Robin Hood
Will a reluctant kulongoski and his merry band finally give the poor tax reform?
BY ALAN PITTMAN

Robin Hood may have robbed from the rich and gave to the poor, but Oregon does just the opposite.

Oregon effectively taxes its wealthiest 1 percent of families at a rate one-third lower than the poorest 20 percent of state families, according to a study this year by the Institute on Taxation and Economic Policy (ITEP). The wealthiest families averaging $672,400 of income pay 6.1 percent of their income in combined state income, property and excise taxes. The poorest families averaging $9,300 in income pay 9.4 percent of their income in state taxes.

Such unfairness appears ripe for reform and tax reform is a major topic in the state as Oregon struggles to fund schools and basic services with billions in red ink. But while most agree on the need for reform, there's little agreement on what exactly "reform" means. For some reform means more breaks for the rich and yet higher taxes for the poor. For others it means taxing the rich to help the poor. For some reform means more taxes. For others it means less.

"Everybody wants tax reform, but that means a hundred different things to different people," says Tim Hibbitts, one of the state's leading pollsters. "I don't know how you stitch together a majority coalition."

Stitching a majority vote to mend Oregon won't be easy. But there's a lot of ideas on how to do it, and a growing number of people say the key may be taking from the rich to give to the poor.

 

Reverse Robin Hood
The unfairness of Oregon's tax system is made worse by the state's many questionable tax breaks for the wealthy and businesses, according to studies by the Oregon Center for Public Policy (OCPP), a progressive think tank, and Fund Oregon's Future Today (FOFT), a coalition of 50 progressive groups pushing for tax reform.

The wealthy cash in on a host of tax breaks in Oregon including:

Wealthier Oregonians that itemize their deductions get $300 million a year through a break that allows them to deduct their federal income taxes from their state taxes. About 74 percent of Oregonians with incomes under $40,000 don't benefit from itemized tax deductions. Among people with incomes over $100,000, 95 percent itemize.

Oregon spent $22 million in 2001 helping wealthy homeowners with incomes more than $200,000 pay their mortgages by allowing them to deduct their loan payments. About $21 million a year in such deductions goes to owners of second homes.

The income tax kicker benefits mostly the rich. In 2001 the richest fifth of Oregonians reaped two-thirds of the kicker money.

Oregon gives $18 million a year in tax breaks to households earning more than $100,000 to help cover medical expenses.

Oregon gives yacht owners $14 million in property tax exemptions a year.

Big business in Oregon also gets big breaks, including:

State Enterprise Zone and Strategic Investment programs give corporations about $80 million a year in property tax breaks.

Oregon spends about $12 million a year on a Pollution Control Tax Credit that pays industry for projects that they are legally required to do anyway.

Oregon gives corporations about $35 million a year in tax breaks to support their foreign operations.

The state taxes large corporations' income at 6.6 percent while taxing small businesses and individuals at 9 percent.

Oregon business were recently given a state break to accelerate depreciation of their purchases, a $52 million a year windfall.

All these big business breaks have left the state with the lowest business taxes in the West, according to a study by the Association of Washington Business. Last year, more than 80 percent of Oregon's corporations used enough income tax loopholes and dodges to qualify for the minimum payment of $10, according to the FOFT coalition.

Many of the business breaks are supposed to create jobs, but there's little evidence of that. Ed Whitelaw, a UO professor and one of the Northwest's leading economists, recently told EW that study after study has shown that corporate incentives don't do much to improve the economy. "We've know [that incentives don't work] for decades, yet people keep getting suckered into it," Whitelaw says.

The unfairness is only getting worse. During the last decade, the tax burden on Oregon's low income families increased by 2 percentage points to 9.4 percent of income. The wealthiest Oregonians saw a slight decrease in taxes, according to OCPP. In 1990, businesses paid more than 40 percent of the cost of running state schools. Now they pay less than 30 percent.

 

Poor Taxes
Many of the leading proposals for tax reform in the state Legislature would only make the system more unfair.

House Bill 3500 has the backing of some moderate Republicans and some Democrats. The bill would trade a 5 percent sales tax for a reduction in state income taxes.

