$2 billion revenue challenge

A Challenge and a Legacy Lie Ahead for Legislative Democrats

Oregon’s Democratically controlled 2019 legislature will have its work cut out for it with a $2 billion revenue challenge for education, an $800 million hole to patch for Medicaid and passage of legacy legislation to curb greenhouse gas emissions through a cap-and-trade program.

Oregon’s Democratically controlled 2019 legislature will have its work cut out for it with a $2 billion revenue challenge for education, an $800 million hole to patch for Medicaid and passage of legacy legislation to curb greenhouse gas emissions through a cap-and-trade program.

The Democratically controlled 2019 Oregon legislative session will address a “once in a generation” challenge to boost education funding by $2 billion and a potential legacy-making bill dealing with climate change.

Expectations are high heading into the session, which begins in January. Neither will be a cake-walk to achieve, despite Democratic supermajorities in the House and Senate.

Some of the complicating factors are:

  • Oregon lawmakers also have to find more than $800 million to sustain the state’s Medicaid program.

  • The Public Employees Retirement System unfunded liability is expected to grow by possibly as much as $4 billion, with no strategy in place to reduce it.

  • There are signs the US economic recovery is facing headwinds caused by an escalating global trade war, political unrest in Europe and a weakening economy in China.

Passing major tax legislation – and avoiding a referral to voters – is never easy, whether for schools or cleaning up the environment. For example, despite polls showing general support for climate legislation, Washington state voters have twice rejected carbon tax proposals. Oregon’s approach, which involves capping greenhouse gas emissions and allowing carbon trading in a state or regional marketplace, is different, but will still be cast by opponents as a tax.

Governor Brown has called her $2 billion challenge for education an opportunity that lawmakers can’t pass up because of the state’s robust economy and the needed Democratic votes in the House and Senate to approve tax bills. Brown also has called the Clean Energy Jobs bill “absolutely a legacy issue.”

Senate President Peter Courtney has endorsed the legacy label for the Clean Energy Jobs bill. "As a 75-year older person – you know I'm going to go to the children and grandchildren – I cannot think of a more serious issue," he said.

While it might be legacy legislation, it also has been introduced and failed to pass in the previous two legislative sessions. Part of the reason is its inherent complexity. Ted Sickinger filed a report for The Oregonian that outlined some of the complexity, which includes exactly what emissions will be capped and what emissions will be exempted.

In the 2019 session, advocates for the Clean Energy Jobs bill have apparently cut a deal with utilities that say their ratepayers are already footing the bill for greenhouse gas emission reductions baked into their future energy plans. Even that compromise isn’t without some debate over whether the utility plans should accelerate emission reductions. Timber and agriculture also may be exempted.

Another complicating factor is “leakage,” which boils down to manufacturing operations relocating to another state to avoid the cost of a cap-and-trade system. Republican Senator Cliff Bentz points to Ore-Ida Foods in Ontario. "I do not want to drive it 150 yards away into Idaho," Sickinger reported. "It will be devastating."

A report unveiled last week confirms Bentz’s fear that the potential for leakage in the manufacturing and industrial sectors is substantial, which if it happened to any degree would throw shade on the legacy of the legislation. “It would also eliminate a big chunk of allowance revenue [advocacy] groups are expecting to reinvest in carbon reduction and climate change adaptation programs,” Sickinger said. 

Rural interests have expressed concern that the increased price of fuel for cars and trucks will disproportionately hurt them at the pump. Then there is a constitutional question about whether any tax revenue collected from cars and trucks can escape the Oregon Highway Trust Fund. In anticipation of that question, Senator Michael Dembrow wants to include a provision to fast-track a challenge to the Oregon Supreme Court.

There is the need to put the program, if created, some place in the state bureaucracy. In her recommended 2019-2021 budget, Brown calls for elimination of the Department of Energy. She proposed creation of a new agency – the Oregon Climate Authority, which would assume the role of the existing Oregon Global Warming Commission. Creating a new agency and identifying who will sit on its advisory board can produce legendary backroom legacies.

Finally, in a system that involves carbon credits, you need a marketplace to trade them. Backers of the legislation and some industry groups favor linking the Oregon cap-and-trade program to the Western Climate Initiative, led by California. Bentz worries Oregon will be like a flea on a dog’s tail without much influence on the direction of the marketplace. 

Neither the $2 billion education challenge or the Clean Energy Jobs bill figure to be among the early bills to move in the 2019 session. Their destiny inevitably will be as part of 11th-hour legislative maneuvers to clear a path to adjournment, probably sometime next July. That’s often how legacies are born.

 

 

Raising $2 Billion Won’t Be a Slam Dunk

Democrats hold all the main levers of power in Salem, including supermajorities in the Oregon House and Senate that could pass tax hikes without any Republican votes. But meeting Governor Brown’s $2 billion revenue challenge won’t be easy and certainly won’t be a slam dunk.

