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On Whose Backs?

by Jeff Thompson

Tax Distribution, Income Inequality, and Plans for Raising Revenue

Executive Summary

Oregon’s current $3.2 billion revenue shortfall and projected revenue shortfalls over the next few budget periods have prompted discussion of major tax reform. As policy makers address tax reform, they will need to consider who will bear the costs of changes to the tax structure.

This study reviews the distribution of Oregon’s current state and local tax system, shifts in the tax burden across the last decade, and trends in income inequality. Low-income households face the highest state and local tax burden, experienced the largest tax increases over the last decade while the wealthy saw their taxes decline, and benefited least from the economic prosperity of the 1990s as income inequality grew.

The study shows:

• The personal income tax is progressive, taking a larger share of the income of affluent households than it takes from those with low incomes. Oregon’s property and excise taxes are both regressive, taking a larger share of income from low-income households;

• The combined distribution of Oregon’s tax system is regressive, taking 9.4 percent of the income from low-income households and 6.1 percent from the richest one percent of households, including the impact of the federal “offset” for state taxes;

• Over the last decade, the state and local tax burden rose for low-income households, primarily because of increased excise taxes, and fell for affluent households, because of property tax cuts and a more valuable federal offset, and;

• Income inequality increased dramatically over the last two decades. The average adjusted gross income of the richest one percent of households increased 171 percent between 1979 and 2000, while the typical household’s income fell by nearly one percent.

One theme present in several tax reform proposals is to scale back the income tax and adopt new consumption taxes. These proposals would raise the tax burden of low-income households while decreasing it for affluent households, further skewing the distribution of taxes and exacerbating the problems associated with growing income inequality.

The “ability to pay” principle suggests that tax reform efforts designed to raise more revenue should be targeted to the affluent households who today enjoy the lowest state and local tax burden and who benefited most from the tax cuts and economic prosperity of the 1990s.