JUNE 2007: ECONOMIX, STATEWIDE ECONOMIC ANALYSIS
By Tom Potiowsky
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Do us all a favor. Kill the kicker. I hate the kicker. Hatred
is an emotion that goes beyond logic. But this is why hatred is
the right emotion for the kicker — it also goes beyond
logic. I’m getting ahead of myself. This is a column
devoted to economics, which is full of logic. So let me build
the story of how an economist, steeped in the science of cause
and effect, ends up with an emotional conclusion.
From September 1999 to September 2006, I was the state
economist for Oregon. The state economist is responsible for,
among other things, the quarterly economic and tax-revenue
forecasts for Oregon. I was blessed with a wonderful staff that
had the training and expertise to develop and implement the
various forecasts produced by the Office of Economic
Analysis.
What purpose do forecasts serve? Fore-casts are our best
educated guess of what will happen. Will the economy slow down
and place further pressures on social services? What amount of
tax revenues will the economy generate to fund government
programs? The forecast is foremost a planning tool for
government.
This is as it should be. But the forecast in Oregon takes on
an importance far greater than similar forecasts for other
state governments. Oregon’s unique factor is the
“kicker.” Back in 1979, a number of people were
trying to figure out a way to curtail state government
spending. The idea that won the day is as follows: If tax
revenues are 2% or higher compared to the forecast, then all
the tax revenue above the forecast is returned, or
“kicked” back, to households and corporations.
There are more details about the personal and corporate kickers
(personal is a cash refund and corporate is a tax credit), but
this is the main gist of how it works.
The intended goal of limited government spending has
unintended consequences. The kicker makes it extremely hard for
government to recover after a recession. When government
services are cut during economic downturns, school years are
shortened and health programs cover fewer people. Economic
recovery usually brings about increased tax revenues to restore
services. Funds that could have been used are sent back to
taxpayers. Once again, you may feel this is just fine, but your
elected legislative officials have no ability to debate the
issue.
Some claim that the kicker is an economic development tool.
Corporations are attracted to Oregon and existing firms stay
because of the chance that they may receive tax credits every
other year. Large multi-state corporations, the recipients of
large kicker tax credits, are more worried about energy costs,
labor availability, transportation issues and federal taxes
than they are about Oregon’s corporate kicker. Advisory
groups have told us that the corporate kicker isn’t even
on their radar screen.
Small businesses also get a tax break from the corporate
kicker. But if you operated your businesses on the margin to
the extent that the possibility of a corporate kicker was the
sole reason you could stay in business, you might want to
change your business plan and start over with new management.
On the personal kicker side, people really do enjoy getting
checks in the mail. But if the sole reason you live in Oregon
is the gamble that you might get some tax money back, move to
Nevada. You’ll be much happier.
Finally, the kicker has prevented Oregon from building a
rainy-day fund. Given our highly volatile tax source (income
tax), any surges in taxes during boom times are not put aside
for the inevitable business cycle downturn. And the same tax
system that makes taxes surge during the good times causes them
to tank during the bad times.
From 1985 to 2000, the combined personal and corporate kicker
returned funds totaled close to $2 billion, enough to have
covered the shortfalls during the 2001-03 biennium. Finally,
the corporate tax kicker is being put aside, approximately $309
million as of the May 2007 forecast. But this will be a little
more than 2.0% of the likely budget for the 2007-09 budget, an
amount that is much smaller than the fluctuations of tax
revenues around the forecast for the past 25 years. Oregon
needs a sizable rainy-day fund. The best way to lock money up
for use during the bad times is to save during the good times,
but the kicker prevents this.
Forecasts are our best educated guesses, and figuring out the
exact strength, let alone the timing, of economic recovery is
still an inexact science. Possibly the solution is a better
forecast. If that darn forecast could only be within 2% each
biennium, then these problems would not exist. What would it
take to have forecasts always within 2%? For starters: accurate
forecasts of the stock market, the 9/11 attacks, the income and
business decisions of the top 100 firms in Oregon, and one of
the largest housing booms in the past 45 years. Forecasters
that are this accurate are either extremely lucky or have a
contract with the devil. Both are short-run phenomena.
The kicker defies logic. It reminds me of the prescription ads
that run on TV: “Take NO CLOG and your cholesterol will
drop by half. Side effects have included nausea, blindness and
brain tumors.” You are relieved that you won’t die
from a heart attack but you can’t shake this feeling that
you wish you were dead. The kicker has outlived its usefulness,
if it ever had one.
Get rid of the kicker, build reasonable rainy-day funds, and
find other ways to ensure and measure accountability of
government taxation and spending.
Tom Potiowsky is an
economics professor at Portland State University and the former
state economist for Oregon.
Have an opinion? E-mail feedback@oregonbusiness.com
