We Interrupt This Repetition for a Few Facts...

May 2, 2004By Jeff Thompson

In the "say it often enough and it becomes true" game that passes for public debate too often in today's politics and media, repetition is king. Evidence is ignored in favor of myths spun repeatedly. Take, for instance, the tall tales that are endlessly recycled in hopes of convincing Oregonians to cut the state tax on income from capital gains.

The story - you've heard it already and you'll hear it again - is that Oregon's income tax on capital gains harms the economy. If we cut it, the spin goes, economic growth will surely follow.

The evidence, though, looks quite different. Research by experts at the Brookings Institution found that these claims of economic growth are "false." The Congressional Budget Office found that cutting federal taxes on capital gains would produce the least bang for the buck of any form of tax cut - having only a tiny and uncertain impact on the national economy. Unless lost revenue is made up through budget cuts or offsetting tax increases, cutting the federal tax on capital gains income shrinks the economy.

State-level capital gains tax cuts are no more likely to help Oregon's economy, since the wealthy will spend or reinvest a considerable portion of their windfall outside of the state. The idea that capital gains tax cuts "pay for themselves" is listed right after "alligators in the sewer" in the urban legends file.

The next time Oregon's legislature meets, expect talk radio hosts and advocates for the wealthy to start telling the tragic, tall tale about the flood of wealthy Oregonians fleeing the state's allegedly oppressive tax code. It'll be enough to make you sleep with a nightlight on! If you bother to peek under the bed, though, what you'll see is that the vast majority of Oregonians who move are just moving to someplace else in Oregon. That the 4,300 richest families in Oregon realized nearly $3 billion in capital gains in 2000 ($684,000 per family) and didn't move out of state, sheds a little light onto how people actually respond to the tax code.

While some Oregonians with capital gains income do move to Clark County, Washington, this movement represents a tiny share - just one percent - of total capital gains income of Oregon residents. Also, most of the moves to Clark County are offset by Clark County residents moving to Oregon. Oregon was one of the fastest growing states in the country over the last decade, because so many people moved here. Our income tax on capital gains was not an impediment.

After you hear the catchy slogan about how Oregon is "punishing investors" by taxing capital gains income, remember that the top graduated rate all Oregonians pay on all types of income is nine percent. Why should income that flows primarily to the wealthy get special treatment?

Also remember that over the last thirty years, Oregon's economy has grown at almost exactly the same rate as Washington State's, despite the fact that Washington doesn't tax capital gains. And during the current anemic economic recovery, Oregon's tax revenue has been rebounding faster than our neighbor to the north. Apparently the "punishment" isn't so severe after all. The investors and entrepreneurs responsible for increasing the number of businesses in Oregon by 34,000 since 1990 don't think so, either.

With so little real reason to think it will boost Oregon's economy, why are legislators still hawking the scheme? Not too surprisingly, many of those lucky enough to have a lot of capital gains income would rather not pay taxes on it. This group also happens to have considerable access to legislators and newspaper editors.

Oregonians need to ask themselves if giving this affluent group a huge tax cut is worth further budget cuts for schools, public safety, and health care programs for the aged, disabled, children, and other disadvantaged Oregonians. Or, if we don't cut more programs, who should pay higher taxes to fill the budget gap created by giving the privileged a large tax cut?

Jeff Thompson is a policy analyst with the Oregon Center for Public Policy. He can be reached at [email protected]

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