A Revenue Problem Needs a Smart Revenue Solution
Chuck Sheketoff
Even before the phrase “Wall Street bailout” reverberated worldwide, Oregon faced a tough budget situation. State economists said in late August that the state is operating on a razor-thin margin in the current budget cycle.
Then, a preliminary report by the state Budget and Management Division projected a $500 million shortfall for the next budget cycle.
A new projection for this and the next budget period will be released in less than two weeks, November 19th.
The financial crisis now at hand is certain to further pressure the state budget, just as more Oregonians will be turning to public structures for help. In this difficult environment, the new legislature must resist slashing key services to balance the budget. They should confront a revenue crisis with a revenue solution.
The budget outlook mirrors the deteriorating job market. Since February of this year, Oregon has lost 20,000 jobs in seasonally adjusted terms. Oregon now has fewer total jobs than it did at this time last year, something that previously has occurred only during recessions.
Fewer jobs mean less tax revenue for the state.
They also mean more struggling families turning to the state for help. The Department of Human Services (DHS) has seen a rise in its caseload that is beginning to strain its budget.
Unlike the federal government, Oregon cannot run a deficit.
What should Oregon do in this fiscal bind?
Besides some internal belt-tightening, such as the efforts DHS is already undertaking, the state should tap into the newly created Rainy Day Fund and the Education Stability Fund. After all, it’s pouring outside.
Thankfully, Oregonians stashed away some money for difficult times. Only time will tell if there’s enough in the reserve funds to ride out the storm, but the deteriorating situation and small size of the funds suggests preparing for the worst.
In that case, should the state slash education, public safety and human services to balance the budget? Or should it raise revenue to protect services?
Neither choice is appetizing. But of the two, the better option is to raise revenue — smartly.
Cutting state spending would aggravate the recession. When a state reduces spending, it lowers payments to businesses and non-profits that provide direct services. It cuts benefits and services relied upon by vulnerable individuals, including school children. It reduces spending on programs such as the Oregon Health Plan that bring matching federal dollars into the Oregon economy.
Spending is what’s needed most during a recession, and the state must maintain its part.
How to raise revenue smartly? In a 2001 paper, Joseph Stiglitz, winner of the Nobel Prize in economics, and Peter Orszag, current director of the Congressional Budget Office, concluded that cutting spending is more damaging to states than raising taxes during a recession. They recommended a tax increase on the wealthy, who can cover the increases by reducing their savings, rather than their spending.
Such a plan is likely to elicit the oft-repeated claim: “The worst thing you can do in a recession is to raise taxes.”
That claim, however, is as baseless as the now-discredited notion that markets are self-regulating.
The worst thing you can do in a recession — for struggling Oregonians and the economy — is to cut state spending.
State government is a key part of Oregon’s economy. Its role will be even more important in the troubled times ahead.
We need the Legislature to meet Oregon's revenue problem with a smart revenue solution.
Chuck Sheketoff is the executive director of the Oregon Center for Public Policy. You can sign up to receive email notification of OCPP materials at www.ocpp.org
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connect with blueoregon
Nov 7, '08
Some time ago the League of Women Voters identified more than a $billion in "temporary" tax breaks to businesss, tax breaks that just "happened" to be renewed without discussion. Of course, the League's report was promptly consigned to the dustbin by the Legislature. It's time to dust it off and make the Democratic majority accountable for a fair tax system
7:48 a.m.
Nov 7, '08
Chuck, according to the Portland Business Journal, the state is going to have a $2 billion revenue shortfall in the 1009-2011 biennium.
1) Is that estimate consistent with your projections? 2) If the estimate is accurate, do you really believe that the state can balance the budget without cuts?
I'll never know a tenth of what you know about tax policy or the state budget, but based on my limited insight, I believe that everyone is going to feel some pain in this biennium.
Nov 7, '08
A friend of mine owns a bar in North Portland which uses the slogan "We cheat the other guy and pass the savings on to you". Unfortunately, tax policy over the past decade(s) seems to be based upon a variation of that theme.
There are two fantasies that drive me nuts. One is the Repub / Wing Nut constant refrain that we can balance the budget by "cutting waste". The other fantasy is the Dem / Populist mantra that we can solve the revenue problem by "taxing business". Neither is true.
I am somewhat hopeful that for the first time in 30 years or so, state and federal legislators are willing to bite the bullet and tell the truth - it will take pain and increased taxes and fees on everybody - rich, poor or middle class - to do the things that need to be done in this country, from infrastructure to schools to universal health care to social security.
8:44 a.m.
Nov 7, '08
This discussion is about the short-term challenge, and I think that's a critical thing, but I also want to see us start talking about long-term solutions.
It seems to me that the solution is obvious. Put money away in good times, in order to save for bad times.
It's wisdom that is as old as the Bible. The tale of Joseph, who advised the Pharoah to store grain during the seven years of fat, is the biblical admonition about exactly this situation.
We've made a small start with the rainy day fund, but I think the state should expand that dramatically.
And the best time to do it is when revenues are low and we're making spending cuts. That's the time to establish a strong savings plan, so that when the economy rebounds and revenues return, we're smartly setting some of it aside, rather than spending those new gains.
The problem with our revenue system is that it wildly seesaws. We should have a savings plan that evens out those swings.
10:23 a.m.
Nov 7, '08
This is a moral issue.
