State Taxes, Volatility and the Kicker

As tax revenues in Oregon once again reach the level to trigger corporate and personal kickers, we’re likely to see lawmakers talking about tax reform.

As tax revenues in Oregon once again reach the level to trigger corporate and personal kickers, we’re likely to see lawmakers talking about tax reform.

Oregon's tax revenue system is slightly more volatile than the all-state average, but less than some critics think based on a new study by Pew Research. One volatile element not included in the Pew assessment is the personal income tax kicker, a unique and quirky procedure that rebates to taxpayers money that exceeds projected revenues by two percent or more.

According to Pew, Oregon's state tax regime volatility rating is 6.4 percent, compared to an all-state average of 5 percent. The most volatile state tax regimes are ones heavily dependent on severance or extraction taxes. Alaska has the most volatile state tax system at 34 percent.

Oregon depends heavily on personal and corporate income tax revenues, which rise and fall in concert with broader economic trends. When times are good, Oregon's income tax system generates a growing pot of money.

If times are too good, Oregon's personal income tax kicker is triggered, requiring a chunk of incremental revenue to go back to taxpayers.

Triggering the personal and corporate income tax kickers could happen again this year, forcing state lawmakers to contend with a hole in their budgets. In the latest quarterly economic forecast, state economists said the corporate kicker is almost certain to be triggered and we are very close to triggering the personal kicker.

The corporate kicker is in the $50 million range and poses less of a problem because that revenue is now dedicated to schools instead of business bottom lines. The personal income tax kicker, if triggered, would likely be in the $300 to $500 million range, enough to pinch the state budget, but not anything like the $1 billion bite in the 2005-2007 biennium, which at the time represented 10 percent of Oregon's General Fund. 

Reducing volatility has been a long-time goal of governors and legislators. It is the source of most drives for "tax reform." Arguments generally come down to finding a "balanced" state tax system, which usually means one that derives revenue from both income and sales. The argument for less volatility is that it makes it easier for state budget writers to do their jobs. 

Sales tax advocates point to Washington, which has a sales tax but not personal income tax, as an example of a more stable tax system. The Pew research shows Washington's tax system volatility is 4.6 percent. 

South Dakota, which relies on a sales tax, has the least volatile tax regime at 3.6 percent, Pew says. The next lowest state in the ranking at 2.9 percent is Kentucky, which has both personal income and sales taxes.