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SB 567: A Kicker on Steriods in the Making

Blog Post
June 30, 2015By Chuck Sheketoff

In the waning hours of the 2015 legislative session, lawmakers are considering a bill that could put Oregon’s “kicker” law on steroids.

If Oregon lawmakers can’t bring themselves to get rid of the foolhardy kicker, they should at least not make matters worse with SB 567.

SB 567 would take some tax revenue from capital gains income — income derived from the profitable sale of stocks, bonds, and real estate — mislabel it "excess" and set it aside in the Oregon Education Stability Fund.

Specifically, under SB 567, state officials would estimate the annual average tax revenue associated with capital gains income that came in during the last two years. Then they would compare that figure to the annual average of the prior three-year period. (For example, if the bill were law right now, they would take the average tax revenue from capital gains income from 2014 and 2013 and compare it to the average from 2012, 2011 and 2010.) If the average of more recent period is higher, then state officials would (wrongly) declare the difference “excess” revenue. Then they would double the difference and send it to the Education Stability Fund.

Those are not "excess" funds. To get "excess" funds you merely look at was projected to come in and compare that with what actually came in. When the actual exceeds the estimated you have unanticipated revenues.

The bill’s proponents lament the fact that capital gains income is the most volatile source of income, but volatility, in and of itself, is not bad. The problem with volatility is that when the Oregon economy is firing on all cylinders and a lot more revenue comes in than anticipated — thanks in large part to tax revenue from soaring capital gains income— Oregon can’t put away the unanticipated money for the day when volatility goes the other way and revenue collections collapse. And the reason why Oregon can’t save the unanticipated revenue is because of the kicker.

SB 567 will do nothing to stop the kicker from kicking. The legislature has bent over backwards to make sure SB 567 has no impact on the kicker, including asking for two opinions from its attorneys to back up their dirty work. The legislature’s attorneys are not always proved right in the courts, but for the time being they are backing up proponents’ claim that the kicker will not be impacted (PDF) by SB 567.

So how could SB 567 make the kicker worse? Right now the kicker is on course to take away almost $500 million dollars from schools and other key services in next budget cycle. An analysis by the Legislative Revenue Office (PDF) shows that if SB 567 were the law today, it would take away nearly $500 million more. In effect, it would about double the negative impact of the kicker.

Or consider what would have happened in 2007, just as the Great Recession was beginning. That year, the kicker frittered away about $1.1 billion in this automatic tax cut as state tax collections were about to plummet due to the recession. If SB 567 had been the law then, another $686 million of revenue would have been removed from the resources readily available to fund our schools and key services.

It is true that, in theory, lawmakers could keep the capital gains-generated revenue from going into the Education Stability Fund with a simple majority vote. That would be a politically charged vote, however.

Once the money is in the stability fund, getting it out is not so easy. Certain economic conditions must be met or the Governor must declare an emergency. Even then, three-fifths of the legislature must approve tapping into the fund to prevent cuts to education and health care.

If lawmakers are concerned about saving money for the next economic downturn (they should be), they should eliminate the kicker. If they are concerned about volatility, they should eliminate the kicker and put unanticipated revenues into the Rainy Day Fund.

SB 567 doesn’t solve our fiscal challenges or reduce volatility. It makes matters worse.


This post was originally published on www.blueoregon.com on June 30, 2015. The original post can be found at http://www.blueoregon.com/2015/06/sb-567-kicker-steroids-bad-fiscal-policy/.