MAY 2007: ECONOMIX, STATEWIDE ECONOMIC ANALYSIS
Taxes: Things are different here
By
John Mitchell
|
One of the strengths of the United States is the ability
of each of the 50 states to try different approaches to issues
such as land use, voting and taxes. State borders can be
interesting points of contact for very different revenue
systems. In the Northwest, Idaho’s revenue sources look
most like the rest of the nation, but the fiscal systems of
Oregon and Washington are definitely outliers.
The differences are dramatic when you compare them visually
(see the charts below). Idaho has both personal and corporate
income taxes and a 6% sales tax. Washington has sales and use
taxes, a business and occupations tax based on revenue, a state
property tax and real-estate transfer taxes. Oregon relies
overwhelmingly on the personal income tax.
In spite of their very different tax systems, all three states
have fared well in the last couple of years with all being
ranked in the top 10 for job growth for much of 2006. Both
Oregon and Washington had the same rapid population growth rate
in 2006, according to the Census Bureau. The importance of the
state’s tax system should not be overemphasized.
But the systems fare differently over the business cycle.
During upturns marked by rapid growth in employment and income
as well as capital gains, Oregon’s system gushes revenue.
When a recession hits with its dropping employment, evaporating
bonuses and diminished capital gains, Oregon’s income tax
revenues also decline or come in below state budget
anticipations.
During the 1990s, the bulk of education funding was
transferred from the local property tax to the state general
fund. Oregon’s revenue system hasn’t changed, but
education funding has shifted from a cyclically stable (but
despised) local property tax to a volatile state income-tax
stream. These fluctuations now have more impact on schools.
More slicing and dicing of Oregon’s tax system by the
state reveals some interesting and unsettling insights.
Oregon’s income tax is progressive (an economic concept,
and to some a value judgment) because the higher one’s
income the higher the percentage of income paid in taxes.
Oregon’s tax rate rises toward 9% as income increases. In
2005, that meant that 68.7% of the state’s income tax
revenue came from 20% of the taxpayers. The state’s
fiscal health relies heavily on the fortunes of a relatively
small share of Oregonians, a risk when bordering a state with
no income tax.
The five counties in the Oregon portion of the Portland
Metropolitan Area (about 46% of the state’s population)
generated 53.2% of the personal income tax revenue. If you
throw in Clark County, Wash., that percentage increases to
56.2%. Only seven Oregon counties generated more income tax
revenue for Oregon than Clark County.
Legislatures, governors and tax activists respond to hot
buttons in the fiscal system in a variety of ways. In Oregon,
frustration over local property taxes and legislative inaction
resulted in Measure 5, which imposed a 1.5% property-tax cap.
In Idaho, rising property-tax bills in 2006 resulted in a
1-cent increase in the sales tax and a shift of some additional
educational functions to the state.
As the region’s legislatures meet this year, various
tweaks to the tax systems are being considered. Strong revenue
growth has provided the raw material and the luxury of
tinkering with tax systems without the pressure of
recession-driven cuts.
Idaho has a rainy-day fund that is used to cushion spending
during downturns. The issue there was what to do about the
sales tax on food. Currently a grocery-tax credit is given to
residents, and an attempt to increase the size of the credit
failed this session. In Washington, Gov. Chris Gregoire has
proposed a rainy-day fund for that state that would set aside
1% of general fund revenues.
In Oregon, legislators have approved retaining this
biennium’s corporate kicker (the refund triggered by
corporate tax collections more than 2% above the budget
forecast). The retained kicker funds along with 1% of general
fund revenues would become the basis of the first serious
rainy-day fund for the state.
Stay tuned. The folks in Salem and Olympia are still
tweaking.
John Mitchell is a
contributing columnist to Oregon Business and the Western region economist for U.S.
Bank.
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