tax reform

Hass: Boost Student Success and Curb Tax Volatility

Oregon’s economic forecast continues to look rosy, but also a little “bizarre,” according to State Senator Mark Hass, D-Beaverton, because the strong economy contrasts with struggling schools and Oregon’s unique personal income tax kicker law.

Oregon’s economic forecast continues to look rosy, but also a little “bizarre,” according to State Senator Mark Hass, D-Beaverton, because the strong economy contrasts with struggling schools and Oregon’s unique personal income tax kicker law.

Legislative newsletters and press releases can be informational, but not always newsy. The one dispatched today by Senator Mark Hass combines informational and newsy.

Senator Mark Hass, whom the Portland Business Journal referred to as Oregon’s Mr. Fix-It, hopes the work of the Joint Committee on Student Success, a rosy economic forecast and the prospect of returning a half billion dollars to state taxpayers could prompt action on Oregon’s volatile tax system.

Senator Mark Hass, whom the Portland Business Journal referred to as Oregon’s Mr. Fix-It, hopes the work of the Joint Committee on Student Success, a rosy economic forecast and the prospect of returning a half billion dollars to state taxpayers could prompt action on Oregon’s volatile tax system.

The occasion for the communication from Hass, a Beaverton Democrat who chairs the Senate Finance and Revenue Committee, was the release of the latest quarterly Oregon economic forecast.

“I want to update you with my impression of the remarkable economic forecast released today,” Hass wrote. “Most indicators – including jobs, income and gross domestic product (GDP) – are all improving. This suggests Oregon’s booming economy will continue into the foreseeable future.”

A booming economy also means higher-than-projected state tax revenues – quite a bit higher. Hass says state coffers will have $911 million more revenue than was projected in the state’s two-year budget approved during the 2017 Oregon legislative session.

“Because revenues grew faster than what economists estimated, the state will send back $555.3 million to taxpayers due to Oregon's unique ‘Kicker’ law,” Hass said. “So, we have this bizarre confluence of a strong economy, struggling schools and sending back a half billion dollars to taxpayers.”

Hass has tried unsuccessfully to convince his legislative colleagues on both sides of the political aisle to look seriously at ideas to reduce the volatility of Oregon’s income-tax-dominant taxation system and modernize state taxation of corporations. Here’s how he explains the dilemma:

“Oregon's volatile tax code is too reliant on the income tax. In good times when unemployment is low, the state brings in too much revenue and we send it back to the taxpayers. In bad times when people are struggling, Oregon has a train wreck. While today's forecast paints a rosy picture, it is important to remember the big jump in projected revenue is emblematic of Oregon's boom-and-bust revenue cycle.”

This may not be new “news,” but it isn’t information that makes its way into a lot of political discussions these days. When it does, it is usually in the context of calling for more revenue or blaming the Public Employees Retirement System for Oregon’s unsustainable spending.

Hass threads the needle differently. He says fixing Oregon’s “bizarre confluence” of a strong economy, struggling schools and a personal income tax kicker should occur during economic good times, not economic bad times. Warning signs abound, he says. Oregon’s economy is still growing, but the pace of its growth is slowing. The housing affordability crisis is taking its toll on many Oregonians. Personal income taxes make up 80 percent of the state’s General Fund, while corporate taxes contribute 6 percent.

Hass hasn’t given up on some type of tax reform, but is concentrating his efforts leading up to the 2019 legislative session on traveling around Oregon as part of the Joint Committee on Student Success, talking to students and education and business leaders.

“My hope,” Hass wrote, “is that through the work of the Student Success Committee and this economic forecast, we end up mixing new educational policies with structural tax reform for stable, well-funded schools, community colleges and universities.”

A Tale of Two Tax Systems

Washington’s sales tax, which carries the revenue load in the Evergreen State, faces a shrinking tax base because of the growth of online sales and the ease of driving to Oregon that doesn’t have a general sales tax.

Washington’s sales tax, which carries the revenue load in the Evergreen State, faces a shrinking tax base because of the growth of online sales and the ease of driving to Oregon that doesn’t have a general sales tax.

Oregonians regard their state tax system as the worst possible – except for all the alternatives, especially a sales tax. That hasn’t blunted calls for “tax reform” in Oregon, including a new initiative to subject large corporations to a gross receipts tax.

KUOW, the NPR affiliate in Seattle, aired a story about the woes of Washington’s state tax system, which depends heavily on a sales tax. The punch line of the piece was that if Washington had Oregon’s system that taxes income, it would raise almost double what the state generates now per fiscal period.

