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The Stability Drug

Commentary
November 1, 2002By Chuck Sheketoff

Beware the medicine man selling the stability drug to cure Oregon’s fiscal woes. Today’s fiscal ill-health stems from a legislature and electorate who rarely saw a tax cut they didn’t like and refused to save for the economic rainy days.

The recession that began in 2001 has resulted in new calls for Oregon to revamp its tax system to add more “stability.” Most of Oregon’s tax revenues come from the personal income tax, supplemented in small part by the Lottery and corporate income taxes. When the economy turns sour so does the state’s primary revenue stream. The state’s personal and corporate income tax revenues for this biennium are $1.7 billion below what the 2001 Legislature thought they would collect and planned to spend.

The demand for stability is a straw man for a change in our tax system that may not lead to improvement or better-supported public services, and is a thinly veiled attempt to duck the real culprit in Oregon’s revenue misfortune. Some of the loudest demands for stability are coming from the same people who sold the legislature and the voters the so-called “Education Stability Fund” that will barely fund education and will add little stability during the next downturn. The Education Stability Fund gives stability a bad name.

Years ago the Legislative Assembly adopted seven “guiding principles” for Oregon’s tax system: (1) ability to pay; (2) fairness; (3) efficiency; (4) even distribution; (5) equitable; (6) adequacy; and, (7) flexibility.

Stability was not part of the mix, and that’s not surprising. Oregon’s revenue stream, like all states’, is tied to the business cycle, and neither Republican nor Democratic legislatures can repeal the business cycle. The economy is not stable and never will be. During better-than-expected times, Oregon sends unanticipated tax revenues primarily to our wealthiest residents. Adding insult to this fiscal injury, the Legislature is loath to save for rainy days.

The state’s kicker law and reluctance to save during good times made Oregon uniquely unprepared for the decline in state revenues. Under the 23-year-old kicker law, if the amount of Oregon income taxes collected exceeds the state economists' projections (from a forecast two years prior) by just two percent or more, the entire excess is returned to the taxpayer unless the Legislature chooses to save or otherwise spend the funds. No other state has such a spendthrift provision.

During the unprecedented economic growth of the 1990s, under the kicker law Oregon chose to let the kicker kick on four out of the five biennia, sending $1.4 billion back to Oregon taxpayers instead of saving it for a rainy day fund. About two-thirds of that refund went to the wealthiest taxpayers.

Had Oregon instead chosen to bank the unanticipated revenues from the 1990s boom, Oregon would have begun the current biennium with $1.7 billion in a rainy day fund (assuming a 5% rate of return). Thus, as state revenues plummeted with the economy, the state would have been able to draw on the rainy day fund to continue programs and services that Oregonians cherish, such as education, health care, supports for small business, care for the elderly, and others.

If Oregon had saved all the unanticipated revenues since first distributing them in 1985, our rainy day fund would have $2.8 billion today. The rainy day fund would have provided Oregonians with stability, without resorting to new or increased taxes. Instead, Oregon squandered tax dollars on those Oregonians reaping the lion’s share of the prosperity of the 1990s.

While Oregon’s tax system has tremendous room for improvement, Oregon can address stability without raising taxes by converting the kicker refund into a source for future rainy days.

The next time someone tries to sell you new tax in the name of stability, tell them you have a better prescription for making Oregon’s system stable and able to weather future rainy days.

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Charles Sheketoff is executive director of the Oregon Center for Public Policy. He can be reached at csheketoff(at)ocpp.org.