Oregon lawmakers worried about the state’s heavy reliance on the income tax will try to deepen their revenue foundation by proposing a 5 percent sales tax, according to an early draft of a tax reform package.
The draft, obtained by The Oregonian, offers reforms that lawmakers say would create more than 55,000 new jobs and raise $488 million in new annual tax revenue.
Reforming the state’s tax code is a top priority of Gov. John Kitzhaber (D), who has long worked to reshape Oregon’s tax system. Oregon is one of just four states, along with Montana, New Hampshire and Alaska, that doesn’t have a sales tax. That means the state gets more than two-thirds of its revenue from income taxes, the highest percentage of any state.
“We are the most heavily reliant state in the country on a single source” of tax revenue, State Sen. Ginny Burdick (D), chair of the Senate Finance and Revenue Committee, said in an interview in October.
States that rely most heavily on income tax revenue:
(Sources: The Tax Foundation, U.S. Census Bureau)
Income taxes are the first revenues to fall in a recession, a lesson Oregon learned again over the last few years, when the state faced deep budget deficits. Sales taxes are more stable, and basing revenue on a broad combination of sales, income, corporate and property taxes can insulate a state from recessionary deficits.
“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,” Lyman Stone, an economist at the Tax Foundation, said in an interview last month.
Currently, Oregon has five personal income tax brackets, ranging from 5 percent to 11 percent. The proposal would shave the state’s personal income tax rates to three tiers of 2, 4 and 6 percent and boost the earned income tax credit. Investment taxes, homestead exemptions and capital gains taxes would also be capped, costing the state an estimated total of $7.7 billion over two years.
The sales tax would replace that revenue, adding $8.5 billion over the same two-year period, according to estimates from the Legislative Revenue Office.
States that rely most heavily on sales tax revenue:
(Source: The Tax Foundation, U.S. Census Bureau)
But the proposed reform would almost certainly need buy-in from Oregon voters. Any tax referendum will make it to the ballot, in part because the threshold for putting initiatives before voters is so low in Oregon. And the track record isn’t great: Oregon voters have rejected a sales tax nine times before.
In an interview last month, Kitzhaber said he would try to bring both business and labor groups to the table to create a broad, bipartisan coalition to change the tax code. He has engaged top Republican and Democratic strategists, including powerhouse Democrat Kevin Looper, to conduct polls and focus groups.
“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.”
Putting a massive tax reform issue before voters is risky, especially since Kitzhaber faces reelection next year. He has not said whether he will seek an unprecedented fourth term, but he would likely face only nominal Republican opposition if he does.