OCPP found that even if the sales tax exempts groceries and other necessities, the bill would result in an average tax increase of $227 for the poorest 20 percent of Oregonians and an average tax break of $21,000 for the richest 1 percent.

The problem is that sales taxes hit the poor much harder because they tend to spend all their money while the wealthy save most of their money. Income taxes hit the poor comparatively less because they are based on a percentage of income. Washington state has a sales tax but no income tax and has the most regressive tax system in the nation, according to ITEP.

HB 3500 "is a double hit to tax fairness," says Tim Nesbitt, director of the Oregon AFL-CIO, a leading member of the FOFT tax reform coalition.

Lynn Lundquist, director of the Oregon Business Association, says his group will "probably" support some sort of sales tax. The regressive impact of the tax on the poor is a concern, he says, but could be partially offset with income tax breaks targeted at lower incomes, he says. "Can you completely do away with it? Probably not," he says.

Jeff Thompson, an economist with OCPP, says even if the poor were protected with targeted income tax breaks, the middle class would probably still see a big tax hit while the rich get a tax cut.

Another problem with sales taxes is that they aren't deductible on federal taxes like income taxes. With HB 3500, Oregon will in effect end up sending 15 percent of the new tax revenue or $400 million to Washington, D.C., Nesbitt says.

The idea of the federal government in effect taking a big chunk out of the proposed tax increase is troubling for Lundquist. "It's the biggest single issue that we don't have an answer to."

A sales tax proposal would also have little chance in passing, says Hibbitts. "I've been down this road. I've been polling in this state for almost 30 years," he says, pointing out that sales tax proposals have failed in the state nine times with support below 30 percent.

Nesbitt says most Oregonians will recognize the unfairness of a sales tax with income tax cuts that benefit the rich. "There's not a chance in hell of that passing."

"The odds of us being successful are tough to say the least," admits Lundquist.

 

Robin Hood
Increasing income taxes on the wealthy would have many advantages, progressive reformers say. "You could keep the fairness and get more revenue," Thompson says.

The rich would only have to actually pay about 70 percent of the state income tax increases because the federal government would cover the rest with federal income tax deductions.

Wealthy Oregonians could afford to pay more. In Oregon, the wealthiest 1 percent doubled their incomes in the 1990s while most other Oregonians saw stagnant wages. In the 1990s, the state had the largest jump in income inequality in the nation, according to OCPP. The situation is only getting worse. Almost half of the recent federal tax cut went into the pockets of the wealthiest 5 percent of state residents.

To make the income tax more fair, Oregon could reduce the percentages it charges the poor and increase the percentage charged on the wealthy. Oregon's income tax rates are effectively nearly flat right now. About 70 percent of taxpayers qualify for the top 9 percent rate. That's far more regressive than most states. Oregon's effective income tax rates (before federal deductions) are about three times higher for the wealthiest 1 percent than the poorest 20 percent. The national average for state income taxes is a nine times difference between the rich and poor. California's steeply progressive income tax hits the very rich 40 times harder than the poor.

Oregon's flat taxes mean that the poor here pay some of the highest state income taxes in the nation. Oregon families of four with incomes at 125 percent of poverty pay $730 in income tax, the second highest such bill in the country, according to ITEP.

To make income tax revenue more stable during economic downturns, the state could create a rainy day fund to take it through recessions, Thompson says.

But boosting income taxes on the rich could meet sharp opposition from business groups. "I don't think that will fly," says the OBA's Lundquist.

"Our income taxes are so high they certainly have a negative effect on business," Lundquist says. Charging more "may drive some of the executives from here to Washington," he says.

Thompson says studies show the argument that high income taxes hurt the economy isn't true. Oregon had the fastest growing economy in the nation in the 1990s despite its comparatively high reliance on income taxes, he says. Most businesses value the government services and quality of life that taxes bring and won't go to all the trouble to move just to seek out lower taxes.

But Thompson acknowledges that opposition to higher income taxes is widespread, even among Democrats. Lower income taxes has been a "right-wing mantra" for years in Oregon, he says. "A lot of Democrats have unfortunately fell under the sway of that siren song."