Democrats hold all the main levers of power in Salem, including supermajorities in the Oregon House and Senate that could pass tax hikes without any Republican votes. But meeting Governor Brown’s $2 billion revenue challenge won’t be easy and certainly won’t be a slam dunk.

Democrats hold supermajorities in the House and Senate to pass revenue-raising measures without Republican votes. Business interests may be relegated to the political sidelines. Yet, Governor Brown’s $2 billion revenue challenge in the 2019-2021 biennium seems tenuous.

In her budget message, Brown didn’t specify how she wanted to raise an additional $2 billion in revenue to fund public education. However, she has been very clear she isn’t interested in tying a revenue increase to reduction in PERS benefits, which business interests have advocated. The implication is that legislative Democrats have the votes and can decide on the details.

It may not be that simple. 

For starters, the PERS unfunded liability is likely to be larger. As The Oregonian’s Ted Sickinger reported, PERS investments so far this year have fallen significantly short of the assumed 7.2 percent return rate, which actuaries say could balloon the unfunded liability by as much as $4 billion. 

That won’t affect the current public employer contribution rate, which is already fixed for the next two years and cost an additional $1.1 billion. The PERS actuary predicts even steeper contribution rate increases beginning in 2021. Such a prospect may propel public employers to press harder for legislative solutions.

Jody Wiser of Tax Fairness Oregon has suggested paying down the PERS unfunded liability with a one-time diversion of the personal income tax kicker, pegged at $724 million. Voting to redirect a kicker payment to PERS is not impossible to imagine in a Democratically controlled legislature, but it still wouldn’t be an easy vote. Most of the kicker benefits flow to middle- and upper-income Oregon taxpayers, the people who typically write campaign checks to legislators.

Democrats have a comfortable supermajority in the Oregon House, but a less reliable one in the Oregon Senate. Senator Betsy Johnson, D-Scappoose, isn’t always a sure bet to go along with her 17 other Democratic colleagues on tax issues. As one of the two Senate co-chairs of the Joint Ways and Means Committee, Johnson will be part of the Democratic leadership team, but also hold more political leverage. Johnson is one of those votes you have to earn, not just count on.

Governor Brown touted her $2 billion revenue challenge by saying, “Our current strong economy gives us the best chance in a generation to address persistent, structural challenges so we can achieve our full potential.” Brown’s challenge drew this response from House Minority Leader Carl Wilson, R-Grants Pass, “This is not a challenge to the legislature; it is a challenge to the wallets and pocketbooks of hardworking Oregonians.”

Governor Brown touted her $2 billion revenue challenge by saying, “Our current strong economy gives us the best chance in a generation to address persistent, structural challenges so we can achieve our full potential.” Brown’s challenge drew this response from House Minority Leader Carl Wilson, R-Grants Pass, “This is not a challenge to the legislature; it is a challenge to the wallets and pocketbooks of hardworking Oregonians.”

Perhaps the biggest challenge to the $2 billion revenue challenge is the lack of a specific plan. Democrats pushed in the 2017 session a corporate tax restructuring proposal, but the proposal or something like it wouldn’t generate $2 billion. That means a tax plan would most likely need to affect business and personal income taxpayers.

A business tax hike might be a lighter lift after the congressional GOP tax cut that included several business tax breaks. But the federal legislation contained personal income tax provisions that limit state and local tax deductions, which will mean higher federal taxable income starting in 2018 for a chunk of Oregon taxpayers. Again, not insurmountable, but not necessarily easy.

Designing a tax proposal, especially one as large as $2 billion in Oregon’s context, will be messy. Tax ideas will be floated and dropped. The final product may not be a single tax increase, but a series of tax and fee increases. This revenue-raiser will be in addition to taxes and fees levied to fill the budget gap for Oregon’s Medicaid program.

How the $2 billion will be spent also will be the source of endless debate. A special committee traveled the state during the interim gathering ideas on how to improve public education in Oregon. It came up with a long list – and didn’t include suggestions for higher education.  

The slim 22-member House GOP caucus, with Rep. Carl Wilson, R-Grants Pass, as its new “superminority” leader, expects to be largely spectators on tax legislation this session. However, that doesn’t rule out a role as spoilers who seize every opportunity to take political pot shots at Democratically backed tax proposals – and rising PERS contributions by cities, counties and school districts.

There is always a possibility of a bipartisan revenue package, which might avoid a voter referral that would be costly and delay any revenue increases. Compromising on a $2 billion tax package would pose political risks for both Democrats and Republicans, but also afford potential political benefits.

Republican legislative control in a blue state seems remote, so negotiating for some “victories” as part of a tax package could be viewed by GOP voters as turning lemons into lemonade. Democrats could win accolades for leadership by including some GOP priorities instead of plowing them over in the legislative process.

One thing is sure. Raising $2 billion in the next biennium is not a slam dunk because there will be votes on one or more tax measures to raise that sum, huge debates over where the money should go and a dark shadow cast by PERS.