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Oregon Economist: Taxes and the Rainy-Day Fund

February 11, 2010

By Patrick Emerson
Oregon Economics Blog

A rather depressing sense of self-satisfaction seems to have consumed the state democrats after the passage of Measures 66 & 67. But celebrating their passage as a major political victory, and allowing their passage to become an excuse not to immediately address the revenue instability that necessitated the new taxes, is a serious mistake. The taxes were not a victory to celebrate but a disheartening sign of the disfunction of the state’s revenue system. The fact that we had to pass them should be seen as a defeat, not a victory, and as a condemnation of our stewardship of the state’s finances. To allow these new taxes to take our eyes off of real reform is to squander an opportunity to permanently fix what’s wrong with the states revenues. Everyone is (or should be) upset, and motivated to fix what is wrong.

One of the main reasons for this lack of urgency, I believe, is the sense that these new taxes were carefully targeted, so that there is little real effect on most Oregonians – that we get a free lunch. But this ignores one of the most basic lessons in economics: TAXES DON’T STAY WHERE YOU PUT THEM.

Even a tax on the wealthiest households don’t stay there. Research has shown that employer’s pay is based on real wages net of taxes – so businesses will end up compensating highly paid employees for the new taxes – which increases their cost of doing business, which will end up in higher prices and lower share performance, both of which affect everyone. [This is the reason, by the way, why income taxes do not turn out to be very effective in addressing income inequality] New taxes on businesses will have the same effect, eventually making their way into higher prices and lower quantities which means – yes – jobs. The point is all Oregonians end up paying these new taxes in some small way and so we should all be upset that we got to this point in the first place.

I supported the new taxes and still do: they were necessary in my opinion and the net effect should be minimal. But there will be effects, make no mistake. I would have preferred them to be entirely temporary because of this.

So it is time for the state legislature to stop wallowing in self-satisfied complacency and get a permanent rainy-day fund passed this year. I have been very critical of the Governor in the past, but he is spot on this time in trying to get this moving now. Because whether you voted for or against Measures 66 & 67 you shouldn’t be happy – you should be motivated for real reform.

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Discuss this article

Marvin McConoughey February 11, 2010

It does little good to rail against a tax that you have voted for.

Kevin Hawes February 11, 2010
This study from Boston University is why New Jersey lost 70 Billion dollars of wealth. This also led to 1.3 billion in less charitable giving. We are on that track. Oregon also has the problem of sharing a border with California. With CA’s financial troubles, the poor can not get benefits fast enough. I personally know of Californians immigrating here for state paid benefits.
Less wealthy, less taxes paid in, more poor created, and the addition of poor immigrants. All of this and Congress is in town trying to find something they forgot to tax.

Laura Bell February 11, 2010

IF this tax hadn’t passed, then maybe this inexcusable excuse for a Legislature would have done something…like look at ways to cut the budget and live on what they have. Instead, as always in Oregon, the tax initiatives are played like a violin…always pushing that “our children” will suffer or “the poor” will take hits. It is time to stop the b.s. and get real. This state’s budget is a mess and the people we have in the Legislature are keeping it that way. Heaven only knows why. Passing taxes is an easy out…dealing within budget constraints takes real work and I just don’t see that these elected officials can do that. It’s too hard, it takes too much time and why bother when you have people out there that buy into whatever they are fed. So my question…just where is the money from Measure 66 & 67 going? To the schools? To PERS? To pay for insurance for people that can’t afford it? From what I can tell…this may be going to assist PERS. It would be nice to have an accounting of where these funds are going.

Matt Evans February 12, 2010

When it becomes necessary to grow your budget by 7 – 10 percent every year on average in order to pay for increases in employee salary and benefits and other government program growth, no “reform” of the state’s tax system can ever be successful. No tax system produces a net gain in revenue of 7 – 10 percent a year, every year, forever for precisely the reasons you state. The economy is dynamic, dollars are fungible and – like taxes – companies and workers don’t have to stay where they are today.

Measures 66 & 67 – as we’ve already seen in the latest revenue forecast – are going to produce less than the $733 million in revenue they were expected to when the tax increases were passed. More importantly, in the 2011-13 budget, the Legislature is going to have to come up with about $100 – $140 million in new revenue – plus however much less than $733 million the new taxes produce – to continue paying for whatever it is that 66 & 67 are funding.

Oregonians are addicted to government spending and like all addictions it’s going to take more and more to satisfy them over time.

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