Financial Friday

Jenson Hagen

Alright, let’s get down to the nitty-gritty on tax reform.

Income Taxes – They are too damn high. The percent of our budget coming from personal incomes is leaps and bounds higher than any other state. Plus, unlike other states that levy a high rate of tax from personal incomes, we don’t have enough tax brackets or tax breaks to ease the tax burden of low and middle-income earners. We should have an above average income tax since we levy no sales tax, but we have the highest. We need to ease off any reforms that call for increases to personal income taxes before we are left with nothing.

Property Taxes – A prime example of letting taxes get out of hand. Our property tax used to rank among the top 3-6 states in terms of state revenue. Now, because of Measure 5 and 50, it ranks among the bottom 25-30. Since we have no sales tax, we should rank among the top 10-15, but with a caveat. Any future increase to property tax needs an accompanying homestead credit for low and middle-income earners, either on their personal income tax return or property tax statement. That’s the only way an above average property tax will survive. But we need solidarity and well-messaged reasons for increasing property taxes before we even write out legislation.

Business Taxes – And I do not mean corporate income taxes. Our corporate tax is very normal and should be left alone, except for maybe the single sales factor that goes into effect in 2008. Business taxes usually come in the form of excise taxes. Now, the main arguments against business taxes are (1) that it hurts business and (2) that businesses are owned by people so you are really just taxing people. First of all, almost all research says that there is no correlation between economic activity and tax levels. When levied on this state’s comparative advantages such as the timber industry and various agricultural products, an excise tax would have to be very high before it disturbed business. And companies don’t pay tax on money they spend unless the tax is levied on gross receipts. As to the second reason against business taxes, most wages are driven by market forces. If you tax a business, I guarantee that the employees will be the last to see its effect.

I remember in Washington, I used to pay over $400 for my Toyota Crapola car tabs. That was before Tim Eyman’s $30 car tab initiative, I-695. Imagine what that did to WA’s transportation budget. The moral of the story is that when one income source is too high, it gives tremendous fuel to any conservative group wanting to push an agenda in the opposite direction. This includes the ITAX. Sometimes moderation is the best long-term plan.

Ease up off the income taxes in this state. Put the hammer down on property taxes and business taxes, but do so in intelligent ways. One tax does not fit all, and if we have a generic tax structure, I assure you that low and middle-income earners will rise up against it. But before we make any changes to the tax system, we need to be very clear with everyone why we need tax increases if at all. This would entail messaging. Try it some time. It works!

Comments

  • Steve Bucknum (unverified)
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    There is an old statement about figures and liars, but I'll pass on that for now.

    Citizen's for Oregon's Future (fororegon.org) put out a recent fact sheet, and I picked up a copy at the Democratic Meeting in Pendleton two weeks ago. It shows that when you combine all State and local taxes and then look at that as a percentage of income, Oregon is ranked 45th out of 50 States. In other words, our total tax burden is relatively low.

    So, a blanket statement that Oregon's income tax is too high just seems wrong to me. The income tax is a progressive tax, you don't pay it unless you have income, and the more income you have the more you pay it. Versus a regressive tax like a sales tax that you have to pay to get necessary items no matter what your income is - so lower income people pay a higher percentage of income for necessities.

    I think we do need some tax reform in Oregon, namely we need more taxes. Being ranked 45th in the nation, tells me where we have fallen to.

    Having just put down sales taxes, there is one scenario that does interest me. I might well vote for a seasonal sales tax, say from Memorial Day to Labor Day, to catch tourist dollars. (Can you imagine the car lot sales before Memorial Day and after Labor Day - the "tax free sales days event at your local --- dealership"?)

    But that aside, taxes businesses pay were lowered by Measure 5, and we have never gone back to get that money back. Businesses depend upon a State infrastructure we all pay for to make profit. In fact, one could argue that the government by handling all sorts of issues decreases costs for businesses, which leads in part to their profits. Businesses should pay a fair share, and a higher share than they do now.

