One of the Best Tax Expenditure Reports

Chuck Sheketoff

According to a new study by the Center on Budget and Policy Priorities (CBPP), Oregon produces one of the best reports of tax expenditures – all tax credits, deductions and exemptions that reduce state revenue. The biennial report, a companion to the biennial budget proposed by the Governor, is accessible (available online at the Department of Revenue’s web pages), broad in scope, detailed and with analyses of each tax break.

Oregon’s tax expenditure report “could serve as a model for other states,” according to CBPP. They note how Oregon’s report has saved the state money:

The state’s first tax expenditure report, released in 1996, showed that a state law exempting lottery winnings from the income tax was costing the state about $44 million per biennium. The following year, the legislature scaled back the exemption (limiting it to lottery prizes of $600 or less). In 2001, the change was extended to non-residents who purchase Oregon state lottery tickets. Together, these changes are saving the state more than $40 million per biennium.

CBPP highlights Oregon as setting a good example in providing the legal citation for each tax expenditure and the specific purpose for each. CBPP also notes that Oregon’s tax expenditure report includes cost estimates for all but a few tax expenditures. Filling in those blanks shouldn’t be too hard.

Unfortunately, while overall Oregon’s report is quite good compared to other states’report (full disclosure here: With the late Sen. Shirley Gold I wrote the law that created it in 1995), Oregon falters in fully carrying out this statutory responsibility.

Where does Oregon fall short? In providing a good analysis of the effectiveness of each of the tax expenditures:

Other states with an evaluation requirement do a less exemplary job, simply rubber-stamping most expenditures without much apparent analysis or even ignoring the requirement altogether. Oregon’s report evaluates every expenditure but concludes that virtually every one has “achieved its purpose,” without explaining how that conclusion was reached.

State law (ORS 291.203) requires that the tax expenditure report “determine whether each tax expenditure is the most fiscally effective means of achieving each purpose of the tax expenditure” and “whether each tax expenditure has successfully achieved the purpose for which the tax expenditure was enacted and currently serves, including an analysis of the persons that are benefited by the expenditure.”

The problem is that in almost all cases the agency that has a direct interest in the expenditure is responsible for evaluating it. This often leads to shoddy evaluations by self-interested, non-objective evaluators.

The lottery exemption is a good example. In the first tax expenditure report (the 1997-1999 report, the only one not available online), the Lottery claimed that “the burden on the consumer or retailer for tax collection would be immense” if the state started taxing lottery winnings; both retailers and consumers would quit participating, “drastically reducing sales and State revenues.”

Needless to say, the doom and gloom from the Lottery was bogus. Moreover, the Lottery’s self-evaluation never explained that out-of-state winners were getting a tax break on their income from Oregon. The legislature found that out on their own and closed that loophole in 2001. Had a better evaluation of how the exemption works and who benefits been performed initially, that loophole also could have been closed in 1997.

Regrettably, there are numerous other examples of shoddy evaluations of tax expenditures in the tax expenditure report. It is dang near impossible to find an evaluation that’s constructively critical of a tax expenditure, and too often the evaluations reach conclusions not supported by fact or reason. The state Department of Housing and Community Services does the best self-evaluations.

The current law is adequate; it’s the implementation that needs further direction. The first step ought to be that evaluations be done by an agency that doesn’t have a self-interest in the tax expenditure. The Departments of Revenue or Administrative Services or the Audit Division of the Secretary of State’s office could do all the evaluations. And if the reviewing agency subjected draft evaluations to public comment the evaluators would end up with a better product. I don’t think new money is needed to do the job well – it is just that the money currently being spent needs to be spent smarter on better and more objective evaluations.

In any event, it is great to see that Oregon’s tax expenditure report is among the best in the nation. Things look different here, and we should be proud of that.

By Chuck Sheketoff April 15, 2009