It’s Tax Day. Have you filed your tax returns? Good if you have; hurry if you haven’t!
Either way, take a moment to reflect on our tax system. Taxes are essential for our communities to thrive. They pay for schools, healthcare for seniors, and many other services that we alone cannot shoulder. Unfortunately, right now our tax system falls short of addressing the needs and aspirations of all Oregonians.
Here are six things to keep in mind about Oregon’s tax system.
1. The personal income tax is the main way our state funds the things that matter to Oregonians
The personal income tax — the taxes we pay out of our earnings — brings in more than four in five dollars that fund the “state budget,” the General Fund & Lottery Funds Budget. About 93 percent of the state budget goes to just three things: education, health and human services, and public safety.
2. Oregon’s personal income tax is mildly progressive; the entire tax system is not
From Jesus to Adam Smith, there is wide agreement that a fair tax system is one based on the ability to pay, asking for a bigger share of a rich person’s income than a poor person’s. That’s called a progressive tax system.
Oregon’s personal income tax is progressive, but mildly so. Marginal tax rate rates start at 5 percent and quickly rise to 7 percent and 9 percent as a taxpayer’s income goes up. Tax rates top out at 9.9 percent. The thing to note is that it doesn’t take much income to get to the 9 percent tax bracket. For couples filing taxes together today, the 9 percent marginal tax rate kicks in at $17,000 of taxable income (what you’re left with after all tax subtractions and deductions, but before tax credits). That 9 percent rate stays in place until $250,000 of taxable income. This means a low-income family pays the same tax rate on its last dollar of income as an upper middle-class family.
When you consider not just income taxes, but all the taxes collected by state and local governments, the tax structure is no longer progressive. While the personal income tax is based on a taxpayer’s ability to pay, Oregonians pay other taxes not connected to how much someone can afford to pay. They include property taxes and excise taxes on things like gasoline, alcohol, and tobacco. When you add up all state and local taxes, Oregon’s tax structure is actually regressive – meaning low-income Oregonians pay a higher share of their income in taxes than the richest Oregonians.
3. Some rich business owners are paying a lower tax rate than their employees
In 2013, the Oregon legislature threw tax fairness out the window by establishing lower tax rates for some owners of “pass-through” businesses, such as S-corporations and partnerships. These pass-through businesses don’t pay corporate income taxes. Instead, the owners pay income taxes on the profits of the business. As a result of the legislature’s decision, some rich business owners — including many rich lawyers, doctors, and accountants — are paying a lower tax rate than their employees.
4. Corporations’ share of all income taxes has shrunk over the last four decades
In the mid-1970s, corporations contributed almost 19 percent of all income taxes collected by the state of Oregon. In the last budget period, corporations paid less than 7 percent, forcing working families and individual Oregonians to pick up the slack. Today, the Oregon Lottery — in effect a tax paid mainly by the poor and people with gambling addictions — brings in more revenue to state coffers than the corporate income tax.
5. When it comes to raising taxes, the minority rules
If you want to cut taxes in Oregon, a simple majority of the Oregon legislature suffices. If you want to create a new tax giveaway for the well-off or a new tax subsidy for corporations, again, a simple majority is enough.
But if you want to raise tax rates on the rich and big corporations to fund Oregon’s schools, then you need three-fifths of each chamber of the legislature to agree. In other words, a minority of lawmakers can block the will of the majority.
6. How the new federal tax law impacts Oregon is still unclear
At the end of last year, Congress crammed through a 1,000-plus page tax bill, ushering in massive changes to the nation’s tax system. This “complex, hastily drafted legislation,” explains the Center on Budget and Policy Priorities, “will likely trigger a surge in tax gaming that could pose a risk to the integrity of the U.S. tax system, as wealthy taxpayers and corporations exploit newly created loopholes that tax experts have already identified and uncover other loopholes that the hasty drafting unwittingly created.”
This poses a risk for Oregon’s tax system as well, because Oregon follows the federal definition of “taxable income.” Thus, changes to federal tax law become part of Oregon’s tax code, unless the legislature rejects those changes. In the short legislative session earlier this year, Oregon lawmakers severed ties with some portions of the federal law, but not all of them. The full extent of how the federal tax law will impact Oregon remains unclear.