatic than in Figure 1, the revenue trend is nevertheless characterized by a lot of volatility. These fluctuations are largely driven by underlying changes in the real economy. Another way of putting it is that the systematic component of state revenue growth is driven by changes in GDP. Variations in state product is one explanation for state-specific deviations from the systemic component of state revenue growth; differences in state tax structures and tax administration is another; the rest is random noise.

Generally speaking the more progressive the overall tax structure the greater its volatility. States that rely heavily on a progressive personal income tax, for example, tend to have more volatile revenue growth than states that rely on more regressive tax sources. That is the bad news. The good news is that the elasticity of revenue with respect to income is approximately ergodic. You tend to obtain about the same results over a moment in time that you get over a period of time. What that means is that revenue structures that are more volatile because they are more progressive, also tend to grow revenue faster over time, even without increases in tax rates or coverage.

Figure 2

 

Oregon state relies heavily on progressive personal income taxes, as seen in Chart 1.

Chart 1

Moreover, while Oregon’s PIT is characterized by a flat marginal tax rate, its pattern of exemptions, exclusions, and deductions renders it highly progressive on average, especially where the household is treated as the unit of analysis, rather than the individual. (I’d like to see the state eliminate the first step of its PIT and expand the EITC, but that is a subject for another time).

 

Oregon is a low tax state

That claim is true whether one looks at state taxes alone or state and local taxes combined (although that claim would have to be somewhat qualified, if one were to take local user fees into account – these are now the highest in the US by most measures). It is also true whether one looks at average taxes paid or taxes as a proportion of disposable income.

One might ask, how did that happen? It wasn’t very long ago that Oregon was near the top of the tax tables – in the top quartile in terms of taxes paid per capita and the top decile in terms of tax take as a share of disposable income. The answer is fairly straightforward: caps on the rate of growth in the property tax (Measures 5 & 47), the inability of the state to increase taxes (see Figure 3), and changes in corporate-income tax assessment that were supposed to be revenue neutral that weren’t. Oregon also spends more of its tax revenues on tax rebates than any other state (the Kicker).

Figure 3

A State and Local Tax Primer

Publish at Scribd or explore others:

Taxes, Revenues, Spending and Oregon

Update: I have made a correction to an unfair criticism that I did not really intend. Sloppy writing on my part, sorry.

Mark Thoma on Sunday had an Op-Ed piece in the Oregonian treading over some old territory for this blog: suggesting a sales tax. I only wish Mark had done his due diligence emphasized spending stability rather than revenue stability. A while ago I wrote a series of posts in which I tried to find out what I could about the reality of sales tax and income tax volatility.

The conclusion: sales taxes are not much less volatile than income taxes and the two are highly correlated. They may add a tiny bit to stability but they won't solve the problem. We need only to look at our neighbors to the north to see that sales taxes are not then answer to volatility questions. Sales taxes cratered a bit before income taxes, but they will likely recover faster too.

While in the long term we may want to think about appropriate revenue levels it is important to remember that trying to tax our way out of a recession is only a recipe for prolonging the recession. We need to be very careful during this recession to be sure that any new temporary taxes are used to preserve only the most essential services and avoid the temptation to enact a host of new taxes to fill the budget gap.

The real problem looking to the future is not revenue instability but spending instability. Mark is right about this: a permanent rainy-day fund is an absolute necessity. A rainy day fund that is 5% of state GDP and filled by withholding kicker refunds until the fund is full. 5% of GDP is, admittedly, a lot and I'd settle for less (3%?), but 7-8 billion would come in pretty handy right now, wouldn't it? The fund can be invested conservatively and excess returns can be refunded to taxpayers as well. It is true that strict rules will have to be enacted to assure that the rainy day fund is not used in the sunshine. But such rules are relatively simple to write down and enact.

What is important now is to think about the appropriate level of revenues in the long term. I don't know the answer to this off hand, but I do know that Oregon is a relatively low-revenue state. According to the Tax Policy Center of the Urban Institute and the Brookings Institution we raise about $3,360 per person in Oregon which places us 35th in a ranking of states. Compare that to Washington which collects almost $4,000 per person and California, which collects more than $4,500 per person.

This leaves us with some serious issues, most notably the abysmal funding of K-12 education. From the Tax Policy Center's data on expenditures we can see that in a list of state expenditures on K-12 schools Oregon is 41st in the nation at $1,394 per person. However, overall expenditures on all services in Oregon is $6,866 per person which puts us in 22nd place which begs the question, why are we so low in school funding? By the way, the difference in the revenues and expenditure numbers is, I assume, mostly federal transfers for things like medicaid as well as timber payments and the like.

I am far from ready yet to say that revenues should increase, and we know we have no sales tax, but what about corporate taxes which have received so much attention? Are they really so low? Again, according to the Tax Policy Center a little less than 2% of all state revenues comes from corporate income taxes which places us 3oth among states. Per capita, according to the Tax Foundation, we are in 39th place with $109 raised in corporate income tax per person.


Finally two last points about sales and corporate taxes. We are one of the very highest income tax states, meaning that adding a sales tax would have to involve a lowering of the income tax without overburdening Oregon households. Also as companies have to compensate employees for high taxes to keep them from fleeing to other states, income taxes can be seen as an indirect tax on businesses. Food for thought.

This is intended to start a discussion and exploration into these issues and, as always, I welcome your thoughts, opinions, knowledge, etc.