    What we really need to do, is "undeadlock" the Oregon legislature (to invent a new word). Once we have a legislature that is willing to be deliberative, then we can really address tax reform, and get creative about how to raise revenue without putting widows and orphans on the street. And there is only one way to "undeadlock" the legislature. Speaker Minnis has clearly shown this session that we cannot trust the House Republicans to act in the best interests of the citizens of Oregon - so we must replace them.

  • Sally (unverified)
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    A few comments/disagreements.

    When Oregon is cast as 45 out of 50 in per capita taxation, I don't know what, if anything, that means. How does that mesh with the recent Forbes/Business Week study (discussed on Jack Bog's blog, for one) that Portland is the sixth most highly taxed city in the country for most people, and the fifth most highly taxed for lower ($25K/year) income? I am very suspicious of "averages" such as "No. 45."

    That low ranking in property tax, for example, Mr. Hagen: is that another of these averages? Because it seems to me that Oregon's homeowner property taxes are high.

    Oregon does not have a graduated income tax. It is a 9 percent tax on income slightly above $6K/year, which is effective a flat tax. Although sales taxes are termed regressive, low-income working people assuredly would not pay sales tax on rents, food and utilities, which constitute the bulk of their outlays. I do not think a sales tax is more regressive at these levels than the current Oregon income tax is for the working poor.

    You don't have to worry about poor rising up in protest. If you did, Oregon couldn't have made such hay with lotteries and cigarette taxes for the last couple of decades.

    Property taxes on individuals in Oregon are high. What M5 did was shift the burden off businesses to individuals, and lessen it for all. I agree that a homeowner exemption or cap to some set level would be intelligent.

    I'm sure the state harnesses more than a few visitors attracted because of the lack of sales tax, but what is the annual revenue that goes tax free in these trades? $12 billion or something that sounds spectacular? Most real tax reformers I have read over the years blame Oregon's two-legged stool for its wobbly and inadequate tax system.

    As to "messaging," this is a propaganda (or information, if you prefer) war that is already on. And did the current crop of incalcitrant Republicans come into being because of tax resentments in the first place? Because if they did, you would be putting the cart in front of the horse to think your first step is to replace them, rather than exploring radical tax reform regardless.

    But I honestly don't see how you are going to "ease up" on income taxes and "hammer down" on business and property taxes and either sell it or make the numbers work.

  • Gordie (unverified)
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    Speaking of messaging and statistics, here we have another discussion of taxes that ignores our fees, which are amongst the highest in the nation.

    And when is Salem going to finish getting PERS under control so that costs stop rising faster than inflation? Sure market conditions have hurt PERS, but there are still all those employees and retirees guaranteed 8% annual increases. That, even more than rising healthcare costs, is taking money from government services.

    Tax reform advocates have a credibility problem with the average Oregonian. Avoiding discussions of fees and PERS sure doesn't help in that area.

  • Sally (unverified)
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    "Tax reform advocates have a credibility problem with the average Oregonian. Avoiding discussions of fees and PERS sure doesn't help in that area."

    Absolutely right in my view, Gordie.

  • Steve Bucknum (unverified)
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    Sally,

    I live in Central Oregon, Crook County just outside of Prineville to be exact. When I watch the TV station from Bend, they frequently start a story with a comment like, "In Central Oregon tonight ..." and then tell a story that only affects Bend. As a Central Oregonian, you can imagine that I get a little ticked off about how Bend grabs the title "Central Oregon" like it only applies to them.

    So, how do you think the rest of the State feels about being painted with the same brush used to paint Portland?

    If you look up at the top of this column of writing, you will find I described "Oregon".

    You then write, "How does that mesh with the recent Forbes/Business Week study (discussed on Jack Bog's blog, for one) that Portland is the sixth most highly taxed city in the country for most people, and the fifth most highly taxed for lower ($25K/year) income?

    There you go, Portland is not Oregon. That's how it meshes (or actually doesn't).

    Which is a big part of the problem with Oregon's tax system. Measure 5's limit on taxation also took away the local option. In my Crook County we can't add new property tax to help our schools. Our County doesn't have an income tax. But good old Multnomah County has extra income taxes out the wazu. Tri-met, Metro, whatever - too much for me to care about tracking from my perch 150 miles away.

