If you were designing a tax system from scratch, who would you tax at a higher rate: a low-income family struggling to pay the rent and put food on the table, or a rich family making way more money than they spend?
For moral and practical reasons, it’s long been recognized that a fair tax system is one that asks proportionately more of the rich than the poor — a progressive system.
Sadly, Oregon fails this basic test of tax fairness and common sense. It’s time to set things right.
A recent report makes plain the fundamental unfairness in Oregon’s tax structure. The Washington, D.C.-based Institute on Taxation and Economic Policy examined the progressivity of state taxes across the country. For each state, it added up all state and local taxes: personal and corporate income taxes, sales taxes, property taxes, excise taxes such as gasoline and cigarette taxes, and more. It then calculated the effective tax rate — the share of pre-tax income paid in taxes — for different income groups.
The report found that, on average, taxes in Oregon take up about 12 percent of the income of the lowest-earning Oregonians, compared to 9.7 percent of the income of those in the middle, and 10.4 percent of the income of the richest 1 percent. Oregon’s “overall system tilts regressive,” the report pointed out.
Oregon is far from having the worst tax structure in the country. That badge of shame belongs to Florida. Indeed, Oregon compares favorably to most other states, having the 10th least regressive tax system.
Nevertheless, we can’t escape the fact that Oregon’s tax system weighs most heavily on families living paycheck to paycheck. It’s an upside-down tax system that fails the basic test of fairness and worsens the economic struggles of many families in our state.
It’s long overdue for Oregon to right this wrong. To do so, the Oregon legislature needs to address taxes on both ends of the income ladder. It needs to cut taxes on the poor and raise taxes on the rich.
There is a tried and true way to target a tax cut for low-paid families: boosting the Earned Income Tax Credit (EITC). The EITC is a refundable tax credit for families getting by on low wages. This tax credit, which has long enjoyed bipartisan support, exists both at the state and federal level.
While Oregon already has in place an EITC, it’s small credit, set at just 9 percent of the federal EITC (or 12 percent for families with young children). States with actually progressive tax systems tend to have much bigger EITCs. Vermont and New Jersey, for instance, have EITCs that are 38 and 40 percent of the federal credit, respectively.
A big boost to the Oregon EITC would help correct Oregon’s flawed tax structure by lowering the taxes of those who earn the least. More importantly, it would help struggling families make ends meet.
On the other end of the income ladder, Oregon should raise taxes on the very rich, who currently pay a lower effective tax rate than the poor and not much more than those in the middle. One way to do so is to establish a Millionaire’s Tax — a new tax bracket for those who make more than $1 million in a year.
Taxing the very rich not only helps flip the tax system right-side up, but also responds to the vast inequality that has built up over the past four-plus decades. Extreme economic inequality is undermining our nation in countless ways, not least in harming our health and shortening our lives. Today’s vast inequality is in part the result of decades of tax cuts favoring the rich, so taxing the rich is essential to restore balance.
Finally, a new Millionaire’s Tax would raise a significant amount of revenue that would help pay for better schools, more affordable child care, more housing, or other essential needs. This, in turn, would improve the overall quality of life in our state.
In sum, the bad news is that Oregon’s tax system remains fundamentally unfair, asking more of the poor than of the rich. The good news is we know how to fix it.