If we accept the premise that every American person, human or corporate, shares responsibility for keeping the nation solvent, literate, healthy, and productive, in exchange for the benefits of living in a solvent, literate, healthy, and productive nation, then cutting State spending and raising new revenue for needed investments are just two different ways of allocating the burden of a shared responsibility.
State spending cuts have been heavily over-emphasized in recent decades, leading to a backlog of deferred maintenance of all forms, from physical infrastructure to learning deficits to systemic health problems. This can be seen as abdicated responsibility, and moral failure. Our nation must either have the moral fortitude to balance the equation, and resume investment in our nation's future, or continue abdicating responsibility and force our children to suffer the results.
Do we get to work, or stay parked on the couch playing video games?
Of course, there will always be some who couldn't care less whether the nation is solvent, literate, healthy, and productive. And I'd argue that's the difference between a patriot and a subversive.
11:24 a.m.
Nov 7, '08
Sal, the next forecast will be out on November 19th, and the Governor's Budget will be out by December 1. That will tell us the most current estimate of the shortfall for next biennium, and possibly this biennium (recall that the last forecast has our "cushion" at a meager $23.8 million).
I don't think anyone, except the un-named "consensus" group referred to by the Portland Business Journal, thinks the new forecast will show a $2 billion shortfall. But in any event, in 12 days we will know how much it has grown, if any, from the $500 million figure.
"Belt tightening" is necessary, and don't be fooled -- those are cuts in public services that people will feel. If agencies put off upgrading computers, for instance, people will see services not provided as well as they might have been with better, faster, newer computers, and those Oregon vendors who supply computers or the parts inside them will have fewer sales.
But cutting state spending can only exacerbate the recession, while raising the funds from those with greatest ability to pay can limit the damage.
And Greg D., OCPP does not think that we should only look to businesses. We think those with greatest ability to pay -- on the personal income tax side and the corporate tax side, ought to pay. Corporate taxes are only paid on profits and there are some very large profitable corporations paying only $10, and more paying slightly more than that but less many struggling working families. In addition, the wealthiest Oregonians pay the lowest share of income on taxes, and a temporary tax on them to maintain public spending during this downturn would primarily come out of their savings, not their spending. And that's just what Stiglitz and Orzag suggest.
Nov 7, '08
Hmmm, I know where there's a few million a year that can be saved immediately with no harm to anyone: cancel the agrofuels mandate, the blending requirements, and the state subsidy that was poured on top of the federal subsidies. Oregon drivers would see better mileage, we'd stop paying corporations to burn fossil fuels to turn Iowa corn and imported soybeans into motor fuel, and we'd save millions of dollars.
Nov 7, '08
Far too much income is not taxed. Perhaps a good idea is to eliminate all deductions and credits and lower the rates. We should also make the rates more progressive without increasing the top rate.
Too many properties are not taxed or are given preferential treatment. These properties need to be put back on the rolls and the rates reduced.
Every corporation should pay taxes. It is obscene that more than half(?) of Oregon businesses pay the minimum tax. The tax code should reduce or eliminate business deductions and credits and lower the rates.
We should make the current pie bigger before we consider a sales tax.
12:47 p.m.
Nov 7, '08
The corporate minimum is a big one and from talking to various legislators, they will not blunder into this with only theories in hand a second time.
Every business that shows a "loss" in a given year will be subject to a minimum. At this point graduation of rates is undecided but the smaller businesses might pay a $500 or so while the Big boys might pay a few thousand (Manicure at The Spa Territory).
Whatever the actual numbers, it will be better thought out than the first go around.......
Nov 7, '08
A tax on the "gross receipts" of every business would raise a lot of money, similar to the Washington B&O tax. Too many businesses can avoid making a "profit" by increasing deductions and by distributing excess income to owners just before the end of each tax year.
But as I said above, everybody - rich, middle and poor - needs to bear the burden of the incredible tasks that lay ahead of us.
Nov 8, '08
I think it is wrong to assume that the room doesn't exist for cuts in government spending. I'm not suggesting a cut in the aggregate government expenditure, but a reallocation of resources government already has. That would require some diligent and objective analysis government operations. That won't solve the entire problem, but your argument is by default premised on the assumption that government is operating at maximum efficiency and there isn't any cost reduction possible in its operating expenses.
Government administrative and overhead costs remain labor intensive compared to the private sector, but technology costs are very low now, so that balance is no longer optimal and attrition in the retiring government employees should be managed to reduce headcount, but at the same time increase specific salaries to retain and attract more highly skilled employees as needed.
Also, as we so often read and hear about, local and state government around here are notoriously consultant-happy. Many projects are started and abandoned, run grossly over budget, or don't work efficiently when they are implemented. All of that money that is wasted is money which could go to support programs that actually do help people and do stimulate the economy.
That's not to say that targeted tax increases won't be necessary or are not a good idea, but to suggest that there isn't considerable waste in the government cost structure is not valid. You may then argue that the nature of government bureaucracy is such that the level of government waste that exists is inevitable and can't be addressed, but then your argument turns against itself.
What is needed is a carefully studied plan to increase revenue and streamline government processes. I also agree very much with the idea of a savings plan for the government, which is a very Libertarian concept in its most fundamental sense.
Nov 8, '08
Every corporation should pay taxes..." when every citizen does.
Nov 8, '08
@Greg D. "A tax on the "gross receipts" of every business would raise a lot of money, similar to the Washington B&O tax."
<h2>Except Washington doesn't have a corporate income tax like Oregon does. Nor does any county that I am aware of have a "tax" in place of a business license fee like Mult. COunty does.</h2>