    So, here I sit with no local options, looking to Salem to solve the problem of service reductions, falling apart infrastructure, and a college system with fees/tuition so high that it makes you want to move just about anywhere else for the sake of your children.

    So Sally, Portland is not Oregon, and Oregon is not Portland.

  • Sally (unverified)
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    Sorry, Steve, I don't think the rest of Oregon is undertaxed (if it is) because Portland is over-taxed. But most Oregonians do live in the metro region. So how does the state allegedly rank No. 45 if the city ranks No. 5-6? Give me credit for asking a good question, even if neither of us knows the answer.

    You needn't fear any pro-Portland bias from me. I was born in Eugene, raised in Medford, went to college in Corvallis, and lived in the Rogue Valley for most of my life. I spent the last five years in Portland and grew quite to dislike it. I left at the end of last summer.

    But if you want tax-raising allies, in spite of their relatively high-taxed status in-state and nationally, that is where you're likeliest to find them.

    Hasn't it been from areas like yours, and my home base, that tax resistance has most heartily come?

    As far as moving out because of college costs, at this point, sorry to say, I could only recommend it.

  • (Show?)

    I don't have an answer on the Portland vs. Statewide question, but it seems to me that the ol' "we're taxed too much" vs. "we're taxed hardly at all" debate comes down to an apples vs. oranges problem.

    Usually, it's that one side is looking exclusively at income taxes or maybe taxes paid by individuals while the other side is looking at total taxes paid by anyone or any corporation.

    Given the tremendous imbalance that has been created between individual and corporate taxes over the last 15-20 years (where it used to roughly 50/50) I think that's where you'll find the answer to the question - yes, individuals pay substantial taxes in Oregon, and yes, our total tax burden is very low.

  • Becky (unverified)
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    Jenson, you write, "If you tax a business, I guarantee that the employees will be the last to see its effect."

    I apologize if you are an economist or something, I don't know your background, but how can you state so categorically - how can you "guarantee" - that employees would be the last to see the effects of a tax hike on businesses? Employee benefits are steadily decreasing, wages are stagnating, and jobs are being consolidated as it is. Do you really believe that increasing business costs won't exacerbate this situation?

  • (Show?)

    The bottom line is, right now in Oregon we have an essentially flat income tax that hits the working poor much harder than most states. We have low property taxes, low business taxes, and no sales tax.

    Sales taxes are not regressive, and neither are flat income taxes. Just because a tax is not progressive does not make it regressive. Flat taxes and sales taxes are neither progressive nor regressive. An example of a regressive tax would be the social security payroll tax, which is flat up to $90,000 and then turns to zero.

    Oregon needs to raise the $6k income tax starting point to at least $15-20k to give a break to the working poor. Then create an 8% bracket for the middle class and leave it at 9% for upper incomes.

    Dividends and Capital gains should be taxed at the same rate as each other so as not to create a tax incentive for businesses to pay out in one form or the other. It's bad policy to encourage companies to avoid dividends in favor of capital gains.

    The portion of business profits paid out as dividends are taxed when shareholders pay tax on them. Increased business profits also contribute to rising stock prices, and therefore capital gains, which are taxed when shareholders pay tax on them. Higher business profits are also reinvested in the company to create jobs, build offices and factories, and pay property taxes.

    So increasing business income taxes prevents businesses from doing more of the above, and results in double taxation of dividends and capital gains.

    I'm all for businesses paying their fair share, but let's keep things in perspective and not kill off Oregon's economy by jacking up business taxes as some sort of panacea.

    That leaves the sales tax. I'm convinced that one of the main reasons the sales tax has failed in Oregon so many times is because of opposition to it from Democrats and the left. People constantly lament how a sales tax is “regressive” and hits the poor harder, when this just isn’t true. Our current income tax is just as flat and harder on more working poor people than any sales tax would likely be, given the usual exemptions for rent, utilities, groceries, and basic clothing items.

    If we are ever going to have meaningful tax reform in Oregon, those on the left are going to have to get over their opposition to a sales tax, and stop calling it a regressive tax when it isn’t. At worst it’s a flat tax and at best it can be made slightly progressive with targeted exemptions.