That “unofficial calculation” by the Washington Department of Revenue is based on data that shows the Evergreen State’s sales tax base is shriveling as a percent of an expanding economy, while Oregon’s relatively progressive income tax rakes in increasing revenue when the economy expands. 

Studies in both states have shown that a sales tax may be a little less volatile than an income tax in up and down economic cycles. But Washington’s analysis of its sales tax base shows it may be inadequate to the task of keeping pace with economic growth when more and more economic growth occurs online. It doesn’t help that Washingtonians cross the border into Oregon and make purchases they can cart home without paying sales tax. 

KUOW’s online version of its story includes “Washington’s Chart of Doom,” an analysis by Treasurer James McIntire that shows sales tax revenues peaked in 1987 as 6.93 percent of the state’s economy and have steadily declined since then to 4.8 percent in 2015. McIntire projects revenue to keep falling to 4.65 percent by 2021.

That’s a tough trend line, aggravated by economic and population growth that places new demands on public revenues.

Oregon and Washington have talked for years about the three-legged stool of taxation – income, sales and property. You don’t have to look far for a state with all three – Idaho. The KUOW report says if Washington adopted Idaho’s tax system, it would collect $10 billion more per fiscal period.

Oregon goes through spasms of tax reform fever, which often involve brief romances with a sales tax. The KUOW story quotes Oregon Legislative Revenue Director Paul Warner as estimating it would take a 12 percent sales tax to equal what the state’s income tax yields. Washington’s state sales tax rate is 6.5 percent.

Contrasts between the two states note that Oregon has no sales tax, which isn’t exactly true. Oregon and some Oregon localities have imposed a few selective sales taxes, most notably on hotel and motel stays, and in some tourist-centric towns on food and entertainment. When you add in Oregon’s gas tax and state-controlled pricing on distilled spirits, one of the main selling points of a sales tax – capturing revenue from tourists – isn’t especially convincing, not that Oregonians seem persuadable on the subject anyway.

There is little motivation from retail businesses to support a sales tax, especially in border communities like Portland that reap benefits from Washington commuters who already drive here to work, eat lunch at restaurants, shop on their way home and pay income tax on their Oregon-based earnings. This explains the success of the Costco store on the Oregon side of the Glenn Jackson Bridge. 

The Oregon tax system demon is economic volatility, which produces plentiful revenues in good times and sparse revenues in bad times. Economic theory would say that problem is curable by stashing away “excess revenue” during economic booms to fill in gaps when the economy lags. This is where economic and political theory diverge. With growing demands for spending, “excess revenue” is hard to define. That drove a GOP-led legislature many years ago to install, with voter approval, the personal income tax kicker, which rebates revenue that exceeds a state revenue forecast by 2 percent or more. Oregonians received a modest personal income tax kicker rebate based on their 2015 tax returns, which averaged around $125 and sucked $402 million out of the state’s General Fund.

It’s inevitable some Washingtonians and Oregonians will continue to cast covetous eyes at each other’s tax system as political leaders struggle with how to generate revenue, particularly for public education. It’s unlikely the two states will trade out their current core taxes, but very likely they will keep complaining about their shortcomings.

The Weed, Guns and Booze Session

Legislator e-letters to constituents are signaling the 2014 session will take up legislation relating to gun control, pot legalization and liquor privatization. Those issues may make the headlines, but the real work of the session is to refine biennial budgets — yet again, with fewer resources than budget writers expected at the end of the last session. 

The arcane process of state budgeting is hardly the stuff of eye catching headlines — in the paper or in constituent newsletters. Still, it’s true that even-year legislative sessions have inescapably become the second-chance opportunity for legislation that didn’t quite make it through the hoops at the longer, odd-year regular session. It also becomes the last chance to do something legislatively before a major issue shows up on a November general election ballot. And the short session offers an opportunity to pass a bill on a topic that has captured the moment.

Gun background check legislation falls into the second-chance category, while pot legalization and liquor privatization belong to the last-chance category. Faced with the prospect of potentially popular initiatives, lawmakers are considering pot and liquor bills that offer an alternative.

Catch-up legislation to the Cover Oregon website debacle heads the opportunity category.

The Columbia River Crossing commands its own special category — the last-ditch, Hail Mary category. After the Washington legislature failed to approve funding for an I-5 bridge replacement at its regular session last year and is unlikely to do so in its session currently underway in Olympia, Oregon is left with a choice of whether or not to step out on its own. Opponents have stoked fears of the risk to Oregon taxpayers and those trepidations seem to be hitting the nerve in a number of former legislative supporters, including Senate President Peter Courtney. One Capitol wag said the project isn't dead, but is a "walking zombie."

