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The Oregon Legislature has shown little appetite for addressing serious tax reform. leaving an opening for ballot measures.
(The Associated Press, 2013)
Few terms raise more suspicion in Oregon than "revenue-neutral tax reform." Put whatever adjective you choose in front of "tax reform" and many voters translate it the same way: tax hike. And to be fair, state government hasn't done a lot to earn their trust.
Oregonomics
The squeeze on middle-class jobs and threat to retirement security have everyone's concern. But what can be done to restore hope for Oregonians? The editorial board of The Oregonian/ OregonLive is exploring questions that need to be answered in order to devise solutions that will put the state on a path to prosperity.
Today:
How would revenue-neutral tax reform work?
So, what exactly is revenue-neutral tax reform, and is it even possible? Paul Warner of the Legislative Revenue Office shed light on those questions Monday when he presented three different computer simulations of potential tax changes to the Senate Interim Committee on Finance and Revenue.
Before delving into computer models, it's helpful to review some of the definitions that Warner and other economists use. When economists refer to revenue-neutral tax reform they are saying that the proposed taxes would produce the same amount of revenue as the current tax structure if the economy did not change. This is often referred to as "static scoring."
Another approach, called "dynamic scoring" uses computer models to project how the economy would react to tax changes. Using these models, economists estimate how much revenue would be generated. Under dynamic scoring, even so-called revenue-neutral changes result in either an increase or decrease in tax revenue.
Dynamic scoring, with some justification, is often viewed with skepticism because the models are built on a combination of statistics from past economic performance and assumptions about, among other things, consumer and business behavior. But here's the irony: Static scoring is virtually guaranteed to be inaccurate since tax changes will have some type of impact on the economy. To produce the best possible projections, you have to use dynamic scoring and make reasonable assumptions. No model will be perfect because some economic shocks - wars, market bubbles, etc. - cannot be precisely predicted.
The Legislative Revenue Office uses the Oregon Tax Incidence Model to make its projections. Warner said though the results fall under the broad umbrella of dynamic scoring, they are based on comparative statistics and empirical data. There are also some behavioral assumptions built in. At the Senate committee's request, he presented the results of simulations for three sets of "revenue neutral" tax changes. Two predict more tax revenue than would be projected under static scoring because of enhanced economic activity. The third projects less revenue.
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The two scenarios with an increase in revenue assumed creation of a commercial activities tax. It's a back-door way to create a tax that is more closely tied to consumption in a state that treats sales taxes like a bad allergy but often supports business taxes. The tax is applied to gross receipts of businesses. Of course, businesses will pass along a portion of those increased costs to customers, which is one reason that dynamic scoring is essential for accuracy. To offset that, the first scenario also increased the standard deduction for taxpayers. The bigger deduction puts more money in the accounts of most taxpayers and likely leads to increased spending, which is another reason to use dynamic scoring. The second scenario puts money in taxpayers' pockets in another way, by creating a $125,000 homestead exemption for homeowners.
The model projected a reduction in revenue for the third scenario, which involved changes in the state's complicated property tax system. The changes would send $51 million more to the state general fund, but would drain $141 million from local governments. In other words, that scenario is even less likely to happen than the other two. And the two scenarios based on a commercial activities tax are about as likely as a 90 degree day in January.
The political climate will have to change a lot for Oregon voters to embrace any significant change in the tax structure. That will require political courage and leadership. For now, the Democratic-controlled Legislature appears content to let union-backed groups drive the tax-change discussion through ballot measures. Warner has not run simulations for potential ballot measures that would raise the taxes of wealthy Oregonians and businesses. Enough details aren't available yet. The details and the computer simulations should be available before the 2016 elections, and voters should study them closely.
Even if you philosophically believe business taxes should be higher, that doesn't mean that jacking up the corporate minimum tax, as envisioned in one likely ballot measure, is the best way to do it. And computer simulations likely will show that raising taxes on the wealthy won't produce as much revenue as proponents hope.
Whether you trust the computer model used by the Legislative Revenue Office or not, it makes at least one correct assumption: Tax changes produce complex reactions. That's why the Legislature should tackle the task instead of recusing itself and accepting the results of ideologically driven ballot measures.
--The Oregonian/OregonLive editorial board