  • Steve Bucknum (unverified)
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    Sally et al,

    When you add up the population of all the people in Washington, Clackamas and Multnomah Counties - you end up with about 42% of the State's population. Let's get a proper perspective on this. Portland really isn't the State.

    Second, again, we have the stereotype of "my part of the State" being seen as anti-tax. It just isn't really true.

    Measure 5, the property tax limitation bill that started the "tax wars" in Oregon, was not passed by rural Oregon. The exceptions were Wasco and Jackson Counties. It was Portland where it passed.

    In "my part of the State" we favor LOCAL CONTROL. So, when school funding went to the State, we lost control, and haven't been happy about that since. When we need to, we pass local taxes for local needs. Since Measure 5, we have voted for new school construction (passed overwhelmingly the first time) and we have voted for a new library (passed overwhelmingly the first time). Yes, we did vote against Measures to increase the income tax. That is because of lots of reasons - some even having to do with taxation, but others not.

    It's too bad that some urban Oregonians don't listen to the whole State. Over here, our biggest taxation related issue right now is PILT. The Republican administration is attempting to reduce, eliminate, and/or redirect this basic payment from the Federal Government.

    (For those that don't know, about half of Oregon is owned by the Federal Government, and as such is exempt from local property taxes. The Federal Government has paid through the PILT program funds directly to County Governments. PILT = Payment in lieu of taxes. This is an important taxation issue affecting the entire State. Due to the way education funding works - If Crook County gets $1,000,000 in PILT funds for local schools, that is $1,000,000 the State doesn't have to pay Crook County. This is a big money issue. Senator Wyden is quietly leading the way on dealing with this issue, as the PILT program is about to expire.)

    So - here is the bottom line. We have to get a grasp of reality before we can solve these sorts of problems. Rural Oregon is not anti-tax, Rural Oregon is pragmatic. Involve us in seeking solutions, engage in a dialogue that involves all of the State, and present a balanced system - and we will show support for a new tax system.

  • ron ledbury (unverified)
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    If the you want to argue fairness then the first place to start is at the bottom. Push for a higher standard deduction. The income tax needs to be applied only to that portion of income that might otherwise be called disposable.

    Will I hear someone say in response to such a proposal "but where will we get replacement revenue?"

    That concern -- replacement revenue -- was expressed to me by a PR guy at PPS in response to a creative proposal by me that was tailored to be the poor mans anti-tax proposal.

    Who is afraid of reducing taxes on the poor?

    My post from January 24, 2004, begins as follows:

    Personal Reserve Flyer -- Appeal For Signature Gatherer

    The Poor Mans Anti-Tax Measure (FLIER) should be a good rebuttal both to the BUSH PUSH for ending taxes on inheritance and the local government's race to use your property as collateral to go on a spending spree.

    My post from January 16, 2004, ends as follows:

    If the state can be so meticulous regarding what is or is not a "resource" BEFORE providing ANY benefit then it should be reciprocally meticulous about defining what is or is not a resource (or wealth) BEFORE imposing a tax on the poor.

    My issue here is that the over-emphasis on revenue seems to wholly and completely disregard the circumstances of the poor, other than to use the mere existence of the poor and their plight as a sick and disgusting pawn in a plan by the non-poor to get more taxes to put into their pocket without helping the poor at all.

    If 15 to 25 percent of the labor cost for tier-one and tier-two public employees is to cover for investment loss or unsound plan design then we have a glaring problem. They are the new CAPTITALISTS capitalizing on inherently unsound pension plan design and seeking to escape the risk of investment loss just as corruptly as if Key Lay were to be demanding that his own losses in Enron should be covered by the taxpayer. (Don't think that the odd-ball treatment of stock options are not involved in raiding the public trough, because that really is their only purpose.)

    Shall We Create A Personal Reserve?

    Ponder this for a moment:

    "Your first 250,000 dollars in savings is your retirement fund. You should receive tax freedom on both income and property until you build a retirement fund."