Large House Turnover Looms for 2015 Session

The 2015 Oregon House will be a substantially different from the one that convened just a year ago. Nearly a quarter of House members who were sworn in during the 2013 session have announced their intention not to seek re-election or are pursuing other electoral opportunities (some in the Oregon Senate).

In a state where relationships are key to legislative victories, the turnover in the House may break Oregon’s recent streak in passing major reforms.

The 14 House members not seeking re-election include nine Republicans and five Democrats. Together, they have served a whopping 117 years as elected members of the Oregon House through 103 regular sessions (and, for some, countless special sessions).

Rep. Bob Jenson (R-Pendleton), the longest serving member of the Oregon House, is among those who will retire this year after serving 18 years as a state representative.

Legislative service is a tough business — long hours, low pay, months away from families and friends, all combined with an election cycle that is increasingly hostile. Yet, the service for many is rewarding, finding ways to pass legislation that is important to their districts, working collaboratively balance budgets and make important reforms.

Oregon Finds Itself in Dunce Chair

Oregon finds itself sitting on the unusual and embarrassing dunce chair for shortcomings in healthcare and education reforms.

At times, Oregon under Governor John Kitzhaber has seemed like the prize pupil of the Obama administration. But recent events have plopped Oregon on the dunce chair.

Oregon may be dead last in enrolling zero people online for health insurance under its health exchange, Cover Oregon. And now the U.S. Department of Education is threatening to withdraw the state's waiver from complying with the No Child Left Behind education requirements. 

Neither represents a policy divergence between Oregon's Democratic government and the Obama team. They reflect a bad poker hand.

Like the federal health care website, Oregon's electronic health insurance portal hasn't performed.  Oregon has pushed to enroll people using paper applications. And the state has added significant numbers of Oregonians to the Oregon Health Plan.

Kitzhaber said the state is too far downstream to change computer consultants, but promises a full accounting when the Cover Oregon website is up and running as intended. The governor has enlisted former Providence CEO Greg Van Pelt and Oregon Health Authority Director Bruce Goldberg to lend their management and medical expertise to unsnarling the IT logjam.

Kitzhaber, Courtney Legacies Grow

The successful five-bill, three-day Oregon special legislative session will enhance John Kitzhaber's legacy as governor. It also signals a constructive working relationship between House Speaker Tina Kotek and GOP Leader Mike McLane. And the session provided campaign platforms for Reps. Dennis Richardson and Jules Bailey.

Almost lost in the shuffle was Senator Peter Courtney's win in establishing a dedicated funding source for expanded community mental health programs, which was his top priority before the start of the 2013 regular legislative session.

News coverage of the conclusion of the special session Wednesday showed a beaming Kitzhaber. For good reason. He took the tatters of a budget deal left on the cutting room floor in the waning hours of the regular session and wove them into a complicated deal that will result in more money going to K-12 schools and higher education. 

Kitzhaber's unwavering confidence he could find common ground among skeptical House Democrats and legislative Republicans stands in sharp contrast to his defeatist views expressed at the end of his second term of governor. His third term has been an unbroken string of negotiating successes that prove Oregon can be governed after all. And he gets much of the credit.

The Oregonian's Friday edition challenged Kitzhaber now to turn his attention and political capital to comprehensive tax reform, a goal that has eluded him as well as many of his predecessors. Hopefully, The Oregonian will forgive Kitzhaber if he takes the weekend off before starting his new quest.

The Kotek-McLane tandem held together well and under extreme political pressure. To make the multiple-bill compromise work, all five bills had to pass for any to survive. Kotek and McLane knew it would take different cross-sections of lawmakers from both party caucuses to pass the most controversial measures dealing with taxation, PERS cuts and a local pre-emption on genetically modified crops.

Only 22 out of 90 lawmakers voted for all five measures. Kotek and McLane were two of them. More important, they showed they could deliver key votes when it counted. The tax measure, a combination of increases and cuts, began in the House and came up three votes short. Kotek delayed declaring the final vote until she mustered three votes — all from her Democratic caucus.

Negotiator-in-Chief Issues Challenge

In a rare pre-May forecast press conference, Governor Kitzhaber challenged lawmakers to agree to a grand bargain on PERS and new tax revenue or face a shriveled budget for education. He also called on lawmakers to take a bipartisan look at tax reform.

