Oregon Tax Hikes Don’t Stop Revenue Bleeding

Long before the Tea Party became the national symbol for lower taxes, voters in Oregon were telling their government to keep its hands off their money.

The state is one of just five without a sales tax because residents have voted nine times over the years to keep it that way. Oregonians have enshrined a property-tax cap in their state constitution. And another voter-backed amendment — like no other in the country — forces the state to give rebates to taxpayers whenever revenues exceed expectations by 2 percent or more. Rebates have gone out to individuals or corporations in 11 of the last 15 budget cycles, even during downturns that simultaneously forced lawmakers to cut programs.

This unambiguous anti-tax history is what made it so surprising last January when voters approved a pair of ballot questions that raised income taxes by $727 million, or about 10 percent of the state’s yearly budget. Measures 66 and 67 hit corporations and households that earn more than $250,000 a year. The Democratic lawmakers, labor unions and others who championed the proposals during a bruising winter campaign said they were necessary to avoid unthinkable cuts in spending. When the Legislature convened just after the vote — with Oregon’s first voter-approved income tax hikes since the 1930s in hand — legislative leaders breathed a big sigh of relief.

What may be most surprising about Oregon’s tax vote, however, is that the fight isn’t over yet. In a shock even to pessimistic economists, the state’s budget situation has only grown worse since the bitter tax campaign. The bad fiscal news could come back to haunt Democrats at the polls.

In May, stunned lawmakers listened as the state economist outlined a new, $577 million shortfall in the current, two-year budget — the result of continued hemorrhaging in income tax collections. Governor Ted Kulongoski, a term-limited Democrat, responded with across-the-board spending cuts of 9 percent. Those cuts included reductions to K-12 education, the avoidance of which had been crucial to the success of Measures 66 and 67. Last month, the National Conference of State Legislatures released a report showing Oregon and Illinois as the only states projecting shortfalls at the end of the budget year that ends next summer — although Oregon’s share of the $26 billion federal aid package for states that President Obama signed into law yesterday will alleviate some of that problem.

Still, Oregonians are gearing up for a repeat of a debate over taxes and spending that most people thought ended months ago. Meanwhile, a disillusioned business community and a Republican Party intent on winning the governor’s office and making gains in the Legislature are asking a simple question about January’s tax hikes: Where’s the money?

Already, they are framing the issue on their terms. “The lesson here,” says Greg Leo, the communications director for the Oregon Republican Party, “is that taxing the rich and business actually reduces the amount of revenues that are collected.”

Would have been much worse

State economists say it is too early to render a final verdict on Measures 66 and 67, even though the tax hikes were retroactive to 2009 and, in theory at least, should have produced a revenue boost around Tax Day in April. While that didn’t happen — and, in fact, the opposite happened — they are holding out hope that late income-tax filers will produce an uptick in collections when the next revenue report comes out later this month. At the same time, they point to Oregon’s stubbornly high unemployment rate, which has held steady at around 10.5 percent for six months, as the major reason behind the poor income tax collections.

Politics, of course, does not wait for the next revenue report, and legislative Democrats find themselves backed into the same corner that President Obama has found himself in when it comes to defending the federal stimulus package: They must argue to their constituents that things would have been much worse without Measures 66 and 67.

“We would be in absolutely terrible shape right now if we didn’t have that revenue,” says state Senator Richard Devlin, one of the Democrats’ budget experts. Instead of cutting $577 million, he says, Oregon would be staring at a $1.3 billion shortfall. Devlin argues that, if anything, the gaping deficit that has emerged has confirmed to residents that supporters of Measures 66 and 67 weren’t exaggerating about the depth of the state’s fiscal crisis and the need for new revenue.

“I have noticed a significant decline in the amount of criticism my members have received about (Measures 66 and 67) since this last forecast,” Devlin says. “Quite frankly, a lot of interests out there who opposed the measures realize that the state is in trouble in terms of being able to provide basic services.”

That Oregon is struggling to offer basic services cannot be disputed. A few weeks after the new $577 million shortfall became public and Kulongoski ordered the spending cuts, providers of in-home care for elderly and disabled Oregonians began sending out notices that the services would soon end because of the state cuts. Only a last-minute reprieve by the state’s Emergency Board, a group of lawmakers that meets between regular sessions, spared some of the state’s most vulnerable residents from being left on their own.

At an upcoming meeting of the Emergency Board, lawmakers are expected to tap into a small stockpile of extra funding — usually reserved for the possibility of a bad wildfire season — to prevent several prisons from closing as a result of the governor’s recent budget cuts.

Representative Peter Buckley, the Democratic House budget chief and one of the members of the Emergency Board, acknowledges that there is an ongoing debate over Measures 66 and 67, but defends the tax hikes this way: “The measures were the best-crafted proposals that we could bring forward to address the situation as it is,” he says. “We’re talking about the worst finanical crisis of our lifetimes, hitting at a speed we’ve never seen before.”

Will voters punish Democrats?

Republicans are hoping that an electorate famously opposed to taxes will punish Democrats and labor unions for selling them on tax hikes as a way to avoid deep cuts, when the deep cuts are happening anyway.

Mark Nelson, a pro-business lobbyist who helped run the campaign against the measures, says Democrats and labor unions sold the proposals as a way to “save the schools.” Now, he notes, K-12 education and every other segment of the state budget still is being forced to absorb cuts.

While there is little chance that Republicans will gain control of the Legislature in November — Democrats hold supermajorities in both of Oregon’s chambers — the party is more than holding its own in the early stages of the governor’s race. The Republican nominee, former professional basketball player Chris Dudley, is tied in the polls with John Kitzhaber, a Democratic former governor, and Dudley is promising “to reduce Oregon’s highest-in-the-nation income taxes” without raising other taxes.

At the legislative level, business groups that opposed Measures 66 and 67 are actively working to defeat vulnerable Democrats and strip the party of its supermajority in the Legislature. Without the supermajority, Democrats cannot raise taxes again unless they have the help of Republicans.

Even if Democrats do not lose seats in November, the fallout over Measures 66 and 67 may have a chilling effect on some of the party’s long-time policy goals. One of those goals — modifying the so-called “kicker,” the tax rebate that is returned to residents whenever revenues exceed expectations — already has fallen by the wayside, at least in the short term.

In the heady days after the tax vote earlier this year, Kulongoski called on legislators to attempt to change the law to allow the state to save more money in good times as a way of preparing for future economic downturns. Lawmakers, however, tabled the idea, citing ongoing divisions between business and labor, conservatives and liberals, over the recent tax hikes.

“Misinformation and hostility from the campaign led the kicker reform to be tabled,” Buckley says. “In that kind of atmosphere, you can’t have a coherent discussion about it.”