Wall Street Journal on Oregon's "Vanishing Millionaires" (Updated with Response)

Today’s Wall Street Journal editorial page (never a big fan of taxes) unloadson the after-effects of Measures 66 and 67—the personal and corporate tax increases Oregon voters passed in January.

Here’s the Journal’s take:

The Wall Street Journal
Editorial
December 21, 2010

Oregon raised its income tax on the richest 2% of its residents last year to fix its budget hole, but now the state treasury admits it collected nearly one-third less revenue than the bean counters projected. The sun also rose in the east, and the Cubs didn’t win the World Series.

In 2009 the state legislature raised the tax rate to 10.8% on joint-filer income of between $250,000 and $500,000, and to 11% on income above $500,000. Only New York City’s rate is higher. Oregon’s liberal voters ratified the tax increase on individuals and another on businesses in January of this year, no doubt feeling good about their “shared sacrifice.”

Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million. The Eugene Register-Guard newspaperreports that after the tax was raised “income tax and other revenue collections began plunging so steeply that any gains from the two measures seemed trivial.”

One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens. These numbers are in line with a Cascade Policy Institute study, based on interstate migration patterns, predicting that the tax surcharge would lead to 80,000 fewer wealthy tax filers in Oregon over the next decade.

The tax wasn’t enacted into law until June 2009 but was retroactively applied to January 1, 2009. So for the first half of the year wealthy Oregon residents weren’t able to take steps to avoid the tax ambush because they didn’t see it coming. This suggests that a bigger revenue loss from tax mitigation strategies will show up on tax return data in 2010 and 2011. The Revenue Office has already downwardly revised tax collection projections for the first three years by one-third.

The biggest loss of revenues came from capital gains receipts. The new 11% top tax rate applies to stock and asset sales, which means that Oregonians now pay virtually the highest capital gains tax in North America. Instead of $3.5 billion of capital gains in 2009, there was only $2 billion to tax—43% less. Successful entrepreneurs like Nike owner Phil Knight don’t get rich by being fools with their money. They don’t sell tens of millions of dollars of assets when capital gains taxes go up.

The tax defenders in the Salem legislature blame the decline on the state’s lousy economy, with unemployment having risen to 10.6%. “This is a temporary thing,” argues Phil Barnhart, a Democrat who helped to write the tax increase, adding that he’s “pleasantly surprised” that only one-third of the estimated revenue was lost.

All of this is an instant replay of what happened in Maryland in 2008 when the legislature in Annapolis instituted a millionaire tax. There roughly one-third of the state’s millionaire households vanished from the tax rolls after rates went up.

If Salem officials want to find where the millionaires went, they might start the search in Texas, the state that leads the nation in job creation—and has a top income and capital gains tax rate 11 percentage points lower than Oregon’s.

Updated at 10:18 am:

Chuck Sheketoff, director of the Oregon Center for Public Policy says theWSJ’s take is “ludicrous.”

Sheketoff, who advocated for the tax increases, says the editorial confuses correlation with causation. Put simply, the tax measures did pass and tax revenues did drop—but one did not cause the other.

“It’s like saying that if a rooster crows at dawn the rooster’s crowing is what causes the sun to come up,” Sheketoff says.

He says the shortfall in revenues compared to projections reflects the fact that when the projections were made, in the middle of 2009, forecasters under-estimated how severe the recession was and how long it would last.

He says there is no evidence in the editorial or in any data source that high-income taxpayers have fled Oregon. Since the tax, which voters approved in January 2010, is retroactive to 2009, they would have had to have left the state retroactively, which is pretty tough to accomplish, even for the rich.

“There is absolutely no evidence there is increased migration,” Sheketoff says.

In fact, figures released by the state earlier this month showed more Oregonians filing tax returns than expected, not fewer.

The problem, Sheketoff says, is not that “millionaires” moved away but that high-income filers earned dramatically less in capital gains, and in some cases, salary and therefore paid less in taxes.