How to cut 9% of Oregon PERS liability (legally)

Eric Shierman_thb

by Eric Shierman

Oregon’s Public Employee Retirement System benefits were once tax free. In 1991 the Oregon legislature tried to pass a rather modest reform to require public employees to at least pay taxes in retirement like everyone else, but it was struck down by the Oregon Supreme Court in Hughes vs. State of Oregon. The court gave Oregon a choice. It could continue exempting public employees from paying taxes in retirement, or it could tax these retirement benefits if the state enacted a monetary remedy by increasing PERS benefits by 9% in compensation. Oregon chose the latter.

If the state no longer taxed income, this monetary remedy would no longer be required. Tier 1 benefits could then be legally reduced by 9% across the board. This would have an immediate material impact on Oregon’s budget.

Oregon’s income tax could easily be eliminated in a revenue neutral way by replacing it with a sales tax – a policy shift that comes with its own advantages. One of the first memories I have in Oregon state politics is listening to John Lim’s radio ads as a high school student that he aired on the Portland area’s Z100 during the 1991 Oregon Republican gubernatorial primary which he would ultimately lose to David Frohnmayer. Lim ran very smart ads extolling the virtues of a sales tax that fell flat upon the ears of Republican primary voters back then but were instrumental in piquing my curiosity about the world of public policy.

It was only later when studying economics in college that I learned about the broad consensus among economists recognizing that it’s better to tax consumption rather than income. Replacing Oregon’s state income tax with a state sales tax would not only have the added benefit of legally implementing a needed PERS reform that was struck down by a judge two decades ago; it will also more efficiently raise revenue with less negative economic impact than we currently suffer under.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change. He also writes for the Oregonian’s My Oregon blog.

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Posted by at 05:00 | Posted in PERS, Public Employees Retirement System, State Taxes | 15 Comments |Email This Post Email This Post |Print This Post Print This Post
  • bill sizemore

    But have you run the numbers to see what rate of sales tax it would take to replace one of the highest state income taxes in the nation? It’s very high, depending of course on the exemptions, which is where the fight always is when it comes time to implement any tax on consumption. Once you exempt the basic stuff, like food, housing, medical expenses, heat, and utilities, which are the exemptions you would make if you want the sales tax to be less regressive, the tax would likely be in the ten percent range, maybe higher, and have to include both goods and services. You can replace the residentdial property tax with a sales tax in the neighborhood of four percent, but the income tax is much more of a challenge.
    It has been a while since I have run these numbers, but just looking at the amount of income tax this state collects, replacing the income tax with a sales tax may not be doable.

    • Steve Buckstein

      Bill, while on Governor Kulongoski’s Tax Restructuring Taskforce (2007-2009) I asked Legislative Revenue to estimate what sales tax rate could replace the personal income tax. With exempting food, shelter, etc. I believe its OTIM model came up with an 8.5%.

      The problem is that OTIM (Oregon Tax Incidence Model) is basically a static model. It can’t take into account changes in individual and business behavior spurred by such tax changes. Based on other research from economists such as Steve Moore and Art Laffer, I believe that eliminating the income tax would generate so much more economic activity that the sales tax rate could be significantly lower than 8.5%.

      Yes, replacing the property tax with a sales tax may be more “doable” but likely won’t generate the economic activity that replacing the income tax will do. Eric is on to something here; we should have a serious discussion of replacing the income tax with a retail sales tax.

      • marvinmcconoughey

        “we should ‘NOT’ have a serious discussion of replacing the income tax with a retail sales tax.” Nine sales tax proposals have now come and gone, and those who weren’t paying attention then, are back. The last recession showed that sales taxes do not assure revenue stability despite prior contrary claims. One of Oregon’s tourist draws is that tourists can come here and escape, even if temporarily, the onerous sales taxes of the state that they are leaving.

    • http://www.facebook.com/eshierman Eric Shierman

      Bill, it is important to remember that we already fully tax what you call “basic stuff, like food, housing, medical expenses, heat, and utilities.” Oregon right now levies a 9% tax rate on incomes between $15,500 – $125,000 which means that it taxes all that money that would fungibly be going toward the consumption of whatever each Oregonian wants to consume, the basics and all. Taxing all their consumption at a rate of 9% is the same thing. There is a certain ah-ha moment in every introductory macroeconomics course when each student first learns that we can calculate GDP in two ways, the sum of all income or the sum of all spending.