Nesbitt says strong business opposition could make higher income taxes on the wealthy hard to pass. Other progressive reforms may be more viable, he says. "They would fight them all, but I'm trying to figure out which ones they would fight the strongest."

 

Breaks On Tax Breaks
An alternative to raising income taxes would be going after all the tax breaks for the wealthy and big business.

Currently about 45 cents of every tax dollar is lost to tax breaks, according to FOFT. A law limiting such breaks to 33 cents on the dollar would generate $1.7 billion in new revenue, Nesbitt says. The law would require the Legislature to budget expenditures for tax breaks for businesses and the wealthy just as it budgets expenditures for government services, he says. "We have polling that shows people like that idea."

Lawmakers need to consider that each dollar in tax breaks steals a dollar from needed state services, according to FOFT. Cutting a million dollars in tax breaks would buy one day of school for 51,000 students, in-home care for 77 seniors for two years or two years of medical insurance for 129 Oregonians.

State spending on social services may also be a better creator of jobs than tax breaks by bringing into the state economy millions of dollars in federal matching funds, according to OCPP.

A variety of other reform ideas are floating around, including:

Making the 6.6 percent corporate income tax rate match the 9 percent personal and small business rate would bring in $300 million, according to Nesbitt.

A statewide commercial and industrial property tax for schools ($3 per $1,000), would raise $645 million in the next biennium, according to FOFT.

As part of a reform package, the tax burden on the poor could be lessened by a homestead exemption or other relief directed at low-income property tax payers, according to OCPP.

Expanding Oregon's Earned Income Tax Credit and making it refundable would also provide relief for the poor. Oregon's credit is set at only 5 percent of the federal credit while Vermont gives the poor up to 32 percent of the federal credit, according to ITEP.

Means testing income tax deductions for medical care, home mortgage and tax expenses and other deductions by making them unavailable for wealthy taxpayers would save the state millions while protecting low-income tax payers, according to FOFT.

Some legislators have proposed a value added or other internal business sales tax similar to those in Europe. Such taxes would likely be passed on directly to low-income consumers and share the same unfairness as a sales tax, according to OCPP.

Eugene Mayor Jim Torrey has proposed the state allow a local option for school districts to increase property taxes to fund their schools. Property taxes are more progressive than sales taxes, but not as progressive as income taxes, according to ITEP.

Repealing the state income tax kicker would bring in more revenue by increasing taxes mostly on the wealthy.

The Oregon Business Association has proposed an across-the-board 23 percent reduction in itemized deductions and personal income tax exemptions to generate $620 million. OCPP says the reduction should apply only to higher income tax payers. OBA has also proposed increasing the corporate minimum tax to bring in $50 million and capping the state deduction for federal income taxes to bring in another $100 million.

Leaderless
Reformers have little hope that the state Legislature will do much to reform taxes and bail the state out of its $3 billion hole. "Their [Republican] caucus is held hostage by a handful of right-wing ideologues," says Joy Marshall, director of Stand for Children, a member of the revenue coalition.

Nor do reformers see much hope in Robin Hood-like leadership from Gov. Ted Kulongoski. "He doesn't want to go to the public with a major tax reform proposal," says the governor's spokesperson Marian Hammond.

Hammond says Kulongoski may propose a reform in a couple years but believes that the public needs time to discuss and understand the revenue and tax problems the state has. Rushing to voters "is not going to succeed," she says.

Hammond says the governor hasn't yet decided even how to begin discussing reforms with voters. "That's something we will be looking at in years to come."

The lack of leadership from the governor has caused frustration among coalition members. "Many people would like to see the governor take a stronger stand," Marshall says.

Kulongoski may be shying away from a vote on tax increases during the statewide races in 2004. He had a tough fight to win election last year with Measure 28 looming on the ballot.

But Hibbitts says with the down economy, the governor's race would have been close even without Measure 28. Kulongoski shouldn't worry about a tax ballot hurting Democrats in 2004, he says. "It probably wouldn't make much of a difference."

Reformers say the time to act is now. "Oregon can't afford not to act," says FOFT coalition director Chip Terhune. "We've become this national poster child for states in fiscal difficulty."

