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From Governing’s Supplemental information | Introduction
Life can be fun without a sales tax — or at least it can be a lot simpler. You can buy a cup of coffee priced at 99 cents and hand the clerk 99 cents. And, of course, less-affluent people who spend a higher percentage of their income on goods are benefited. But some of the side effects are not as pleasant. With no sales tax, Oregon is more dependent on income tax receipts than any other state in the country. It gets about three-quarters of its total tax revenue from that one source, double the national average.
Oregonians chose to put even more reliance on the income tax when they passed Measure 5 in 1990. This ballot initiative shifted much of the responsibility for funding schools away from the local property tax and left the income tax as the major source. Through the 1980s, the state had paid for about one-third of the cost of local schools; after Measure 5, its share doubled. That significant change was followed seven years later by Measure 50, which locked in assessed property values at their 1995 levels, capping the increase in taxable value at 3 percent a year (except for new construction) and forbidding local governments from raising their own property tax rates without voter approval. Both of these citizen-mandated measures were greeted with predictions of disaster by many economists. But there are few fiscal problems a booming economy can’t mask. With the rapid expansion of high-technology firms in Oregon, new building muted the impact of the cap on property tax rates. The state cleverly sought, and won, additional millions of dollars in federal aid. It put more emphasis on fees. Revenue from the state lottery and video poker added to the pot. Oregon voters had their dream. Their relative tax burden dropped from 13th in the country in 1990 to 37th a decade later. And they achieved it without a sales tax. They also didn’t do much to prepare for a reversal of fortune. By the end of the 1990s, Oregon was one of only five states without a rainy day fund, and despite the urging of budget analysts, legislators were loath to leave more than a skimpy balance in the general fund at year’s end. In fact, most years they couldn’t set aside money, even if they wanted to. According to state law, if revenues come in more than 2 percent over estimates, all excess money is returned to citizens in the following biennium. As recently as the fall of 2001, after September 11 and with the economy tanking, Oregon officials were required to send $253.6 million in revenue back to the citizens. One reason the state’s treasury thrived was the income tax. Since income taxes are immediately vulnerable to changes in the economy, Oregon’s revenue system is like a feather in a heavy wind. Whatever the economy does, its tax system does too, only more so. Through the late 1990s, graduated income tax schedules and a huge influx of capital gains resulted in revenues that frequently exceeded estimates by more than 10 percent. Revenue from corporate taxes grew by 50 percent. But the income tax coin has another side. Oregon’s tech-dependent economy was hit harder than most in 2001, and its current unemployment rate is one of the highest in the nation. Amid the high-tech bust, residents dropped to lower tax brackets and capital gains disappeared. The state faced a 17.4 percent decline in tax collections in 2002. Confronting an $830 million hole in its two-year budget, the legislature endured five special sessions last year, each of them even more acrimonious than the one preceding it. By December, the projected gap between revenues and spending for the upcoming biennium had grown to $1.8 billion. As 2003 began, Oregon budgeters anxiously awaited a January 28 referendum in which the state’s voters would either approve or reject $315 million in temporary income tax hikes for this budget year, and another $412 million for the coming biennium. Supporters of the plan warned that its rejection would mean layoffs of state police and teachers, and closing of some prisons. They said approval would allow the state government to get through the current year without another round of significant budget cuts. Whatever one may think of Oregon’s tax system, the state does a good job of managing it. Customer service efforts are good and analysis is top notch. The state’s tax expenditure report, which keeps track of the cost of tax incentives for business, is one of the best in the nation. Although the state lags in some technological areas — it has no imaging capability, has to do a lot of manual data entry and doesn’t give businesses the ability to pay most taxes electronically — it does have an integrated information system and provides useful technological tools to income tax auditors and other staff. “Because we don’t have a sales tax,” says Elizabeth Harchenko, the revenue director, “we put a lot more resources and attention into our personal income tax.” But all the high-tech bells and whistles in the world won’t really address Oregon’s central problem. It has created a revenue structure that contracts pneumonia when the economy gets a bad cold. And no matter how many vitamins you take, everyone gets a cold every now and then. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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obody loves the sales tax, but it’s fair to say nobody despises it quite as conspicuously as the voters of Oregon. Nine sales tax initiatives have appeared on state ballots; nine have been turned down. The most recent one, in 1993, was defeated by a 78 percent majority.