As Oregonians wait to learn later this week of the extent of the state’s revenue shortfall, a report released today said that states can do much to strengthen their cash flow by curbing itemized tax deductions that mostly benefit wealthier households.

Oregon could have raised an estimated $218 million this year alone without affecting middle- and low-income families, according to the Washington, D.C.-based Institute on Taxation and Economic Policy (ITEP).

“Oregon’s revenue shortfall is evidence that we urgently need to control the spending that takes place through the tax code, and itemized deductions are a large part of tax code spending,” said Steve Robinson, policy analyst with the Oregon Center for Public Policy.

Itemized deductions on tax returns amount to government subsidies for certain personal expenses of taxpayers, such as mortgage interest payments, charitable contributions and extraordinary medical expenses.

“Like any direct state spending program, spending through the tax code seeks to achieve a public policy goal and costs the state money,” Robinson explained. “The difference is that instead of writing a check from Oregon’s treasury to pay for, say, affordable housing, the state lowers taxes for families who make mortgage payments.”

But because the spending takes place through the tax code, rather than through the regular appropriations process in the legislature, the cost of itemized deductions often goes unnoticed, said Robinson.

Another problem with itemized deductions is that they “disproportionately benefit the well-off, those who don’t need taxpayer subsidies,” said Robinson. The ITEP report and Robinson cited the example of the home mortgage interest deduction. If a wealthy and a low-income taxpayer each have the same home mortgage interest deduction, the wealthy individual gets a bigger subsidy because he is in a higher tax bracket.

“No legislator would vote for a direct spending program that more heavily subsidizes the wealthy, but that’s just what tax code spending with itemized deductions does,” said Robinson.

Itemized deductions help explain why Oregon’s tax system is “upside-down,” Robinson said, with the poorest Oregonians paying the biggest share of their income in state and local taxes while the wealthiest pay the smallest share.

Some states have begun to pare back itemized deductions. They include Rhode Island, which earlier this year repealed all itemized deductions. To avoid impacting middle-income families, Rhode Island also raised the standard deduction to $7,500 for individual taxpayers or $15,000 for married couples.

Rhode Island’s approach would benefit Oregon, said Robinson. For example, according to ITEP, by eliminating itemized deductions and increasing the standard deduction to $4,300 for individuals and $8,500 for joint filers, Oregon could have raised about $218 million in revenue in 2010 if it had chosen to do so this year.

Such a proposal also would have cut taxes for 49 percent of Oregonians, according to the ITEP analysis.

The ITEP report also outlined four other options for raising revenue by limiting itemized deductions.

“Reining in itemized deductions would raise badly needed revenue and improve the fairness of our tax system,” said Robinson. “It must be on the table and part of the discussion about how Oregon moves forward to solve our revenue shortfall with a revenue solution.”

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.