Tax Reform

Oregon Triggered by Poor Tax Policy

Oregon taxpayers will receive $464 million worth of their income tax payments back as refundable credits on their 2018 returns, despite the initial $1.8 billion gap between planned spending and expected revenues to start off the 2017-2019 biennium. At the same time, lawmakers are considering one of the largest tax increases in state history. Triggering the disconnect is a 1979 law unique to Oregon called “the kicker” by which taxpayers sometimes enjoy a partial income tax rebate after a biennium ends.

Ideally, tax and expenditure limits are designed to ensure that government does not grow faster than the private economy. Oregon’s law stands out when compared to other triggers, such as Colorado’s Taxpayer Bill of Rights, because its refund baseline is projected revenue rather than actual revenue. So while the kicker might appear advantageous, unfortunately, its baseline renders it ineffective in preventing excessive spending growth and providing long-term, structural fiscal reform.

The kicker is activated when actual tax revenue collected in a biennium exceeds anticipated revenue by a minimum of two percent. If actual revenues exceed this limit, the full amount of unanticipated revenue is then rebated. Originally, the kicker rebated both personal income taxes and corporate income taxes to taxpayers. But in 2012, voters approved a ballot initiative that allocated corporate income tax rebates to the State School Fund rather than to business owners. Individual rebates include revenue from personal income taxes, insurance taxes, inheritance taxes, tobacco taxes and some other sources; corporate rebates simply include corporate income tax revenues.

This mechanism lacks the power to rein in spending increases because the trigger and subsequent refund are independent of expenditures in a given year. As a result, it’s possible for no refund to take place while at the same time revenue and spending grow substantially, just so long as that revenue and spending was included in budget projections. Ultimately, triggering the rebates based on projected revenue as the baseline—rather than actual revenue growth—means budgeted spending is unaffected by the trigger. Only a kicker tied to actual increases in year-over-year revenue or spending, ideally adjusted for growth in inflation and population, would hold down spending long-term.

The kicker does provide some relief, but leaves the underlying tax structure unchanged, rendering it less effective in producing long-term benefits. Any taxpayer rebate resulting from an understated projection creates only temporary and partial respite. Though beneficial to return dollars to the private sector where they can be put to more productive use and not be used to grow government—not all tax cuts are created equally. Only at the conclusion of the biennium do taxpayers even know whether a partial tax rebate will ensue. This uncertainty negates one of the benefits usually accompanying a tax cut—enhanced economic output as taxpayers react to the marginally greater personal benefit from working and investing. Prior knowledge of the effective tax rate for a given year would empower individuals to work and invest based on more complete information about the economic climate. Uncertainty renders this more informed decision making—which could spur additional economic growth—impossible.

When properly designed, tax triggers can be a source of resiliency, safeguarding state governments from unnecessary tax hikes or spending cuts. A trigger based on exceeding a particular level of real revenue growth—rather than on exceeding a mere prediction of growth—would be more effective in preventing government growth. Further troubling, a rebate based on a prediction provides government estimators with an incentive to make overly optimistic projections in order to avoid a rebate. Because of these design flaws, state legislators find themselves in the peculiar circumstance of issuing tax rebates while pondering an enormous tax hike.

Structural changes to both revenue and spending would brighten Oregon’s economic climate and provide more stability for appropriators and taxpayers. A continuation of the current kicker scheme controls neither spending nor tax burdens. The ALEC State Budget Reform Toolkit is a starting point for reforms.

In Depth: Tax Reform

Mainstream economists, small business owners and taxpayers across the country understand that growth-oriented reforms mean increased opportunity for all. As demonstrated by the annual Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index, sound tax and fiscal policies are critical to economic health, allowing businesses and households to flourish. A…

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