HISTORY, TAXES, ECONOMICS AND OREGON

In the immortal words of George Santayana, “Those who cannot learn from history are doomed to repeat it.”

The current budget “crisis” is a direct result of the recent economic recession and the excessive growth in state spending leading up to it. The recession reduced tax revenue growth to below the unrealistic projections of the Office for Economic Analysis. So the legislature had to reduce their expectations in the growth rate of many government programs, including education. Not wanting to make any tough decisions like getting the state out of the wholesale liquor business or ending subsidies for art, the legislature passed a tax increase that is the largest amount in Oregon history as HB 2152. Thus repeating history.Â

What history? In the early 90’s the nation was suffering through another recession during which many states chose to raise taxes in order to balance budgets. A study done for the American Legislative Exchange Council

in October 2002 by Stephen Moore clearly demonstrates the relationship between raising taxes and slower state economies. Moore studied how states dealt with the recession of the early 90’s and the result of those actions for the period of 1990-1993. Some states raised taxes while others cut taxes or held the line. What Moore found is a history lesson Oregonians should learn from:

  • The tax-avoiding states created 653,000 new jobs versus only 3,000 in the tax-increasing states — even though the tax-increasing states had much larger populations.
  • The unemployment rate rose by 2.2 percentage points in the tax-increasing states versus 0.6 percent in the tax-avoiding states.
  • Income for an average family of four dropped by an average of almost $500 in the tax-increasing states, but rose by $300 in the tax-avoiding states.

In fact, the impacts of raising taxes lingered through the rest of the decade. The top ten tax “˜hiking’ states showed employment growth of only 6.8% from 1990 to 2001. The top ten tax “˜cutting’ states had employment growth of 18.6%, almost three times the rate of the tax hikers.

Total personal income also grew twice as fast in tax cutting states as tax hiking states from 1990 to 2001. As Oregon is highly dependent on income taxes, a faster growing total personal income means a faster growing revenue source for the state.

As history teaches us, increasing taxes, will only delay the economic recovery in Oregon. Extending the recession here in Oregon will not provide more tax revenues for the state and “stable” funding for education.

History also shows that high tax states lose population to low tax states. Dr. Richard Vedder, an economist at Ohio University, did an exhaustive study of the relationship between the migration between states and the relative tax burden on the populace. Dr. Vedder excluded the change in population due to immigration from outside of the United States. What he found is not surprising to anyone with a little background in economics. The states that taxed the highest had the slowest population growth rates and the states with the lowest tax burdens grew the fastest.

Dr. Vedder’s findings include:

  • Â Low tax states gained over 2 million people who moved within the US between 1990 and 1999
  • High tax states lost 890,000 people between 1990 and 1999

His report also showed that nearly 3 million people moved out of states that impose an income tax and into states without an income tax. Of those who moved between 2000 and 2002, low tax states gained 729,000 while high tax states lost 371,000.

Oregon’s growth rate has been steadily declining for the past eight years. Growing by 62,750 from 1994 to 1995 to this past year’s growth at almost half that rate of 37,000. At the same time, spending on state and local government has been increasing faster than inflation and population. The relationship between the two trends is extremely telling as we prepare to vote on raising state taxes even higher.

As history teaches us, raising income taxes will create out-migration of taxpaying individuals. Which will reduce revenue for state and local government and subsequently destabilize government and education funding.Â

History also shows that state deficits have more to do with excessive revenue growth and a failure to restrain spending below that growth. Kevin Hassett of the American Enterprise Institute describes this in an article for the Wall Street Journal. He writes that tax revenues increased at about the rate of 5 percent a year over the last decade in the ten states with the largest deficits per capita. In contrast, the ten states that are most fiscally sound tax revenues grew only 1.5 percent a year over the previous decade. Â

Hassett also notes that deficits are not a matter of too low of a tax burden. The average tax revenue per person in the ten sickliest states is $2,445, compared to only $1,923 in the ten healthiest states. Oregon was included in those ten “sickliest” states.

Now, before anyone drags out that the statistics about Oregon being a low tax state and that the tax burden has decreased over time, let me tell you that taxes alone can no longer tell the whole story of the burden of government on the Oregon economy. Oregon is becoming a state of hidden taxation and fees. The portion of Oregon’s revenue that is derived from fees and other miscellaneous charges increased over the last decade from 13% to 18%, the national average is 14%. Â

If fact, Rep. Prozanski voted to increase fees on all hunting and fishing licenses, to increase motor vehicle registration and title fees, to establish a new shellfish license and fee and to establish a new 1% lodging tax. Those are just a few examples of how Oregon has decreased the tax burden by switching to a fee based revenues. The real key to looking at the burden of government is to look at spending.

According to US Census Bureau data, per capita state and local government spending in Oregon increased by 52.7 % from 1992 to 2000 while inflation registered only 16.4%. Only three other states had faster rates of government growth during the period. In the year 2000, State and local spending was $7,040 per capita. Only six other states had higher per capita rates of government spending. I choose the comparisons between states that include both state and local government because that eliminates the inconsistencies of how education and other services are funded.Â

This high burden of government of Oregon’s economy is a major factor is the slow growth of the economy and is manifested in a slow population growth. Growing economies attract people. That is just the plain and simple truth. Raising taxes will only accelerate the population trends by putting addition dampers on an already slow economy. Oregon already has the highest unemployment rate in the nation. History shows increasing taxes will only exacerbate unemployment possibly resulting in double-digit rates.Â

From July of 2000 to July of 2002, employment in Oregon fell by 35,861 jobs according to the US Bureau of Labor and Statistics. During the same period, state and local government in Oregon hired 5,603 new full time equivalent employees according to the US Census Bureau. The “dis-appropriation” bill requires the layoff of 60 employees of the state police crime lab, while most of these new government employees will keep their jobs. The legislature has failed to prioritize spending and which of the 47,000 state employees are essential to the citizens of the state.Â

From 1993 to 2002, Oregon’s population grew by 15.5%. During that same ten-year period, State and Local employment measured as FTE grew by 18.5%. Monthly payroll for state and local government in Oregon increased by 48.1%. Raising taxes will only continue these historical trends, when will Oregon run out of private citizens to tax for support of the public payroll?Â

Finally, I would like to point out how important small business is during economic recoveries. Small businesses will account for a majority of the new jobs created as the economy recoveries. Yet, the Small Business Survival Committee ranks Oregon 42nd out of 50 states for small business climate. Income taxes are a large reason for Oregon’s low rating. Raising taxes will not improve our small business climate.Â

If you look at the states that made the choice to raise taxes during the last recession, it is impossible to see tax increases as anything other than harmful to long term government and education funding. In my opinion, lowering taxes, not raising them. is in the best interest of Oregon’s economic recovery and the financial stability of government institutions. I wish to learn from history, do you?

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