Will the legislature let the corporate-tax-break-dog bite?

Chuck Sheketoff

Those looking for an emergency to justify this month’s “special session” by the Oregon Legislative Assembly need search no more. The economic stimulus package President Bush will sign Wednesday threatens to slash over $100 million in Oregon tax revenue and sink the state into red ink, unless state lawmakers act to neutralize the impact of the federal legislation

Although state economists issued a forecast on Friday predicting that Oregon will squeeze through the current budget cycle with a meager $29 million to spare, that forecast does not account for the impact of the economic stimulus package on state revenue.

Among the elements of the economic stimulus package that Congress sent to the President is a tax break that allows businesses to depreciate more quickly purchases of machinery and equipment.

It’s an inefficient business tax cut that will wreak havoc on Oregon’s budget.

A number of economists have noted that the inclusion of the bonus depreciation provision in the economic stimulus package will be largely ineffectual.

According to Mark Zandi, chief economist of Moody’s Economy.com, bonus depreciation will generate only 27 cents of increased economic activity per dollar of cost. That compares to $1.26 for the tax rebates at the center of the stimulus package and $1.73 for a temporary increase in food stamp benefits, a stimulus measure that did not make it into the final legislation.

Big business, Congress and the President sold the nation a dog that won’t hunt. At the very least state lawmakers should make sure it doesn’t bite us here in Oregon.

The bogus bonus depreciation provision in the stimulus package will reduce Oregon’s tax revenue by approximately $100 million, according to an analysis by the Washington, D.C.-based Center on Budget and Policy Priorities (PDF).

We’re facing a real economic emergency here. The depreciation tax break will blow the slim revenue cushion that we have and force cuts to public services that Oregonians count on. The legislature needs to take the necessary step to protect the state's fiscal condition.

What’s the step? They need to “decouple” or “disconnect” from the bonus depreciation tax break scheme. Oregon is among the approximately two dozen states that automatically follow the federal definition of taxable income. For those states, congressional changes to the federal definition of taxable income automatically impact the states’ revenue collection unless the states choose to decouple.

Some of the cost of the business tax break could be offset by another aspect of the stimulus package, but that prospect is unlikely given past practices of the Oregon legislature. Most Oregonians who itemize will pay more in state taxes as a result of the rebate provision in the stimulus package, bringing about $50 million in increased tax revenue to Oregon’s coffers.

While this would halve the damage caused by the business tax cut scheme, the legislature likely will choose to forego the extra revenue. The legislature gave up about $17 million the last time Congress passed a special rebate. This time my odds are on the bet that they will give a tax cut to the itemizers and forego the $50 million.

Addressing the fiscal emergency caused by bonus depreciation is the ultimate test of whether this session is truly special and whether annual sessions can work. And, most importantly, decoupling from the business tax break scheme is the fiscally responsible thing to do.

Find your legislator and tell him/her to protect Oregon by decoupling from the bogus bonus depreciation business tax cut.

  • BCM (unverified)
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    And Chuck's relentless drive for a Scandinavian-like tax structure continues...

  • verasoie (unverified)
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    Looks like a legit argument to me, $.27 return on a $1.00 investment is ridiculous?

    And since when is keeping our state budget in the black not a worthy goal, BCM, even from a nominally "conservative" perspective?

    Remember, the whole point of tax cuts is that they pay for themselves, which this one evidently does not.

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    BCM, if the Oregon Legislature wants to make a decision to cut taxes, fine. But they shouldn't defer that decision to the White House and the Congress. Let's uncouple our state tax system from the federal tax system.

  • Kurt Chapman (unverified)
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    I agree w/Kari. Now is the time for a meaningful consumption tax that exempts food and medicine. Replace or greatly reduce the state income tax as an inefficient means for steady state revenue.

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    Kurt, that's not what Kari said. And this post has nothing to do with changing to a sales tax as you propose. Please stay on topic.

  • Larry McD (unverified)
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    And we all know those Scandinavian countries are cesspools of failure in commerce, environment, energy, health care, education, and quality of life, not to mention their billions upon billions of dollars of debt to foreign nations.

    It is sooooooo much better to borrow and spend and spend and spend than to tax and spend and pay as you go!

    The Fed/State tax link is simply lazy legislating.

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    Well, the Fed/State tax link also should reduce tax preparation time, a small benefit compared to the cost.

    Thanks for digging in on the important tax wonkiness, Chuck! $50 million is a lot of money as the legislature is scaling back due to lower revenue forecasts. Do you know if it was included in last Friday's revenue projection?

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    Of course, Chuck's argument assumes the stimulus package won't really work and that there won't be increased investment creating a higher level of employment thereby increasing tax receipts (or at least minimizing the loss of tax receipts if we, in fact, do have a recession).

