A Revenue Reservoir to Achieve Fiscal Stability
Chuck Sheketoff
Volatility happens, be it in nature or in state government revenue systems.
During Oregon’s fall and winter, snow piles up in the Cascades, but the summer is mostly dry. Even so, farmers and communities enjoy fresh water all year round. That’s because our predecessors addressed the volatility in Oregon’s precipitation patterns by building reservoirs to store runoff of the melting snowpack for the inevitable summer dryness.
Unfortunately, we haven’t had similar wisdom with regard to the state’s fiscal system. If the current economic crisis has taught us anything, it’s that Oregon’s fiscal system needs stability to weather downturns in the business cycle. And to achieve it, we must build an adequate revenue reservoir — an emergency reserve fund sufficient to maintain public services that are even more vital during economic downturns.
Some Oregon politicians and pundits decry the volatility that accompanies corporate and personal income taxes, Oregon’s primary sources of revenue. They pin their hopes on a sales tax.
But a sales tax is no cure for volatility, which is inherent in all revenue systems. Washington, a state with a sales tax and no personal income tax, is grappling with a shortfall of a magnitude similar to Oregon’s for their two-year budget period.
Any call for a sales tax distracts from the principal issue: adding stability to our fiscal system.
It’s no secret how Oregon can engineer fiscal stability. As a state task force on revenue system restructuring concluded in 2008, we need to save the unanticipated revenue collected during good economic times for revenue droughts during the inevitable downturns.
The biggest impediment to stability is Oregon’s practice of spending, not saving, unanticipated revenues. We spend money on an automatic tax cut — one that primarily benefits the most well-off households and large corporations — triggered when revenues come in at 2 percent or more above the amount predicted by the state economist two years earlier. That’s an exceedingly narrow margin of error, considering the many events that can happen over the course of two years and considering that Oregon’s relatively small economy — just 1 percent of the national economy — is subject to national and international economic forces.
True, the legislature can suspend the automatic spending — commonly called “the kicker” — with a supermajority vote, but that’s an unreliable mechanism for achieving fiscal stability. In 2007, the legislature did nothing to block the tax cut for households, opting to spend $1.1 billion rather than save the money for an economic downturn. The legislature did, however, partially suspend the smaller corporate payment and put the savings into a newly created Rainy Day Fund.
While an important first step, the new reserve fund proved too meager. As the state was spending $1.1 billion giving unanticipated revenues to households, the Great Recession was starting to descend upon Oregon and the nation. Oregon’s revenue collections ultimately plummeted far in excess of the new Rainy Day Fund, forcing deep cuts in public services and necessitating tax increases in the form of Measures 66 and 67.
Until Oregon develops more ample emergency reserves, we will continue to suffer more than necessary during recessions. At such times, the only options are raising taxes or cutting government spending. Tax increases are politically tough to enact anytime, especially in a recession. Budget cuts, which choke the flow of state dollars into the economy, make a recession deeper and longer. They also magnify the pain for families and communities, since the need for public services grows dramatically during recessions.
Unfortunately, lawmakers meeting in Salem this month have announced that they will not put up for a vote a plan for a better emergency reserve fund, even though many of them recognize the urgent need for such fiscally conservative reform. We'll never know whether that political decision was correct, but we do know we need a better reserve than we have now. Meanwhile the clock on the next business cycle ticks away.
An adequate emergency reserve won’t end the inherent volatility in our revenue system, any more than a water reservoir prevents summer dry spells. But it will alleviate a great deal of the pain that a fiscal crisis would otherwise engender.
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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Feb 22, '10
I have one, you have one, every business has one, every reader here has one, had one or sure wishes they had had one. Why the state doesn't see the logic in it is well, what do you expect from our "leaders."
We need one NOW and a substantial one at that. There needs to be no debate on this issue. The debate we need to be having is how and when those funds are withdrawn from the reserve fund.
The kicker is just about the single stupidest thing this state has ever done. Get rid of it.
Feb 22, '10
Oregon doesn’t need to repeal the kicker to start a rainy day savings account. Legislators just need to police themselves – something they so far have not done with the public’s money – and set aside a specific percentage – possibly 3 percent – of all projected revenue to be received in each and every good year to br reserved for use in recessionary times. The problem has been and still is that legislators want to spend every penny that comes in. How many of them actually run their own households in that same manner?
Feb 22, '10
Thanks MP.
"Why the state doesn't see the logic in it is well, what do you expect from our "leaders."
What really galls me is the attitude of some politicians (not all, but some) who say "until it polls well, why should we debate this issue?".
Feb 22, '10
"Oregon doesn’t need to repeal the kicker to start a rainy day savings account. Legislators just need to police themselves – something they so far have not done with the public’s money – and set aside a specific percentage – possibly 3 percent – of all projected revenue to be received in each and every good year to br reserved for use in recessionary times. "
Terry, I suggest you discuss this with a member of Ways and Means.
What would you tell them to cut to be able to put away that 3%?
If revenue forecasts went down from forecast to forecast, how would you have Ways and Means deal with that?
Feb 22, '10
Yes, mp, LT! Maybe a consensus of sanity forming around these parts?
I have to research the facts Chuck is using more before agreeing. Unfortunately, the performance of local Dems lately has been such that one doesn't know if it is an accurate rendering of the facts, or if it's another M66/M67, where party leaders have decided what the facts are and are beginning to narrow the debate already. The question I am asking myself is how one would regard a sales tax vis a vis the analogy. It seems, on the face of it, that the analogy would be to having water flowing in every season, from natural precip. Sure it's still drier in the summer than the winter, but the point would be that there's enough in the summer that one doesn't need a reservoir! The bit that has the ring of "P'land Dem leaders have decided, fall in line or you're a troll"/M66 tone is the tacit assertion that "any revenue source that varies is inherently unreliable". Sounds kind of reasonable until you realize that the theory doesn't fit empirical data.