Beeronomics: Death and Taxes and Beer

Well I am not dead, so I guess I had better turn in my tax forms. As I am not enjoying Bend and Mt. Bachelor as was the plan for this spring break and am instead dodging nasty germs that my sick kids are constantly releasing into the stale air of my house, I figured I might as well do my taxes.  But now that they are done, my thoughts turn to beer.  This begs the question, what is the best beer to have post-taxes? (And this year I don't owe any extra taxes so I don't have to go the malt liquor route to drown my sorrows, in fact I can be a bit profligate since I get a modest refund - permanent income hypothesis?, pah!)

Well, I had to go to the local Safeway for a prescription (see: sick kids, above) I figured I'd pick up some post-tax filing celebratory beer.  Unfortunately, Safeway's beer selection is the worst in Portland, but I figured that among the many Widmer beers they sell would be the new 'Drifter' that I am eager to try.  Nope.  Dang.

But aha! Salvation.  Of all random things they have a 22oz-er of Deschutes' hop bomb 'Hop Henge,' this is a perfect post-tax beer.  A huge beer that will nuke your senses and rid you of that bad tax after-taste.  I find 'Hop Henge' and the similar 'Hop Lava' from Double Mountain a wee bit much, yet I still enjoy them immensely and they are perfect for certain situations (and this is one).  I love hops, but these are intentionally out-of-balance for the serious hop heads, so beware should you go looking for that perfect post-tax beer.

After my Hop Henge, all the nasty memories of the Form 1040, the Schedule A, the Form 2441, the Schedules SE and C-EZ and on and on and on fade away and my consciousness is transported to Bend - where I was supposed to be all along.  Thanks Gary and the Deschutes crew! [BTW, be nice to my brother who is in the brewing program at UC Davis and going to be doing an internship with you in April]

So, what is your choice for your "Thank God I am Finished With My Taxes!" beer?

Two Cheers for the Task Force on Revenue Restructuring

Editor's Note: Fred Thompson checks in again with a look at the recently released report from the Task Force on Comprehensive Revenue Restructuring (executive summary here, full draft report here).

Our state, Oregon, has a highly volatile revenue structure, both because of its composition and because of the jurisdiction’s size.

This causes all sorts of difficulties as it moves through the business cycle. State spending doesn’t fluctuate as much as revenue, but it fluctuates more than it should. The problem, however, is not revenue volatility per se but the nastiness that results from trying to adjust spending up and down to match current revenue flows and from trying to find the money needed to stabilize spending during downturns. During booms the state tends to grow spending at an unsustainable rate and then cuts spending way back during busts. As a consequence of these behaviors, the Pew Center on the States at Harvard’s Kennedy School of Government ranked Oregon’s money management practices 43rd out of 50 states.

Recognizing these issues, the legislature authorized the creation of a Task Force on Comprehensive Revenue Restructuring (OR House Bill 2530, June 30, 2007) to examine "Oregon’s tax structure from top to bottom." The task force was appointed by the Governor, Chaired by Lane Shetterly, and charged with assessing several options for change: replacing personal income and/or property taxes with a sales tax or a gross receipts tax and imposing a tax on business assets and/or a value-added tax in place of the corporate income tax. It very quickly became apparent to the task force members that, even if these options were politically feasible, they would not work to correct the problem, but would leave the state with a tax system that was less fair, less efficient, and less adequate than the existing tax structure and not significantly more stable. Moreover, it was obvious that Oregon’s long-term revenue trend was one of the highest in the nation and that its revenues would be sufficient to meet most future needs, if it could find a way to use savings and or borrowing to smooth out spending over time. What was initially hard for the task force to accept is that putting such a system into place requires only fairly modest institutional fixes. But, that is, indeed, the case.

Oregon’s constitution requires the legislature to enact a balanced budget in which planned spending is equal to or less than the revenue forecast. If the forecast is up, the state can plan to spend more; if the forecast is down, the state must scramble to cut the budget. Then, if actual revenue exceeds the forecast in the period in which the budget is executed, the state must return the difference to the taxpayers. If revenue falls short of the forecast, the state can make up the difference from savings or, if necessary, by borrowing. This is looser than the balanced budget requirement found in some jurisdictions, where, if actual revenue is less than forecasted, spending in the period of budget execution must be reduced to bring it into line with actual tax receipts (Hou & Smith 2006). Consequently, smoothing spending in Oregon requires only two changes to its budget process. The first would be to base the state revenue forecast on the state’s long-term rate of revenue growth rather than short-term revenue growth. The second would be to give savings or the retirement of general-obligation debt first priority for the use of revenues in excess of the forecast. And, that is essentially what the task force recommended: amend the method of estimating the end-of-session forecast of state revenue on which the budget is based and apply actual revenues in excess of the forecast to the state's general reserve fund (The Statesman-Journal, January 23: B-1).

However, a more satisfactory recommendation would have specified the method for estimating the end of session forecast. In my opinion, the state revenue forecast should reflect the state’s long-term, sustainable rate of expenditure growth. Otherwise, as one very insightful colleague observed: "If we believe that the problem is caused by the fact that many of our politicians have a distorted time preference … because they care mostly about the current generation and discount the future generation’s concerns too heavily, a debt‐financing regime is optimal. So we are back to square one – the original problem of inadequate reserves and too much spending." Unfortunately, the task force was unwilling to take this step, perhaps, because they weren’t fully persuaded that forecasting a sustainable rate of expenditure growth was workable, perhaps, because they persisted in viewing the problem as one of reduced tax receipts during economic downturns, or, perhaps a little of both.

What they have done is eminently sensible; what they have left undone is potentially very dangerous.