OregonPEN Agenda II: Fixing Our Broken Tax System


 This week’s OregonPEN is the last issue before the start of the 2016 legislative session, which promises to further highlight the extreme fragility and brittleness in in Oregon’s haphazard kludge of a tax and revenue-raising “system,” which includes the State Lottery, a special tax levied almost entirely on people with who suffer from any of a number of disabilities that are known to cause the impairment in judgment necessary to produce the participation that we choose to call “voluntary.”
The unceasing pressure to raise greater and greater revenue streams in a stagnant or contracting state economy creates exponentially greater tensions in the political arena. Senate President Peter Courtney predicts a disastrous session marked by such fierce warfare as to justify comparisons to the Battle of Antietam, the bloodiest day in America’s pugnacious history.  The short, 35-day session is likely to be followed by competing initiative campaigns to raise Oregon’s minimum wage and to tax large corporations, among other hotly contested issues.
Both of those ideas are attempts to reverse just some of the dramatic losses that individuals have suffered, as workers and taxpayers, in the roughly 35 years since Ronald Reagan carried Oregon’s then-six electoral votes. Since then, Oregonians have waged increasingly bitter election campaigns and struggled mightily to find the magic lamp with a genie who can produce the fruits of economic expansion despite forces of contraction pressing on the state’s economic fortunes in all directions.
Thus, with the shooting about to resume, this is an opportune issue in which to highlight the important news that Oregon can, if it chooses, raise the revenue needed to operate a modern economy without the zero-sum politics that characterizes tax policy today and that regularly pits students and workers against retirees, the students and workers of prior years. But we first have to understand why our system is so poorly performing today.
Oregon: A Pogo Stick Instead of a Three-Legged Stool
Oregon’s methods of raising the funds needed to pay for public services combines the simplicity of a Rube Goldberg-designed cuckoo clock with the robust stability of a sand-castle built on the beach at low tide.
Although most state public finance systems rely on what is called a “three-legged stool” of taxes (income tax, property tax, and sales tax). In most states, the three main taxes differ enough to reduce the overall variability felt during recessions, as sales taxes help cushion falling income tax receipts. Property values do fluctuate, but because the property owning class and investing class is very different from the people who depend on wages, there are substantially different time periods involved in the cycles of wages versus the cycle of property values. (Even in recessions severe enough to force individuals to return to renting, the global pool of investors seeking investment property props up the values.)
The net effect is a much greater stability in state revenue pools fed by all three revenue streams.
Oregonians famously refuse any form of sales tax entirely, and we further allowed ourselves to be conned into approving strict property tax limitation measures. Thus, instead of a solid base with three supports, Oregon’s revenue is, functionally, a pogo stick with a shortened mainspring, where the truncated spring represents the effect of our property tax limitations.
Staying upright on any pogo stick is hard enough, much less making progress towards a desired destination; it requires constant exertion and attention just to stay in place. But Oregon’s specially hobbled pogo stick presents an even greater challenge. Our over-reliance on the income tax as our revenue mainspring means we get an amplified, painful jolt whenever incomes and income taxes fall, such as when national trends compress the state economy. There is no sales tax, and no matter how far incomes fall, the revenue boost available from property taxes is sharply limited. Without state revenue available to make Keynesian investments, the contractions in the business cycle are made more severe and last longer.
As if all that wasn’t bad enough, we have to add Oregon’s bizarre state tax “kicker” law to our understanding. If raising the funds needed to pay for services in Oregon requires keeping upright and balanced while jumping up and down on a hobbled pogo stick, the kicker moves the whole show into a concrete basement –with a very low ceiling.
Then there are the usual problems common to other states as well: balanced budget requirements coupled with laws that make no distinction between operating expenses and spending on capital improvements that pay for themselves over time.
It’s really no wonder that Oregon’s economy struggles. We exhaust ourselves just trying to stay in one place, even as our spending needs operate independently of any of the limits we place on ourselves in terms of raising revenues.
Worst of all, our over-reliance on income taxes means that we are heavily dependent on taxing – discouraging – income, which is the very thing we hope to encourage with much of our public spending. It’s as if we are driving with our foot on the brake and the gas at the same time, wondering why the engine overheats and breaks down so much.
Time to Get Off the Pogo Stick. It’s Time to Root our Tax System in Oregon Itself
There ARE solutions to our funding problems, ways that would let us get off the pogo stick that gives us a painful jolt every time the spring bottoms out and hurts our head whenever we smash against the ceiling kicker.
But implementing the solutions requires being willing to think about the problem of raising revenue in a new way, with the “how” first, rather than the “who” first. Oregonians never sat down and created our tax system from a clean slate, but ever since the days of the pioneers, the effort has been, as anywhere, to put the tax burden where it belongs, which is anywhere other than present company – and that applies for all values of present company, all across Oregon. When social scientists say that Oregon is one of the least religious states in America, that is only because tax avoidance and tax hatred is not a recognized faith.
This issue of OregonPEN focuses on the first, most fundamental change we need to stabilize our tax system and to improve how we pay for things, regardless of how much we pay.
Because our tax system is and always has been so dependent on income, we have an extraordinarily complex and inefficient system, since the income subject to an income tax is a defined quantity, and each definition is subject to countless exceptions, both intended and otherwise (exceptions to the definition of income are generally known as obvious or common sense when used by present company and loopholes when used by others).
A better tax basis than income, which is a purely defined quantity, is one where the tax basis is a real quality, and where that real quality is objective and apparent to all, rather than being something that can only be discovered by an accountant operating thousands of definitions in the aptly named “tax code” (where code means a system of sharing information with chosen allies while serving to confound all others).
As the articles in this issue will argue, the best basis for a tax system is with the basis for the state itself, the very land that makes up the state. And it is important to distinguish between land value taxation and property taxation, because property taxes – taxing both land and structures on the land — work counterproductively, just like income taxes. That is because property taxes discourage the same things we want to encourage, improvements to land in places where people derive benefits from the improvements.
One metaphor to keep in mind throughout this issue of OregonPEN is that of the strong horse and the 200 pound weight. A healthy horse bears a 200 pound burden on its back with ease; but that same horse can be completely immobilized just by lashing the burden to the horse’s leg. Oregon is like a horse in that we have a burden we must bear, in this case the burden of raising the money we need to support the investments and services we want.
Sadly, while we expend thousands of hours fighting over the right size of the burden and millions of hours trying to shift the burden away from present company and onto “them,” we have given little or no thought to how we could go farther, faster, just by carrying that burden on our backs instead of having it tied to our legs. By taxing Oregon itself – the land value of our state, rather than the work of Oregonians or their improvements to the land – we can better carry the burden, and we would soon obtain the many additional benefits of a more efficient, transparent, honest revenue system.