Helping the Top

Report
May 29, 1999

SB 537-A Provides an Upper Middle Class Tax Cut

Under current law, Oregon taxpayers can deduct up to $3,000 of federal personal income tax on their Oregon tax returns. Senate Bill 537-A would increase this limit from $3,000 to $5,000 starting in tax years beginning January 1, 2000, and would index the limit to changes in the consumer price index in subsequent years.

The Oregon Center for Public Policy asked the Washington, D.C.-based Institute on Taxation and Economic Policy (ITEP) to conduct a distributional analysis of the change using ITEP's nationally recognized microsimulation tax model. The table on page 3 summarizes ITEP's analysis of the consequences of SB 537-A.

The bulk of the tax cut goes to upper middle-income and wealthy Oregonians:

The Legislative Revenue Office (LRO) projects that the tax cut would reduce Oregon Personal Income Tax revenues by $143 million in the 1999-01 biennium. Because the tax credit does not start until the tax year beginning January 1, 2000, the revenue loss will increase substantially in future years. In the following biennium, 2001-03, LRO projects that state general fund revenues will be reduced by $223 million as a result of SB 537-A.

Senate Bill 537-A does not address the effect such a significant revenue impact would have on state services. The $143 million of revenue lost in 1999-2001 is only slightly less than the Governor's Recommended 1999-01 spending for the entire natural resources program area ($145.6 million in General Funds) and more than will be spent on Oregon Health Sciences University ($107.9 million), the District Attorneys ($9.5 million) and the Commission for the Blind ($1.3 million) combined.(1)

When the AOI tax cut is fully implemented in the 2001-03 biennium, the cost impact is even more significant. Full implementation costs exceed the Governor's Budget recommended spending in 1999-01 for the juvenile justice agency, the Oregon Youth Authority ($211 million); the state's welfare agency, the Adult and Family Services Division of the Department of Human Resources (DHR) ($219.3 million); or the Department of State Police ($166 million). Full implementation will cost almost as much as requested for the state's child protective services agency, the State Office of Services to Children and Families in DHR ($250.6 million). The tax cut's impact on providing these and other important state services should be considered by decision makers.

Effect of Increasing the Cap on Deductibility
of Federal Income Taxes to $5,000

(Oregon Residents by Income Group, 2000)

Income Group

Bracket Starts At

Average Income In Group

Tax Cut as % of Income

Average Tax Cut

Percent of Total Tax Cut

Tax Cut as % of Income Tax

Lowest 20%

$0

$8,800

0.00%

$0

0%

0.0%

Second 20%

$14,000

$19,800

0.00%

$0

0%

0.0%

Middle 20%

$26,000

$31,900

-0.06%

-$20

7%

-1.5%

Fourth 20%

$40,000

$51,600

-0.18%

-$92

33%

-3.6%

Next 15%

$65,000

$82,700

-0.19%

-$158

43%

-3.4%

Next 4%

$119,000

$169,200

-0.11%

-$182

13%

-1.7%

Top 1%

$273,000

$720,500

-0.030

-$184

3%

-0.4%

Oregon Center for Public Policy

Source: Institute on Taxation and Economic Policy Microsimulation Tax Model, May 1999.


(1) All budget cost estimates come from the Governor's Budget 1999-2001, State of Oregon. The natural resources program area includes state departments of agriculture, forestry, environmental quality, fish and wildlife, parks and recreation, and others. (back)