    Chuck is the master of static tax revenue forecasts. In his world, tax policy has no effect on the economy and every tax increase results in a dollar-for-dollar increase in total tax revenue, while every tax cut results in a dollar-for-dollar reduction in total tax revenue.

    I don't know a single serious economist who believes this, but Chuck keeps touting his message to a sympathetic audience.

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    According to Congress.org & MegaVote, both Sen Wyden and Smith voted Yea for HR 5140, the "Recovery Rebates and Economic Stimulus for the American People Act of 2008". I have already emailed Sen Wyden asking what can be done to help Oregon avoid a tax revenue shortfall of $100 Million due to the effects of HR 5140. Who in the OR Leg should be contacted to address this issue (committee members, etc?)

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    Posted by: BCM | Feb 12, 2008 12:42:59 AM And Chuck's relentless drive for a Scandinavian-like tax structure continues...

    Yea Chuck! Go, go! If only ...

    But of course this has nothing to do with anything like that.

    Interesting comment, Jack. Do you support adopting the rosiest possible revenue projections in order to limit the size of kickers?

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    Jack Roberts apparently didn't read yesterday's Wall Street Journal article noting that a host of economists don't think it will work. Oregon does use the Oregon Tax Incidence Model to guess at dynamic impacts (I was on the technical advisory committee that created the model Jack after pushing for a tax incidence model for years. Where were you?) But OTIM is merely a hypothetical guess and no one, no legislator, no lobbyist, no politial hack like Jack will put their job on the line to show the dynamic impacts will actually occur.

    I could go on...but I will end with noting that it is rewarding decisions already made (effecitive date for purchases is post 12/31/2007), so it hardly can be called a stimulus measure.

  • Miles (unverified)
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    I don't know a single serious economist who believes [in static tax forecasting].

    True, Jack, economists believe tax policy impacts the economy. But I don't know a single serious economist who would use a dynamic model to project government revenues. That's like planning your annual budget based on house appreciation of 10%. Could happen, probably won't.

    The economy is too complex to model. It's folly to assume you can do so simply to hide the potential impact of a tax cut.

  • Miles (unverified)
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    As for decoupling, doesn't that also apply when federal taxes go up? Given that we may be on the verge of a Democratic administration, I would bet taxes will go up rather than down over the next 5 years. Given how difficult it is to raise taxes in Oregon, I would prefer those increases automatically flow through rather than asking our weak legislature to do it.

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    Chuck can correct me if I'm wrong... but Miles, it's not about the tax rate (which may go up or down), but rather about the deductions and credits which influence your taxable income.

    So, if you think Congress is on the verge of wiping out a whole bunch of tax deductions and credits, by all means, hold your breath. But I won't be holding mine.

  • BCM (unverified)
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    Posted by: Larry McD | Feb 12, 2008 7:45:54 AM And we all know those Scandinavian countries are cesspools of failure in commerce, environment, energy, health care, education, and quality of life, not to mention their billions upon billions of dollars of debt to foreign nations.

    Posted by: Chris Lowe | Feb 12, 2008 10:13:50 AM

    Posted by: BCM | Feb 12, 2008 12:42:59 AM
    
    And Chuck's relentless drive for a Scandinavian-like tax structure continues...
    

    Yea Chuck! Go, go! If only ...

    Good to see Blue Oregon's socialist colors are flying for all to see. You're just ostracizing yourself from relevance with comments like those. I'm sure the average Oregon's voter would love to have a little piece of Scandinavia right here in the Pacific Northwest...

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    I could go on...but I will end with noting that it is rewarding decisions already made (effecitive date for purchases is post 12/31/2007), so it hardly can be called a stimulus measure.

    Okay, and it's now February 12th, so after 43 days you're declaring that this can "hardly be called a stimulus measure" because it is "rewarding decisions already made"?

    As you know, it is customary to pick an early start date for these kinds of incentives to as not to induce people to withhold making investment decisions to see if an incentive will be available in the future, which would be counter productive.

    If this stimulus package works, the revenue benefits over the balance of the year will far outweigh any additional cost due to making this provision effective as of the first of the year. And Oregon's revenue picture will be far better off, not worse off.

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    BCM, I don't speak for BlueOregon, but only for myself. I'm pretty well to the left of the center of gravity here as any fair reading of the range of posts will show. I try to be both open about it and non-doctrinaire.

    In a Republican universe where Freeper types will accuse George W. Bush or John McCain of being socialists when it suits them, it is clear that the accusation is meaningless as to content and is only a scare smear.

    That is also illustrated by your original ridiculous comment, as Chuck's argument has absolutely no relationship to anything like Swedish or other Scandinavian social democracy or their tax and social wage structures.

    <h2>Rather it's about protecting Oregon from another round of grossly insufficient revenues that harm key government functions and last-ditch services for people in real need.</h2>

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