      It is also important to remember what a regressive tax code means. It’s an arraignment that taxes the poor at a higher rate than the wealthy. A consumption tax is inherently flat. The wealthy end up paying far more in taxes than the poor, but everyone pays the same rate.

      • valley person

        But people earning $125K a year “consume” less of their income than people earning $15.5K a year, so your proposal basically is a tax cut at the upper end and tax neutral at the lower, meaning it is a gross revenue cut to the state. And since your purpose was to gain back 9% from the handful of PERS recipients, its a bit Rube Goldberg, even for you Eric.

      • marvinmcconoughey

        Most sales taxes are deeply unfair. They typically tax material goods purchases while shielding the rich by not taxing what the rich spend much money on: overseas travel, services, stocks, bonds, tax advisers, legal help, warrants, high-class education for their kids, etc. While that injustice flourishes, the poor find that many of the high tech goods intrinsic to modern life are hit by the sales tax.

  • Bob Clark

    This is an aspect, reduction of PERS obligation, not previously reported at least in mainstream media. So, kudos to Eric, here.
    It’s good to hear from Bill Sizemore, too, and Steve as always. Our so-called leaders are out to undo measure 5 property tax rate limits, which is one of the few mandated constraints existing on ever bigger, oversized government spending at the local level in Oregon. This battle is being raised under the veil of so-called property tax fairness, but the real end game is to allow local wasteful governments like Portland city hall to continue on its spending binge, having now run into property tax compression. The underlying Portland city economy doesn’t support Portland city hall’s spending binge, so its so called leaders now come to simply confiscate by trying to get the state legislature to blow up the real strengths of property tax rate limits.
    I hope the Oregon Senate might have at least one Democrat who would be willing to keep property tax rate limits off the ballot. As for other tax reform: I don’t know I would trust getting a complete substitution of the sales tax for constitutional elimination of the state income tax, through the Oregon legislature and governor. In my mind this would be a real success if it were to actually occur long term; but attempting this in a Democrat controlled state government carries big downside risk, that of having a combined income and sales tax regime, like badly over taxed California.

    • David from Mill City

      I have a different take on allowing the voters of a city or county to permanently raise their property tax rate, the State Constitution needs to be changed to permit it. As an O&C county Lane County did not need a high tax rate to provide a reasonable level of services as it had the revenues from federal timber sales. Measures 47/50 permanently froze that low rate and the timber revenues have dried up leaving a tax rate of $1.275 per thousand which is not enough to operate a modern county. To balance the budget, cuts have been made to a level where the public is not even getting close to an acceptable level of service. The Sheriff’s patrol division no longer provides 24/7 coverage and when they do have deputies on duty there are only 3 of them for the 4,620 sq. Miles. The DA’s office only prosecutes DUII and violent felonies. And the County Jail barely has room for alleged murderers. There needs to be away for the County to ask the voters to raise county property taxes and to do so in a maner that does not cut the revenues of other agencies in the county.

      As to Sales Taxes, having lived in California, I know that once the apparatus is establish to collect sales taxes is set up, it is very easy to get approvals for small (1/4 to ½ %) increases particularly for popular projects. Pass several of those and soon the 7% rate is 10 to 11%. And as VP pointed out, when a sales tax is offered as a replacement for an income tax it shifts the burden from the rich to the poor. Which in a consumer based economy like ours is bad.

  • valley person

    Um…excuse me Eric. So your proposal is to enact a sales tax on everyone, and eliminate the income tax for everyone, in order to achieve the objective of cutting PERS by 9%?

    Isn’t that a bit like traveling to China by way of Argentina?

  • marvinmcconoughey

    Giving the state legislature access to sales tax revenues will, based on experience in other states, lead to repetitive sales tax increases. Abuse happens sometimes, but it should not be invited.

  • http://www.facebook.com/people/Jim-Karlock/100002941973847 Jim Karlock

    Or we could fire 20% of state employees and not notice any difference is services.

    A good start would be anything to do with climate action, sustainability, smart growth, passenger rail, bike transport, solar energy, wind energy, energy mandates, all ODOT employees working on bike projects and anyone messing with gasoline formulation.

    Thanks

    JK

    • valley person

      Yes, you could do that if you could actually win an election once a decade or so.

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