Oregon Economists Endorse Legislature’s Tax Measures

News Release
October 7, 2009 Download PDF

Balancing cuts and tax increases was “a prudent course of action”

Three dozen Oregon economists issued an open letter today backing the Oregon legislature’s decision to balance budget cuts with tax increases targeted at corporations and high-income Oregonians, calling it “a prudent course of action” from an economic perspective.

The economists’ analysis and endorsement of the legislature’s tax measures come as the measures seem headed to the ballot box in January, where Oregon voters will decide their fate.

Download a copy of this news release:

Oregon Economists Endorse Legislature’s Tax Measures: Balancing cuts and tax increases was “a prudent course of action” (PDF).

Related materials:

Read the letter from Oregon economists (PDF) to Oregonians on the tax measures

Read a copy of Research Report #6-09 , Referendum 301 & 302: Revenue Measures, by the Oregon Legislative Revenue Office (PDF), September 2009

Read a copy of Budget Cuts or Tax Increases at the State Level: Which is Preferable During a Recession? (PDF), by Peter Orzag and Joseph Stiglitz, November 6, 2001

The economists’ letter echoed a report released last week by the Oregon Legislative Revenue Office. In it, the legislature’s own economists concluded that state spending reductions “tend to decrease economic activity more than tax increases.”

“The report by the legislature’s economists and this open letter from dozens of Oregon economists provide a one-two punch that ought to settle the matter of what’s in Oregon’s best economic interests,” said Chuck Sheketoff, executive director of the Oregon Center for Public Policy. “They make an indisputable case for Oregonians to vote ‘yes’ on the revenue measures in January.”

Recognizing that the legislature had “no easy options” for balancing the state’s $4 billion budget shortfall, the group of economists concluded that “in a recession, it is preferable for states to enact targeted tax increases than to cut services.” That’s also the recommendation of “eminent economists, such as such as President Barack Obama’s budget director Peter Orszag and Nobel Prize winner Joseph Stiglitz,” the letter noted.

Cutting services is more damaging than targeted taxes because “the bulk of the money that the state spends on public services — more than 90 percent of which goes to education, health and human services and public safety — is spent right here in Oregon,” the economists’ letter said.

By contrast, “tax increases targeted at high-income households and corporations” don’t reduce total in-state spending as much. The economists said that’s because high-income households don’t spend all of their money, and some of the money they spend is likely to be spent outside the state.

And since “a significant fraction” of Oregon’s corporate income taxes are paid by out-of-state corporations, the tax increase on corporations keeps money in Oregon that would otherwise leave the state, according to the economists.

The legislature’s revenue economists described this phenomenon as “leakage” of money from the state economy in the absence of the tax increases.

The revenue office and the group of economists also concurred that reducing state spending would cause an even greater reduction in total economic activity because Oregon would lose federal matching funds.

Those are funds that Washington, D.C., sends to states that put up some of their own money to help pay for certain programs such as Medicaid. The federal government may provide two or more dollars for every one dollar spent by the state, depending on the particular program.

“The positive impact of federal dollars coming into Oregon’s economy as a result of the revenue measures is something the opponents refuse to acknowledge,” said Sheketoff. “The federal match is an undeniable economic boost to Oregon’s economy and an important reason why voters should join these economists and say ‘yes’ to the tax measures in January.”