    This flips the retirement account dynamics away from favoring the rich first, in their quest to escape taxes, and places it for the benefit of the poor, until they are free enough to actually experience the feeling of liberty. Why should a poor person that is living hand-to-mouth or paycheck-to-paycheck have to pay a dime in taxes to cover for the exemption on taxes upon the disposable income of someone to meet their future needs.

    The manipulation of tax laws to provide for retirement accounts is regressive taxation. When a Key Employee (IRC 416) gets to shelter 135,000 dollars of disposable income they are using the poor as the source of the "replacement revenue" to cover for their special benefit. The other feature of retirement accounts is that they are largely beyond the reach of creditors, it becomes an asset that is inalienable (a buzz word) by the rich person. Yet, it is the poor who need the protection from the lenders and bankruptcy courts just so they do not become indentured servants and remain so for possibly the entirety of their lives. My little proposed initiative was drafted to survive scrutiny in federal court as well as in state court.

    If you want to talk about the general welfare of the greatest number of Oregonians then I am all ears. It is this class that is not invited to the bargaining table by the schemers from both the left and the right when the good folks in Salem sit down to put money into each other's pockets, at the expense of the poor.

    But where will we get our replacement replacement revenue? This is the wrong question.

    If I were in Salem and had the power of either that of the Democrats or Republicans I could push for the general welfare of the Oregonians who are today excluded from the bargaining table. The question is why does the government exist in the first place? Is it not for the General welfare rather than the Special welfare?

  • Gregory A. Carlson (unverified)
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    "And when is Salem going to finish getting PERS under control so that costs stop rising faster than inflation?"

    I see you have been listening to Lars again. Well I hate to bust your bubble but the Oregon Supreme Court just told the the legislature that they CAN't change PERS any more then they already have. That's why you see 0 bills coming out of the legislature this yeat trying to reform PERS. Sorry.

    Ps. By the way it's funny (and sad) to go into the news around the country and read the same articles over and over again. "The(fill in the favorite local corporation/City/State name here) is struggling with a underfunded, hopelessly in debt pension program. Will local (employees/taxpayers) take it in the shorts again?" The bosses mismanage the money and the little guys argue over who should have to pay for their mistakes.

  • (Show?)

    This would entail messaging. Try it some time. It works!

    Another Friday, another self-important post about "messaging" from a guy who's never worked for a campaign for a single day in his life.

  • David Wright (unverified)
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    As Gordie mentioned, the discussion of "tax burden" often ignores fees and other funds.

    Check out the Oregon revenue budget for 03-05. Notice that "General Funds" (including personal and corporate income taxes) make up only 27% of the budget. "Other Funds" (including fees, miscellaneous taxes, and PERS) make up 49% of the budget.

    I think Kari has a good point, mentioning the apples and oranges that get mixed up when people talk about tax burdens relative to other states.

    But one way to perhaps factor that out, is to consider per-capita state spending instead of taxes per se. After all, if the state spends money, that money comes from somewhere (either a tax, or a fee, or a transfer from the feds). So from an overall "burden" standpoint, spending seems a more reliable measure.

    According to the most recent Government Performance Project rankings, Oregon's per-capita state spending is 13th in the country. Compare this with Washington (15th) and California (11th). Oregon is roughly in line with our neighbors, but still well towards the top for all states.

    For that reason, I question whether more spending, funded by more taxes, would really be appropriate. The structure of taxation may need to change, but overall funding levels perhaps not (or, if anything, perhaps overall funding levels should decrease).

    Another point to consider, Oregon's per capita income is 29th in the nation. I can see how lower income presumably means greater need for state support, thus it may be reasonable to expect Oregon's overall spending ranking to be higher than 25th (average) because of lower than average income. But should it be as high as 13th?

    I took the figures for each state from the GPP web site, and calculated state per capita spending plus state per capita income, to come up with a total dollars per capita ranking. As it turns out, Oregon ranked 25th -- dead average -- under this scheme (California was 8th, Washington 12th). This tells me that perhaps 13th in per capita spending to compensate for lower income is just about right after all.

    Keep in mind, Oregon lags so far behind California and Washington not due to state spending (which is comparable), but due to lower per capita income (about $4K lower than both states). So I'd suggest that instead of a focus on increasing state spending through higher taxes, we might want to focus on increasing per capita income by improving the employment environment (which, not coincidentally, would presumably decrease the need for state funding in the first place as people become more self-sufficient).

