Finding Money in Oregon's Messiest Room

June 6, 2010By Steve Robinson

It turns out that the Great Recession clobbered the economy harder than state economists had projected. As a result, Oregon’s budget has come under renewed stress, threatening schools and other vital public services.

Improving this perilous fiscal outlook — shared by nearly all states — requires federal action. But no matter what the feds do, Oregon can begin by thoroughly cleaning the messiest room in its fiscal house: the one where tax expenditures reside.

Tax expenditures are the roughly 380 deductions, credits and exemptions contained in the tax code.

Properly targeted, tax-code spending can be an effective and efficient way to accomplish policy goals. The Oregon Earned Income Tax Credit, for example, helps low-income working families make ends meet, with little government overhead.

Like direct spending programs, tax expenditures cost the state money. The difference is that instead of writing a check from Oregon’s treasury to, say, pay part of the cost of installing solar collectors or buying hybrid vehicles, the state lowers taxes for families and businesses who make those purchases.

Unlike direct spending programs, tax expenditures don't go through the regular, priority-setting budget process every two years. While public schools and programs that protect foster kids vie in the legislature for limited tax dollars each legislative session, the tax credit that subsidizes film production in Oregon avoids such competition.

And when, as now, a revenue shortfall prompts the Governor to order "across the board" cuts, tax-code spending programs escape the budget ax.

Another problem with tax expenditures is that they are not always well-targeted. For instance:

Yet another problem with tax expenditures is that projecting their cost can be difficult. The poster child of a tax expenditure run amok is the Business Energy Tax Credit; its costs have ballooned every time the legislature reviewed it over the last few years.

The mess in the tax expenditure room has not gone unnoticed. In the mid-1990s lawmakers directed the Governor to evaluate tax expenditures every two years as part of the budget process. In 2009 the legislature made sure all but a few Oregon tax credits would have expiration dates, or "sunsets," to force future legislatures to at least do a cursory review of those particular programs.

But sunsets on tax credits fix only a small part of the tax expenditure problem. Here’s what the legislature needs to do:

First, sunset all tax expenditures – not just tax credits – to ensure that the legislature periodically examines the cost and effectiveness of each one.

Second, end the preferential treatment granted tax credit-funded pots of money, such as those set aside for subsidizing Hollywood filmmakers and the arts in Oregon. Those programs ought to compete head-to-head with education, health care and public safety for scarce public funds.

Third, make tax expenditures meet the same standards for cost-effectiveness that apply to "on budget" programs. The legislature should require more and better information about tax expenditures from the recipients and the agencies that evaluate them, including who benefits, by how much and whether the tax code spending is meeting specific policy goals and performance standards.

Fourth, fix the problems identified by these evaluations. If a tax expenditure is subsidizing activity that would happen anyway, then end it or redesign it. If a tax expenditure is subsidizing behaviors of well-to-do people or corporations, then means-test it. If an economic development subsidy doesn’t have accountability provisions, such as clawbacks when performance standards are not met, then add some.

Many tax expenditures are appropriate and working just fine, and these reforms will help affirm that.

But cleaning out the tax expenditure room would undoubtedly uncover millions of dollars that would be better spent protecting schools, health and human services and public safety from deeper cuts. That’s why it must be at the top of the legislature's to-do list.

Steve Robinson is a policy analyst with the Oregon Center for Public Policy.