In his third term, Kitzhaber has become known for his keen negotiations skills that have helped to ensure bipartisan passage of his major policy initiatives during the last two sessions.

His methods have included bipartisan legislative leadership meetings at Mahonia Hall, weekly meetings with presiding officers, one-on-one diplomacy with key members, attending caucuses of both parties and, when necessary, public pressure to break logjams in negotiations. He clearly resorted to the latter yesterday.

Signaling that the legislature is at a crossroads and faces a “partisan impasse,” the governor used his public “bully pulpit” to call on legislative leadership to take on two major challenges:

 

Tax Measures and Tax Reform

When Oregon voters receive their ballots this weekend, they will confront three very different tax measures, which could have an impact on the prospects of comprehensive tax reform in the state.

The ballot measures deal with prohibiting more real estate transfer fees, phasing out the estate tax and modifying the corporate income tax kicker. Proponents of comprehensive tax reform in Oregon worry the measures could remove issues from discussion that could sweeten a broader tax measure.

So far, none of the tax ballot measures has stirred much public debate, overshadowed by the higher profile and more costly fight over two measures to allow privately owned casinos in Oregon.

The three tax measures have received spotty editorial support. Measure 79, which would place a ban on future real estate transfer fees in the Oregon Constitution, has been called overkill since there already is a statutory ban in effect. Measure 84, which phases out the estate tax, has been questioned because there already is a $1 million estate exemption. Measure 85, which redirects corporate income tax kicker rebates to K-12 schools, has been criticized because it won't automatically mean more money for education.

Local government officials seem resigned that the constitutional ban on real estate transfer fees will pass, with financial backing by the National Association of Realtors. Washington County is the only Oregon municipality with a real estate transfer fee in place. While there weren't any nascent plans to challenge the statutory ban on such fees, some local officials have suggested the tool would be appropriate for capital projects such as restoring and modernizing county courthouses.

Backers of the estate tax repeal have branded their effort as ridding the state of a "death tax" that cripples family-owned small businesses. However, the Legislative Revenue Office estimates the repeal, when fully phased in, would result in an annual tax savings of $120 million, suggesting it would have a fairly limited impact.

Opponents of Measure 84 also have identified a potential flaw, which they say could create an unintended capital gains loophole.

Oregon Loses Strong, Moderate Voice

When Frank Morse announced his resignation from the Oregon Senate last week, the 30-member body — and the entire state — lost one of its most competent members. The Senate and the state also lost one of its most dedicated moderates whose hopefulness seems to be flagging.

"I have thought long and hard about this decision and I believe it is time for new energy," Morse told a hushed Senate chamber. "While serving in the legislature, I’ve worked harder than I have ever worked, but there comes a moment in one’s life when energy fades, and you know it is time to go. I love this state and I cherish the many friendships I’ve made in the legislature and throughout the state. While the work is not done, it is time for new energy to carry our state into the future."

In his final speech on the Senate floor, Morse also made a statement that, in retrospect, will characterize his state service. He urged lawmakers, one last time, to solve Oregon's tax and spending problems for "the sake of our children." Failure to do so is "destroying our state," he said. "It's destroying our schools."

Following a career as president and CEO of Morse Bros. Inc., a construction materials firm, Morse won election to the Oregon Senate in 2002. As The Oregonian put it in a story last weekend, he "was fit and well-groomed at 69 and always wore business suits and ties on the Senate floor. All business, he showed little patience for partisan antics or issues he deemed trivial."

Time Short to Launch Tax Reform Debate

Governor Kitzhaber is talking privately about tax reform, but the time has come when conversations about what reform looks like must go public.Democratic Senator Ginny Burdick surprised many political observers when she came out against Our Oregon's proposed 2012 ballot measure directing all corporate kicker refunds to K-12 education. Our Oregon, the political arm of Oregon public employee unions, proceeded and successfully placed its initiative on the November ballot.

What was surprising is that Burdick had supported past Our Oregon proposals, such as Ballot Measures 66 and 67 in 2009 that raised income taxes on corporations and wealthy individuals. Burdick didn't criticize the substance of what Our Oregon was doing. She was unhappy because it wasn't a more comprehensive tax reform proposal. Burdick told Willamette Week, “All I can hope is, it doesn’t make the ballot. It will throw a monkey wrench into real financial reform.”

Burdick and other leaders believe only dealing with the corporate kicker will take the wind of out the sails of a larger discussion on restructuring Oregon's tax system, which relies heavily on income taxes that can sag when the economy tanks.