Jobs and Taxes

By William K. Jaeger, PhD of Corvallis, Oregon. Jaeger is a professor in the Graduate Program in Applied Economics at Oregon State University. He recently helped inform the debate on Measures 66 and 67 by publishing Perspectives on Oregon’s Taxes (PDF). Emphasis and link in text added by BlueOregon.

A central issue in the debate over Measures 66/67 is whether these tax increases will cost Oregon jobs. Dozens of scholarly studies on the economic effects of state and local taxes and public services have been published in peer-reviewed economics journals over the past 30 years, but to date none of this research has been used to inform Oregonians about the likely job impacts of Measures 66/67. Opponents have instead touted analyses from three economists tied only to a local libertarian advocacy group – analyses that do not reflect the professional standards of economics scholarship. Oregonians deserve better.

What does scholarly economics research say about the likely job impacts of Measures 66/67? There are three parts to this question: What are the typical negative effects of a tax increase? What are the typical positive effects of increased (or maintained) public services? How different is Oregon from a typical state?

First, how would tax increases such as those proposed for Oregon affect jobs for a typical state? Estimates vary considerably, but most scholarly research estimates that for each 1% increase in taxes there will be a 0.1% to 0.3% long-term job loss. For Measures 66/67 this translates into a loss of 7,000-20,000 jobs.

Second, how would the public services paid for with these tax revenues affect jobs in a typical state? This effect depends on how the funds are used. Research estimates suggest larger job effects for health services, medium for education and public safety, lower for highways, and no measurable effects for welfare spending. For Measures 66/67, the available estimates translate into a long-term gain of 9,000-17,000 jobs.

Third, the estimates above are for a typical state. But in states with taxes above average, we expect job losses from a tax increase to be higher that this; and for states with public services above average, we expect the job gains from increased public services to be lower than this.

Where does Oregon stand relative to a typical state? Oregon’s state and local taxes as a share of personal income are significantly below the national average. Oregon’s rank is 43rd based on the most recent data. Thus, because Oregon’s taxes are below average, we would expect job losses in Oregon to be lower than 7,000-20,000.

What about public services? Oregon’s teacher-student ratio places Oregon 49th out of 50 states; Oregon’s school year is the second shortest. Oregon’s university faculty salaries and benefits are significantly below the national average. So, with public services below average, we would expect job gains to be higher than 9,000-17,000.

Thus, scholarly research suggests the net change in jobs in Oregon is likely to be positive. However, there is no research on how much the effect for a typical state should be adjusted for Oregon and, indeed, the available research should be viewed as providing only “ball park” estimates. Nevertheless, the research provides no support for the claim that Oregon will lose jobs in the long run.

Indeed, even if keeping taxes low were to increase jobs in Oregon, this is not the same as increasing jobs for Oregonians. Many new hires by Oregon businesses come from other states, and in-migrants to Oregon tend to have higher levels of education than current Oregon residents. Thus, in-migrants are more likely to out-compete current Oregonians for high paying jobs. Since Oregon businesses can hire nationally but must pay taxes locally, it should not be surprising that businesses favor low taxes. This reality suggests that in addition to helping businesses create jobs, more attention should be paid to preparing Oregon’s workers to compete for those jobs that are created.

  • (Show?)

    I think this article falls short in one major way and that is specifying the nature of the tax increase that could result in long-term job losses.

    If you tax idle money sitting in someone's bank account, then you would draw it out for government services (per your second point). But we often forget that government spending and taxation does not destroy money. The outflow of money through government services would continue cycling through the economy creating more jobs. Therefore, taxing idle money would create jobs through government initiatives as well as through subsequent private initiatives.

    On the other hand, the middle class tends to have little idle cash. They spend, and when we place a heavy tax burden on the middle class, the tax money tends to cycle more slowly through the economy as it makes an extra government stopover. Oregon is not a typical state because our income tax grossly targets the middle class because tax brackets kick in at such low levels.

    Measure 66 finally addresses the need to spread out our tax brackets. More work still needs to be done.

