Oregon’s Tax System Keeps State Afloat While Many States Drown in Red Ink

News Release
December 18, 2007 Download PDF

While nearly half the states in the country will face budget shortfalls next year or the year after, Oregon is projected to collect just enough revenue to stay above water, according to analysts at the Oregon Center for Public Policy.

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See the Center on Budget and Policy Priorities report: 13 States Face Total Budget Shortfall of at Least $23 Billion in 2009; 11 Others Expect Budget Problems

Oregon escaped mention in a report released today identifying 24 states confronting budget problems. Of that group, 13 face a combined budget shortfall of at least $23 billion for fiscal year 2009. The report, by the Washington, D.C.-based Center on Budget and Policy Priorities, is based on a survey of all 50 states and the District of Columbia.

Just last month, Oregon state economists predicted that general fund revenue will come in $116 million above the amount anticipated for the 2007-09 budget period. The additional dollars are slight, in the context of the state’s $13 billion expected general fund revenue.

“Oregon’s tax structure is far from perfect,” noted OCPP analyst Michael Leachman, “but it’s performing better than that of many states. And state economists are doing a good job forecasting our economic performance.”

The revenue shortfalls plaguing other states stem in part from the bursting of the housing bubble, which has dampened revenue from sales taxes on the purchase of furniture, construction supplies, and other home-related products, according to the CBPP report.

But the slowdown in the national economy is not the sole cause of many states’ budgetary woes. Some states enacted tax cuts during flush times, the CBPP report noted, and they are now proving unaffordable.

Some states are also hurting because “structural flaws” in their tax systems prevent state revenues from growing in tandem with the economy and the cost of providing public services.

One such structural flaw is outdated sales taxes, which typically fail to tax services, according to OCPP’s Leachman. He explained that as services have gained prominence in state economies, sales taxes have become outmoded and maintaining adequate revenue has proven to be a chronic problem.

Although Oregon is not on the list of states facing budget shortfalls — which may grow longer because not all states had completed their forecasts at the time of the survey — the state’s tax structure still contains significant weaknesses in need of reform, according to Leachman.

He cited five major flaws with Oregon’s tax system: a reserve fund that is too small to weather a downturn and unable to grow by capturing unanticipated revenues; a weak corporate income tax that allows too many profits to go untaxed; property tax caps that pressure the state budget and restrain local governments; a supermajority requirement that hampers legislative enactment of new revenue measures; and a tax system that exacerbates income inequality.

“Oregonians should be happy we have a revenue system that is performing relatively well,” said Leachman, “but we should also fix the major flaws in our system.”

The Oregon Center for Public Policy is a non-partisan research institute that does in-depth research and analysis on budget, tax, and economic issues. The Center’s goal is to improve decision making and generate more opportunities for all Oregonians.