As a consultant, my fee varies wildly, over 500%. The length of contracts varies from a few days to years. How do I manage my budget?!? Well, my cheapest, shortest gig pays the bills. The rest is gravy. Simply the fact that my income varies wildly does not make my personal budget unstable.
Then there's the filling the reservoir detail. Are you going to engineer a Lake Mead? Boy, other desert locales are stupid not having a big reservoir like Las Vegas. You know, if you live in an arid climate you can't just snap your fingers and fill it. It's either a pipe dream, you have regular monsoons, or you're going to undertake a massive engineering project to make the desert bloom. Following the analogy, Oregon's economy is an arid climate. Which of the three mechanisms do you propose to fill your reservoir? Without that bit, this sounds like Texans in the '50s, "You don't have an oil well? Well git one!"
Months ago, LT, rw and I had a mini discussion on here about sales tax. I think we left the question in a more advanced state, wondering if it could be crafted so as to not be regressive. I think the consensus was "not easily". And that pretty much rules it off the "things our lege might do" list. Chuck's a great mind, and when you get stuff that doesn't go as far as our ramblings, in terms of thought out, one really has to wonder if this is simply the party faithful tirelessly promoting whatever tepid Ted has decided can't be done. You know, rather than continue to lose progressive that are disgusted with your lock step spin for tepid solutions, maybe you should just adjust our expectations. Have Nancy, Harry and Ted have a press conference and explain to progressives everything that they will never get support for from Dems, and then we don't have to waste our time. In 18 months we've gone from "hope for change" to "don't bother". Of course, most progressives saw the scam then, but one still feels sorry for the Dem on the street that keeps wanting to believe that their party is better than the alternative in terms of character.
Terry's a troll (and the most narrow, self-centered blogger it's been my unfortunate experience to "meet") that is going to say the same thing, regardless of the conversation, regardless of the subject. It's not discussion. Respond to him if you want to hear more, I guess.
1:29 a.m.
Feb 23, '10
For all those who believe that the parables in the Bible are God's literal instructions -- I suggest reading Genesis, chapter 41.
Feb 23, '10
I'm so sick and tired of the endless pursuit of the "rainy day" fund. Why was the fund established? Because we don't trust government to handle finances, that's why! Leave the rainy day fund alone and focus on cuts and efficiency.
The current socialist trend has been relentless and it flies in the face of what the majority of Oregonians really want. We want a tight run ship, something we haven't seen for years under this progressive government.
How's the change working out for ya?
Feb 23, '10
Red Dog
Go hump someone's leg and then come back when you have something constructive to add to the discussion.
Feb 23, '10
mp97303
go sniff your knickers and then tell me if it don't smell like the rest of us
you progressives are a joke w/ ur arrogance.
Oregonians want the kicker - tell ur gov friends to monitor themselves like normal people do and if they demonstrate they can exhibit some self-control then THEN we'll talk rainy day. So far they have NO SELF Control nor intelligence to handle large sums of cash.
Feb 23, '10
To: Terry Parker
I've heard my Sen. Starr say that the rainy day fund should be established, and we should just put 3% of the state budget in it. I'm assuming that means only during times when the economy is stable, like you suggest. Though I haven't heard him say that. Probably because it doesn't make for a good sound bite, and takes some thought.
But, Let me ask you this, Assuming a good economy, are you suggesting we figure out what it would take to continue services, then cut that by 3% and put it into your rainy day fund? Or are you suggesting we fully fund services, and add 3% to that for the rainy day fund.
If its the former, what are you proposing we cut? Across the board? Schools? Public Safety? Do you even know how that would effect services? And, would the Republicans and tea bloggers ever ever agree to build in a 3% reserve? wouldn't they just argue that all we need to do is continue to cut spending 3% every year and the economy would blossom.
If you're suggesting the latter, aren't you just saying that we're increasing the kicker trigger to 5% with only the additional 2% being refunded? And in that case, why not just change the kicker to provide the first 3% excess goes to a rainy day fund? That would be truth in legislation.
And to Chuck S. Please quit saying that getting a rebate on taxes we paid in is government spending. I understand the term tax expenditures, but you're using it incorrectly here I think. A "tax expenditure" is where the government targets deductions, credits, etc, instead of direct government spending on a policy or program. The kicker isn't in lieu of spending, it isn't a BETC, it isn't a mortgage or charitable deduction. It isn't a credit or deduction in lieu of a particular policy. Its a rebate to taxpayers WHO PAID THAT TAX IN.
Not saying its good policy, but I don't think it meets the definition of tax expenditure. And frankly, when you tell me that the government is spending money on me when I get back a couple hundred dollars after paying several thousand, it irks me, it fails the common sense test, and you lose credibility.
Feb 28, '10
Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices: "Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM."
The Center for Responsible Lending says YSP "steals equity from struggling families."
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/release/?id=A09C6A80-537A-4EB1-83C5-31925F046B6F
Feb 28, '10
Chuck,
Thanks for continuing to push on this. While I'm disappointed that the legislature didn't act--again--I do feel the momentum building strongly in the grassroots community. I hope that we can keep that momentum going and see action next session.
I think its important to make this a campaign issue. We need our politicians to be hearing from voters that this is important and to be on the record promising action.
The challenge, as always, is for Oregonians who care about this to not let it slide down the list of importance for more immediate concerns.
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