PORTLAND — The economic boom of the 1990s and early 2000s were good to Oregon. The state’s technology industry grew rapidly. Nike expanded its facilities and hired workers. Even the wine and beer industries grew from small vanity projects to serious revenue contributors. But when the recession depressed incomes and cost thousands of jobs, few states were hit harder than Oregon.
That’s because Oregon, one of five states in the union without a sales tax, relies more heavily on income taxes to fill its coffers than any other state in the union. When incomes drop, so do state revenues.
States that rely most heavily on income tax revenue:
(Sources: The Tax Foundation, U.S. Census Bureau)
Now, Gov. John Kitzhaber (D) and state legislators are contemplating new ways to diversify the state’s revenue streams and overhaul its tax code. Inevitably, their thoughts are turning to a new sales tax as a pillar of any reform plan.
But Oregon has been down this road before. The state’s voters have been asked to impose a sales tax on themselves nine times since 1933; all nine measures have failed.
Kitzhaber, who was elected to his third term in 2012 after spending eight years out of public office, seems determined to try once again to reform the state’s tax code. In an interview, he said he views the effort to rewrite a tax code that has been largely unchanged since 1957, when he was just 10 years old, as part of a larger vision.
“Tax reform is part of this larger question of how we address growing income and wealth inequity, and frame it, not as a fight between the rich and the poor, but a more basic question of how do we ensure that the growing wealth of this economy is equitably shared among the people who are driving it,” Kitzhaber said. “The key is to frame it in a way that doesn’t create polarization but engages people in seeking an answer that will be beneficial to all of us in the long term. I think that’s impossible to do in the Beltway today. I think it’s still possible in the states.”
Kitzhaber said he would work to bring business and labor interests together to craft a new set of proposals. The two interest groups, which once had a strong working relationship, were driven apart by a pair of ballot measures in 2010, which raised taxes on corporations and wealthier Oregonians. The two measures passed with labor backing and over business opposition.
“We have to reengage business and labor. Without those large groups pulling in the same direction, it will be hard to be successful,” he said. Kitzhaber said he wanted to spend a few months on a “deep dive into where the solution space is” — identifying areas where both sides agree on a solution.
Any final package, he said, has “got to have a lot of authors.”
Oregon faces challenges that the other four states without a sales tax don’t. Those states all rely on more diverse revenue streams: Montana and Alaska each fund their states through taxes on oil and coal mining operations. New Hampshire relies on corporate income taxes for a hefty percentage of their revenue. And Delaware gets more than a third of its revenue from licensing taxes and fees.
Of the $8.1 billion in tax revenue Oregon collected in 2011, more than two thirds — nearly $5.5 billion — came from income taxes. That means Oregon relies more heavily on income taxes as a source of revenue than any other state relies on any other single revenue stream, with the exception of Alaska’s reliance on the taxes oil companies pay.
“We are the most heavily reliant state in the country on a single source” of tax revenue, said Ginny Burdick (D), chair of the Senate Finance and Revenue Committee.
By comparison, the average state gets about 20 percent of its tax revenue from income taxes, and 34 percent of its revenue from sales taxes, according to the Tax Foundation.
Relying so heavily on a single source of revenue, tax policy experts say, leaves a state vulnerable when the economy experiences a downturn. But not all revenue streams are created equal: Income tax receipts are especially vulnerable to economic downturns.
“A state that collects more of its revenue from sales taxes on final consumption, we think, is going to be more stable, because even when people’s income falls, consumption seems to change by not as much,” said Lyman Stone, an economist at the Tax Foundation. “Highly progressive income taxes, and income taxes generally, are more volatile. Things like property taxes and sales taxes are less volatile.”
Burdick, who will be involved in the tax reform conversations, said a sales tax would almost certainly be a part of the reform conversation. She estimated that a 5 percent sales tax would generate between $700 million and $1 billion in new revenue, even if it was offset by income tax cuts, because the state would begin to capture new revenue from visiting tourists.
Still, some tax policy experts say a sales tax inherently shifts the tax burden from higher-wage earners onto lower income families.
“Poor and middle class families have to spend more of their income on necessities that are taxable than do high income families,” said Kitty Richards, associate director of tax policy at the left-leaning Center for American Progress. “If what you’re worried about is providing a good steady stream of money for important investments, a better way to think about volatility in tax collections is to deal with longer-term budget planning, and thinking about how to invest in the rainy day fund when the revenue is coming in strong.”
States that rely most heavily on sales tax revenue:
(Source: The Tax Foundation, U.S. Census Bureau)
The twin hurdles Kitzhaber and his allies face are Oregon’s high threshold for tax increases and low threshold for qualifying ballot measures. Democrats don’t control the three-fifths of the legislature required to unilaterally pass tax measures. And virtually any revenue package is almost certain to make it onto the ballot, either because backers want voter ratification or because opponents want to roll back the changes.
“The real issue with tax reform is, yes, it’ll have to go on the ballot or it will get on the ballot, but that should be okay,” Kitzhaber said. “You have to convince people, bring them to see that this is really in the common interest. That makes the hill steeper, but the outcome more robust and enduring.”
Kitzhaber, already Oregon’s longest-serving governor, hasn’t said whether he will run for a fourth term in 2014. But the way he talks about tax reform suggests that passing what would become his signature accomplishment will take longer than the 15 months he has left in his third term.
“No one’s ever done an 18-month campaign. Voter ID, GOTV, really engage people in a conversation,” he said.