Oregon’s Revenue Problem

In my Public Finance class, which ended yesterday, the other half of the final was that we had to give a small-group presentation on ways to fix Oregon’s revenue problems. You see, Oregon relies on income taxes for most of the money for the general fund which, combined with the lottery, gasoline taxes, and federal funds more or less makes up all of Oregon’s budget. The problem with income taxes is that they’re generally volatile and highly responsive to positive or negative economic indicators. (For instance, tax revenues were way down in the 1981-83 biennium due to timber issues and almost catastrophically low in 2001-03 due to the tech crash.)

How do you solve the problem of such amazingly high revenue swings?

Two groups approached the problem from a tax diversification standpoint. One encouraged the raising of property taxes (due to several measures in the late 90’s which limited property taxes), and another group advocated switching almost entirely to a sales-tax funded system, much like the State of Washington. Neither of these solutions appealed to my group; we don’t necessarily like taxes that much and we dislike the income tax the least because it’s very progressive in nature.

Looking at the problem, we realized that Oregon tends to have high highs and low lows. Moreover, Oregon’s revenues tend to be strong in all but recession/depression years. Another issue is that, due to the balanced budget amendment Oregon has, we can’t borrow to cover short years. Furthermore, when we do have a good tax year, we refund most of the excess collected taxes in the form of the kicker.

My group’s (highly elegant) solution was to eliminate the kicker, instead redirecting those funds into a rainy day fund that would automatically be added to the budget during periods of revenue shortfall. (I say “automatically”, as opposed to “by legislative or administrative action”, so that it can’t be used as a political tool.) Had we started this after the 1981-83 recession, we could have more than halved the effect of the 2001-2003 crisis on state government, which - considering that the State of Oregon is the state’s largest employer - would have resulted in remarkably positive results. Add to this the economic bonus of NOT slashing all government spending during a crisis - which, in our opinion, is vastly more beneficial than the small economic bonus provided by kicker checks - and I think our presentation was pretty solid.

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