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January 6th, 2010 12:00 am NIGEL JAQUISS | News Stories

Class Warfare?

You’re about to be asked whether to raise taxes. Here’s what you should know before you answer.


IMAGE: Jonathan Hill

What a way to start the new year.

We get to vote on raising taxes. Twice, actually.

Oregon voters will soon receive ballots asking them to vote on Measure 66, which would raise personal income taxes on the highest-income Oregonians, and Measure 67, which would increase corporate income taxes.

The Democratic-controlled Legislature already approved the tax hikes in 2009, but opponents then gathered enough signatures to put them on the ballot for voters to decide.

Tax policy is thorny. It’s never so simple as “taxes are good as long as someone else pays them.” In fact, if you take a close look at this state’s tax structure, you will often see a reflection of our collective psyche. Nothing speaks to the stubborn individualism of Oregon quite like our continued refusal to adopt a sales tax, for example.

To dispel some of the overheated rhetoric surrounding the tax hikes, here’s a look at how we got here and what our collective response to Measures 66 and 67 may say about Oregonians as we enter a new decade.

Oh, and WW’s editorial board also tells you at the end how we think you should vote.

What would Measure 66 do?

It would raise the state income tax rate from 9 percent to 10.8 percent on an individual’s personal income between $125,000 and $250,000, and to 11 percent on every dollar above $250,000. The measure would also eliminate the state income tax on the first $2,400 of unemployment income. The Legislative Revenue Office, which crunches numbers for lawmakers, projects fewer than 3 percent of Oregonians would pay this increased tax—that’s why some people call the measure “class warfare.”

How about Measure 67?

Measure 67 is a lot more complicated. First, corporations with no taxable income now pay a minimum $10 tax. This measure would raise the minimum to $150. It would also raise the corporate income tax rate on companies with profits to 7.9 percent, compared to the current 6.6 percent. This measure would do something completely new, as well: It would create a new tax on companies with more than $500,000 in annual sales but no taxable profits. All companies would pay the new minimum tax or the 7.9 percent tax on profits, whichever is higher.

How much money would the two measures raise?

Measure 66 would raise $472 million during the 2009-11 biennium. Measure 67 would raise $255 million. Total take for the two-year period would be $727 million.

If the tax increases pass, will they be permanent?

The rates eventually come back down, but not all the way to pre-66 and -67 levels.

I’ve been a little preoccupied with the Ducks’ Rose Bowl run. Let’s back up and go over some basics. First, where does the state’s money come from?

The “general fund budget” is the portion of total state spending over which lawmakers have discretion. (The general fund does not include federal funds that are passed through the state and “other funds” generated by fees and licenses.) According to the Legislative Revenue Office, about 90 percent of the general fund comes from personal and corporate income taxes, and another 7.5 percent comes from the Oregon Lottery. Property taxes do not fund state government. They are used to fund local public safety and other municipal and county services and pay part of the tab for K-12 education.

What does the state do with the taxes it collects?

The chart above shows that most state government dollars pay for education (for everyone from elementary-school pre-readers to Ph.D. candidates), human services (medical care to the poor and running the foster-care system) and public safety (prisons, state police and the courts). What the chart does not show is that while some of the money is spent on debt service, rent and stuff like copier paper, the vast majority is spent on salaries and benefits for public employees. And the number of employees working directly for the state (as opposed to employees of local districts, such as schoolteachers) has increased to 51,103 in 2009 from 42,194 in 1995-97. That’s a 21 percent increase, about the same as the rate of population growth over that period.

How does the current state budget compare with that of previous years?

Unlike businesses or local governments, the state works on a two-year, or “biennial,” budget cycle. The general fund budget for 2009-11 amounts to $14.2 billion, which is actually 1 percent less in real dollars than the state budget two years ago. According to the Legislative Revenue Office, this decline is the largest since the 1950s. So advocates for Measures 66 and 67 are correct when they argue that even with the tax hikes, the current general fund budget is smaller than the one for the prior two years. At the same time, the 2007-09 budget increased 16 percent in real dollars from the prior biennium.

Are individual Oregonians taxed more or less than other Americans?

Our personal income tax rates are among the highest in the nation, even without 66 and 67. If the voters approve Measure 66, we will share the highest personal income tax rate with Hawaii. But it’s important to remember Oregon is one of five states with no sales tax.

Policy wallahs say there are two criteria one should use to compare tax systems: First, how much residents shell out in total taxes, including sales tax, and second, what percentage of one’s income that tax burden represents. Oregon’s Legislative Revenue Office—a nonpartisan agency that both proponents and opponents of the measures trust—says Oregonians’ total per-capita tax burden in 2006 was 36th highest in the nation. (In other words, 35 states ask their residents to pay higher taxes.) On a percentage-of-income basis, we look even more lightly taxed: According to Legislative Revenue, Oregon ranked 42nd highest. If Measure 66 and Measure 67 pass, we’ll move up slightly but still keep more of our income than do residents of most states.

