The Real Problem with the Latest Tax Plan

Chuck Sheketoff

In the latest tax reform plan floated in Salem, the inclusion of a sales tax is not the problem. The problem is that the plan uses a sales tax to pay for a big income tax cut for wealthy Oregonians.

Commendably, Senator Mark Hass and others pushing the reform plan have committed to offsetting much of the disproportionate impact that the sales tax would have on low-income Oregonians by including both a refundable income tax-based sales tax credit and an improved earned income tax credit.

Senator Hass and his colleagues also rightly recognize that property taxes take a disproportionate share of income from low- and middle-income households. So their plan includes a long sought-after homestead exemption to lower the property taxes of those with the least ability to pay them.

Finally, it’s encouraging that the Hass plan would raise additional revenue. A modest sales tax, for example, could help fill gaps in education funding, from pre-K through the community college and university systems. It could help provide health care for all, relieving businesses and individuals alike of that significant expense.

Yet the Hass plan also commits much of the revenue raised by the sales tax to finance a huge income tax cut for the most well-off Oregonians. The wealthier they are, the bigger the income tax cut. While the plan cuts income tax rates across the board, wealthy Oregonians at the top bracket get a bigger rate reduction than everyone else. All told, more than half of the tax cut goes the richest fifth of taxpayers, with the top 1 percent reaping about 17 percent of the gain.

Adding insult to injury, after bringing the top tax rate from 9.9 percent down to 6 percent, the plan cuts in half the income tax rate on certain capital gains. Who are the prime beneficiaries of this cut? We know that about two-thirds of all capital gains income flows to the top 1 percent.

It would be interesting to hear Sen. Hass explain why an income tax cut for the wealthy is justified. For now, we have The Oregonian’s flawed excuses (PDF): growing the economy and creating stability in the tax structure.

Decades of evidence show that tax rates on the wealthy have no correlation with economic growth or job creation. The Oregonian and others who claim our income taxes are too high refuse to acknowledge that Oregon’s economy has grown faster than all but one state in the nation over the past decade.

Indeed, as Pope Francis recently noted, "trickle-down theories which assume that economic growth, encouraged by a free market, will inevitably succeed in bringing about greater justice and inclusiveness in the world has never been confirmed by the facts.” (PDF). The income tax rate cuts in the Hass plan are pure trickle-down economics.

As to the “stability” claim, it is misguided. For sure, making Oregon’s public finance system more stable — better able to respond during economic downturns — is critical. But handing a big tax cut to the well-off does nothing to further that goal, while robbing the system of dollars when the economy is humming along.

The best way to achieve stability is to build a well-stocked rainy day fund. And the most common-sense way to do that is to eliminate the provision in our tax structure that spends the money through an automatic tax cut — which primarily benefits the well-off — when more revenue comes in than expected. Saving, not spending, unanticipated revenues generated during good economic times would help the state weather bad economic times.

Some might say that eliminating this inappropriate spending through automatic tax cuts that steal from the rainy day funds is too difficult politically. But is it any harder than enacting a sales tax, which Oregonians have rejected nine times? Shouldn’t Oregonians get at least one chance to vote to save in a rainy day fund, not spend, unanticipated personal income tax dollars?

Oregon does need tax reform. And a sales tax component may be something worth considering if it is designed carefully to protect low- and middle-income families, and if it raises new revenue to invest in Oregon’s physical and human capital.

What we definitely don’t need, however, is another income tax cut for the well-off.

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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.

By Chuck Sheketoff Dec. 03, 2013