Oregon voters in January approved significant personal and corporate income tax hikes. The predicted increases in revenue have failed to materialize, however, and now the state is bracing for extensive budget cuts.
Oregon’s June revenue forecast predicted tax collections through July 2011 will come in $577 million shy of the budgeted amount. Nearly all of the decrease is due to lower-than-expected personal income tax collections.
In response, Gov. Ted Kulongoski (D) has ordered 9 percent across-the-board cuts for state agencies. Oregon law does not give the governor the authority to cut funding selectively.
Kulongoski is considering whether to phase in the proposed cuts or implement them all at once. Either way, Oregon’s budget must be balanced by June 30, 2011.
The tax hikes were widely touted by proponents as the end of Oregon’s deficit problems and a preferable alternative to program cuts.
Big Personal, Corporate Tax Hikes
Measure 66 increased the personal income tax rate for single filers earning more than $125,000 and joint filers earning more than $250,000, from 9 percent to 10.8 percent. The rate for single filers earning more than $250,000 and joint filers earning more than $500,000 jumped to 11 percent.
Measure 67 raised the minimum corporate excise tax from $10 to a graduated scale according to overall sales volume, resulting in a minimum tax increase of 1400 percent and in some cases much higher.
The measure also raised the marginal income tax rates and changed the income thresholds for corporations.
Some observers are not surprised the hoped-for relief to Oregon’s budget has not materialized.
Relying on Fewer Taxpayers
Scott Pattison, executive director of the National Association of State Budget Officers, told the Oregon Statesman-Journal states relying on income taxes are increasingly dependent on a smaller group of high-earner taxpayers.
“A huge percentage of state income-tax revenues comes from those people,” he said. “Some argue that’s good because it’s progressive, based on the ability to pay. But we’re reliant on them, and it creates volatility.”
Oregon’s state government economists also forecast the higher marginal income tax rates embodied in Measure 66 will increase the volatility of the state’s personal income tax revenue stream.
Higher Volatility Forecast
“In past years, the relatively small number of taxpayers impacted by the measure—two to three percent—regularly accounted for two-thirds of the change in tax revenues from one year to the next. By increasing the dependence on this small group, relatively small changes in the economy can yield large changes in income tax collections. Essentially, the state can expect to experience greater positive revenue changes in good years and greater losses in revenue in bad years relative to the past. It is likely the most recent months are examples of the latter,” Oregon’s Office of Economic Analysis forecasters wrote.
Standard & Poor’s recently acknowledged the volatility of personal and corporate income tax collections in its bond ratings for Oregon’s neighbor Washington. That state’s AA+ ratings reflect, among other things, a “sales-tax-focused revenue structure that is subject to economic cycles but not, we believe, to the degree experienced by states that rely primarily on personal and corporate income taxes.”
That might come as news to many backers of a proposed graduated income tax on high-earners in Washington state. Contrary to the findings of Pattison, the state economists, and Standard & Poor’s, initiative sponsors are blaming Washington’s budget deficit problems on a revenue structure that is overly reliant on sales tax collections, arguing an income tax would solve the state’s budget problems for the long term.
Redistribution Over Wealth Creation
Bob Williams, director of StateBudgetSolutions.org, says most tax hike advocates care less about revenue stability and more about who pays.
“They are far more interested in redistributing wealth than in maintaining the conditions for its creation. If wealth creation were a priority, we would see tax cuts, not tax hikes,” he said.
Williams says his research shows most state budget problems are attributable to excessive spending. “Until states decide to address the spending side of the equation, we won’t see a solution. Everybody’s out of money,” he said.
Amber Gunn ([email protected]) is director of the Economic Policy Center of the Evergreen Freedom Foundation in Olympia, Washington.