Many businesses hate the proposed corporate tax increases. Are they overtaxed already?

In a 2008 national study of corporate taxes, the Ernst & Young auditing firm found that the largest chunk of taxes businesses pay is property tax, followed by sales taxes. Corporate income tax was a distant third. In Oregon, businesses pay moderate property taxes, no sales tax and a middling corporate income tax rate, all of which make their overall tax burden among the lowest in the nation. Ernst & Young found that Oregon’s tax burden on businesses is the second lowest in the country. Critics of 67 dispute the Ernst & Young study. “We think the methodology is wrong and it leaves out some things,” says Pat McCormick, a spokesman for the “no” side. It’s worth noting the Legislative Revenue Office was comfortable enough with the Ernst & Young study to have relied on it in its November analysis of the tax measures.

Critics say the state has plenty of money in the bank. Is that true?

The state currently has a $79.2 million general fund “ending balance”—or about half of 1 percent of the general fund budget—which can be used for any purpose. It is a small fraction of the 5 percent ending balance that governments aspire to keep on hand.

There is a total of about $312 million potentially available in the state’s rainy-day fund and school stabilization fund, monies that could be tapped with a three-fifths vote of both the state Senate and House. That’s easier said than done. Republicans and some Democrats oppose burning the last of the state’s reserves so early in the biennium, especially since state revenue receipts have continually fallen short of forecasts. Gov. Ted Kulongoski, a Democrat, also opposes draining reserve accounts.

There are also several pots of money that cannot legally be spent for general fund operations, without extraordinary legislative action. SAIF, the state-owned workers’ comp insurer, for instance, has lots of money in the bank to pay future claims, but that money cannot be used for other purposes.

Is state government just paying its workers too much?

Hard to say what constitutes “too much.” But one could certainly make the argument that state employees are not cheap: A November report by the Oregon Employment Department found that Oregon’s public-sector workers on average are paid more and have better benefits than private-sector workers, and they enjoy far greater job security. Critics have noticed. “We’ve seen more than 130,000 private-sector workers lose their jobs in this recession versus only a few hundred government workers,” says Portland economist Randall Pozdena, who opposes the tax increases. It’s also worth noting that state workers are taking 10 unpaid furlough days this biennium, including six in 2010.

Nobody likes to pay more taxes. Is that what the opposition is about?

Partly, yes. But to critics, it’s also about fairness, it’s about whether state government actually needs the money, and it’s about whether raising taxes in a recession is loony. All those points are subject to debate. What seems to be getting less attention than it should is that Measure 67 does more than just raise corporate taxes; it really represents a new form of taxation in this state.

Right now, Oregon companies pay taxes on their profits, or if they make no profits, they pay a minimum of $10. Measure 67 would raise the tax on profits and the minimum. But it would also create a new tax on the revenues of large companies—even if they make no profits at all.

Here is an example: According to the Legislative Revenue Office, there are more than 100 companies that reported sales of more than $100 million in Oregon last year yet also reported no profit, and so they paid the minimum $10 tax. Measure 67 would create a tax on gross sales, a sliding scale that tops out at $100,000 a year in taxes for companies that record more than $100 million in Oregon sales. Why should a company that reports no taxable income have to pay taxes? Backers of Measure 67 say companies should pay for state services they use regardless of profitability. What they are more reluctant to say is that many of the companies that report no taxable income simply have better accountants than the rest of us. So what’s to be done about those companies that have a big footprint in Oregon but pay minuscule taxes? A tax based on sales, which other states, including Washington, use. Ironically, the idea to put a tax on sales first bubbled up out of the Republican caucus in 2007, but opponents slam it now. Says McCormick, the spokesman for the “no” side: “You’re opening a whole new vein here. It’s terrible tax policy.”

Impact of Measures on Oregon’s Business Tax Ranking

SOURCE: Council on State Taxation

Let’s play devil’s advocate. If I’m rich, or at least make $125,000 or more, why should I support this measure?

Because Oregonians are underemployed, underfed and undereducated compared to national averages and residents of neighboring states. Thanks to the recession’s impact on the state budget, we’re letting criminals out of prison early, and school districts such as Central Point in Southern Oregon have moved to four-day weeks. And although our personal income tax rate is already high—and would get higher if these measures pass—our total tax burden is not. Tax enthusiasts and foes alike agree that our best shot at attracting new jobs is a robust educational system. And providing a strong safety net of social services for those in need is the right thing to do.

Devil’s advocate again: I’m a working-class stiff. Why should I vote against these measures?