  • Fair and Balanced (unverified)

    There's a significant difference in this kind of analysis, which is important and focused long-term, and an analysis targeted on the short-term impact of the measures on the Oregon economy in the throes of a recession.

    There should be no question that the measures will sustain greater economic activity and preserve jobs if they pass, compared to the disaster that will ensue if they fail. We need look no further than the roughly half billion in federal dollars represented by the loss of matching funds and deductibility of state taxes on federal returns. But if we do look further, we see that the majority of corporations paying increased income tax under M67 are based out of state; thus their tax contributions will come from outside Oregon. They won't be "passed along to the consumer" as the opposition claims. We should also ask whether, in the short run, people making over $250,000 a year would significantly alter their in-state spending because their taxes went up a few hundred dollars. These folks are highly likely to take any added taxes out of their savings - if they notice them at all.

    Bottom line, the relative increase in economic activity will be GOOD FOR OREGON BUSINESS. If I'm right that the benefit will be over $1 billion, that means the average business would sell an extra $10,000 for every $1 million in current sales. If the average gross margin is a modest 30%, that means it would have $3,000 more profit than otherwise. That would be plenty to cover the extra $150 in entity or minimum tax paid by over 90 percent of businesses. It would even more than enough to cover the extra income taxes of a profitable C-corporation.

    If there are rough edges to the new scheme, there will be plenty of time for the lobbyists to point them out after implementation and for the legislature to fix them. Yes, we need to take another look at the proposals of the revenue restructuring task force, reform the kicker, and move closer to an overall progressive taxation system, but that's for later. Right now, it's far more important to preserve vital state services and keep our economy moving in the short term by passing the measures.

  • Zarathustra (unverified)

    Jenson has a good point, as usual. On balance, I expect the result to be as the research would have it. Great analytical post!

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    Indeed, even if keeping taxes low were to increase jobs in Oregon, this is not the same as increasing jobs for Oregonians. Many new hires by Oregon businesses come from other states, and in-migrants to Oregon tend to have higher levels of education than current Oregon residents. Thus, in-migrants are more likely to out-compete current Oregonians for high paying jobs.

    And as soon as they move here and take jobs, they become Oregonians.

    I believe the argument about whether a "yes" or "no" vote is better for the economy is largely bogus, but this idea that it doesn't do any good to create jobs anyway because "they" will simply come here and take the jobs anyway is ludicrous.

    The more jobs we have that employ a well-educated, well-trained workforce, the more well-educated and well-trained people we will have (or keep) living here.

    I support Measures 66 & 67 because I believe the consequences of passing them is better than defeating them, not because I don't believe creating jobs is a good thing.

  • Zarathustra (unverified)

    And as soon as they move here and take jobs, they become Oregonians.

    Yeah. That's not the image when company X says they're creating new jobs. And the higher paying ones are disproportionately the out of state relocators. What about companies that move here, relocate 50 management, 5 directors, hire 300 locals and request 150 H1 visas? I can tell you they will sell that as "more than 500 new, local jobs". By pay, less than half that monetary influx is going to unemployed Oregonians. And that doesn't count how many of those 300 will be changing jobs.

  • (Show?)

    Sorry, I guess I should quit posting here. I wasn't born in Oregon.

  • LT (unverified)

    Jack, I've lived here since 1969, and my first campaign was Tom McCall's re-election.

    People who say only natives should be called Oregonians are snobs: Society of Native Oregon Born.

  • Kurt Chapman (unverified)

    Z - a company with under 1,000 employees locally would not be able to get 150 H=1 Visas. They would be hard pressed to get even 20 in this economy. Combined they couldn't get 30 H-1 and TN Visas.

  • Zarathustra (unverified)

    Well, that's good Kurt; thanks for the facts. I worked for a Beaverton outfit once with 15 employees, and they had 10, but that was back in '01.

  • Lucy (unverified)

    I recently came across your blog and have been reading along. I thought I would leave my first comment. I don't know what to say except that I have enjoyed reading. Nice blog. I will keep visiting this blog very often.


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