Budget cuts threaten to cut medical coverage for 150,000 Oregonians and close schools up to 30 days early. "Tremendous damage is being done," Terhune says.

Lundquist of OBA says business leaders also have a sense of urgency. "We cannot have a healthy business environment if we let the state fall below certain minimum standards," he says. Already it's becoming hard for businesses to recruit employees to a state with a national reputation for schools closing to save money, he says.

Nesbitt says now is not the time for yet more tax reform blue-ribbon commissions. "It's a time for solutions."

With so much publicity recently about Oregon's failure to fund schools, the time is ripe right now for reform, Nesbitt says. It will be harder to restore cut programs later than save them now, he says. With school out for summer, the public pressure for reform has let up, he says. "We may already have lost it for the time being."

 

Taking Initiative
With action from the governor and legislature unlikely, FOFT coalition members say they're preparing to gather signatures to put a progressive tax reform measure on the ballot in November 2004.

Coalition members are now debating among themselves and trying to figure out what exactly to put on the ballot. Members want something that will be fair, politically viable and provide additional stable revenue, Terhune says. "It is going to take a lot of work to boil it down to either a single initiative or series of initiatives."

Given the urgency of the school funding situation, there's some debate on whether it's more important for the measure to provide more revenue and be politically viable or be fair to the poor, Marshall says.

David A. Leslie, director of Ecumenical Ministries of Oregon, says the most important criteria should be fairness. "It would be better to try and keep the principle focused before you jump to any revenue is good revenue."

"The benchmark has to be does this make the tax system more fair to working families. Without that I don't think it has a chance" of passing, Nesbitt says. The AFL-CIO director says the group should put one easy to understand measure on the ballot. Two measures could split a potential majority and both fail, he says.

 

Moral Majority
Whatever reformers put on the ballot, it won't be easy to pass.

"I don't think it's a problem of finding the right question," Hibbitts says. "Nothing would pass."

A tax increase will be even more difficult given recent votes to fund tax increases in Eugene and Multnomah County, Hibbitts says. Voters who've already passed a local measure for schools may say, "We gave at the office."

"It's way too early to know what's going to pass in November 2004," Marshall says. She says this tax reform effort will be more broad based and well-organized than the failed Measure 28 campaign and other past efforts at tax reform.

Oregon passed an income tax increase in the deeper 1980s recession to fund schools, Marshall says. "We could do it now if we had the political will."

If Oregon is able to reform the higher burden of it's taxes on the poor, it would be a leader among states nationwide. Oregon state taxes are actually less regressive than most states, mostly because Oregon lacks a sales tax, according to ITEP.

State taxes are so regressive because of a variety of reasons, according to Bob McIntyre, director of ITEP. States historically left income taxes to the federal government, were ignorant of the highly regressive nature of sales taxes, and were more vulnerable to lobbying by the better off against reform. "Changing the tax system in a big way is hard to do," McIntyre says.

Another difficulty in taxing the rich and giving to the poor is that "class warfare politics hasn't been terribly successful in the United States," Hibbitts says. "Many people believe that one of these days they're going to be in the upper class," Hibbitts says. Middle class voters also often have different interests and don't ally with lower income people, he says.

But McIntyre says, "raising taxes on the rich always polls well." The challenge, he says, is educating voters that the poor get stuck with the bills the rich don't pay. "When confronted with the tradeoffs, people tend to move towards more progressive taxes."

Nesbitt says the appeal of fairer taxes will help pass a ballot measure. "The key to solving the budget problem is to come up with a more fair tax system that raises revenue," he says. "Fair taxes for good schools and good jobs," should be the motto, he says.

"Possibly that might have a chance," says Hibbitts of such a Robin Hood call for fairness and justice.

Leslie of Ecumenical Ministries says fairer taxes have a universal moral appeal. "In a fair and just society, the rich should pay more," he says.

In anti-tax Alabama, conservative Republican governor Bob Riley is citing the Bible in his campaign to reform the "immoral" taxes in his state by taxing the rich more and the poor less.

Who would Jesus tax?

 

 


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