You vote against these measures if you want to send a message to lawmakers to stop kicking the same old can down the same old road. Oregon’s tax structure is imbalanced, and passing these increases would add to that imbalance. Our revenue system is like a roller coaster already, and voting “yes” would give lawmakers more money to spend—mostly on public employees—in the good times. And it would still leave us broke during tough times, as we were in 2003-04 and are again now. Here’s how the Legislative Revenue Office describes the roller coaster: “Oregon is already more dependent on the personal income tax for state tax dollars than any other state is on any single tax source (about 70 percent of total tax collections). If Measure 66 becomes law, this dependence will increase.”

Critics quote President Obama, who said last year that a recession is the worst time to raise taxes. Is he right?

Steve Novick, a spokesman for the “yes” side, explains that the federal government has the “luxury” of being able to run a deficit, so Obama is not under the same pressure to raise taxes as states, many of which are constitutionally required to balance their budgets.

Historically, state governments do raise taxes during economic troughs. Oregon created its personal income tax in 1930, just after the stock market crash and in the early days of the Great Depression. Many other states followed suit, according to the Legislative Revenue Office. “Between 1930 and 1940, 24 states enacted sales taxes and 16 states income taxes,” a November 2009 LRO memo states.

Actually, even critics of 66 and 67 agree that the current recession warrants a tax hike. They do not agree on making the hikes permanent. “If the tax increases had been temporary, we probably would not be having this conversation,” says McCormick.

What happens if one or both measures fail?

Since the Oregon Constitution requires a balanced budget, lawmakers will either have to make additional cuts or find other revenue. There is a special legislative session scheduled for February already, so lawmakers would address the issue then.

Following The Money

Who are the big contributors to the “yes” side?

  • Oregon Education Association, which represents 47,000 teachers: $827,000

  • Service Employees International Union Local 503, which represents 45,000 state workers: $493,000

  • American Federation of State, County and Municipal Employees, which represents 27,000 corrections officers and local government workers: $400,000

  • SEIU (National Chapter): $250,000

  • American Federation of Teachers, which represents 11,000 Oregon educators, mostly at the community-college level: $200,000

  • Largest individual donor—Leland Larson, a longtime giver to progressive causes and landlord of Dignity Village: $10,000

Who are the big contributors to the “no” side?

Unsurprisingly, many of those most opposed to the new taxes face a bite from the new tax on sales. The companies who stand to pay the biggest increase are those with large sales but small profits—so-called “small-margin” businesses—such as:

  • Construction contractors, who work on large-dollar, slim-margin projects. The total from contractors and their executives: $300,000

  • Oregon Local Grocery Association, perhaps the slimmest-margin industry in the state: $226,000

  • Timber companies, the most reliable source of money for conservative causes in Oregon politics: $237,000

  • Oregon Restaurant Association, whose members work in a notoriously small-margin business: $140,000

  • Utilities—although as a sector they will be hardest hit by the increased income taxes because they have large in-state sales and profits, they can pass along the increases to customers: $75,000

  • Largest individual donors: Nike CEO Phil Knight and Columbia Sportswear CEO Tim Boyle, $50,000 each. Both have been critics of government inefficiency. “I compare the Oregon tax system to a stereo system built around an 8-track player,” Boyle says. “There is widespread agreement that it’s not a good system, that there are better systems, and that it is outdated and needs improvement. But instead of working to find and implement those improvements, someone rushes in and decides that the answer is to just turn up the volume.”

So When My Ballot Arrives, What Should I Do?

WW’s editorial board is not thrilled with these measures. They make Oregon’s lopsided tax system worse and do nothing to address the tax-revenue volatility that caused the Pew Center on the States, in November, to name Oregon one of 10 “states in peril” of financial collapse. The measures will drive a bigger wedge between Democratic lawmakers and the private sector.

The whole process feels like the aftermath of a botched game of chicken between Democratic legislators and the business lobby. But despite all the numbers being tossed around, this is not a theoretical exercise. There are real-world consequences if Measures 66 and 67 fail. We do have to balance the budget. And the damage to schoolkids, the poor and the infirm would be real and long-lasting if voters blast a $727 million hole in the budget. Besides, these tax increases do not strike us as exorbitant, and capturing some revenue from large companies that “report” no profits makes sense.

WW recommends a YES vote on both measures.

Editor’s Note And Contest

Watch WW’s endorsement interview with Pat McCormick and Steve Novick below. Win a $40 Kells gift certificate for the best summation of the video in 40 words or less in the comments section for this story.

Measures 66 and 67 with Steve Novick and Pat McCormick from Willamette Week on Vimeo.

For a list of ballot drop-off sites, visit www.co.multnomah.or.us/dbcs/elections/election_information/drop_sites.shtml. Ballots must be received by 8 pm Tuesday, Jan. 26.
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