    Just a few thoughts to consider...

  • jim karlock (unverified)
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    Here is the source of the claim that Portland is #5 or 6 in oveall taxes.

    Be sure to download the Wash DC report - it has comaprisons for varioous income levels and appearently does NOT include the MC income tax. If that is the case, this study would put us at about #3 highest tax in the country!

    The CNN article on city taxes is at: http://money.cnn.com/pf/features/lists/taxesbycity2005/index.html

    The Washington DC version is at: http://www.cfo.dc.gov/cfo/frames.asp?doc=/cfo/lib/cfo/tax_burden_nation_2003.pdf

  • Gordie (unverified)
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    Gregory, I live in the southern part of the state and have never heard Lars...so save your judgmental BS.

    The Supreme Court said that the Legislature "can't change PERS any more than they already have?" One of the cases before the Oregon Supreme Court now is the appeal of the City of Eugene (Lipscomb) case regarding the 1999 PERS Tier 1 rate and a potential lowering of earnings crediting orders. That's not from the legislature, but it certainly shows that PERS is not immune from further legal interpretations and challenges that could either shrink or grow the benefits.

    But yes, it's sad how often we see similar stories around the nation regarding underfunded pensions. Sometimes it's from bad investing and/or sometimes it's from promising too much. 8% is an overpromising problem, regardless how well or poorly the investments have done (and they sure did poorly when the bubble burst). The little guys--lots of us taxpayers--are paying for that mistake.

  • ron ledbury (unverified)
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    Gregory,

    Long comment posted here, partially pertaining to PERS.

    Basically, PERS can be terminated (by the legislature) without further liability. Any local government could also spark a case by refusing to pay PERB demands, and then the court would find that a payment that is not yet due cannot serve as the basis for a claim of liability because it is contingent upon future events that have not yet passed; it is mere speculation. The employer contributions that get funneled to PERS are largely uncompellable in court, but the lawyers, for various reasons, seem to get away with creating the fiction of compellability. This fiction was dealt a rather harsh blow in the latest PERS case.

    I can only hope that the court took some of my points seriously. I will likely never know for sure.

  • Suzii (unverified)
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    Sally: "low-income working people assuredly would not pay sales tax on rents, food and utilities."

    Who assured you of this, and do I have a reason to trust it?

  • Greg Carlson (unverified)
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    Ok, where to start. The Oregon Supreme Court in the so called Strunk case ruled that to the extent PERS covered Tier 1 employees were vested in PERS the State had to pay them 8% a year on their balance. The Court also ruled that the State could shut down PERS to new money and start a new pension plan. Which the State has already done. Now I suppose that the State can refuse to grant any pension to new employees in order to save money to spend on the older ones. Not very smart of them but it's possible. And I will agree that paying the current pensions is not easily compellable by a court order but I guess I have enough faith on our Court system that ultimately the pensions would be paid. The Federal Courts certainly have the authority.

    The City of Eugene case is one where it will be determined the extent that the Court's can second guess a decision of the old PERB Board on one year's vesting decision. And upholding the City of Eugene will save the State about $500 million. I guess my point is that most of the big money decisions have been made and anyone expecting to see any big money impacts on PERS rates from the legislature is going to be disappointed.

    Greg C

    Ps. Sorry you thought my Lars comment too judgemental. Lars is a local radio host who is frequently wrong and the comment was only intended as a crack on him....not you.

  • Sally (unverified)
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    Suzii: historically, Oregonians have not trusted that if they passed a sales tax, the rate or the trade-off (in lower income tax rates) would hold. Those are the conversations and debates I recollect clearly from growing up there and seeing it more than once come to a vote.

    Far be it from me to ever encourage anyone to trust any government. Most states do exempt food and prescription drugs from sales taxes, and I have never heard of applying a sales tax to rent. Utilities usually include a variety of sneaky little taxes, sales tax or no.

    And even farther be it from me to encourage Oregonians to raise taxes before they resolve the burdens and unfunded liabilities of PERS.

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