Why the Oregon Capital Gains Tax Should Be Repealed

Last week Cascade Policy Institute released a report analyzing Oregon’s relatively high capital gains tax. Why the Oregon Capital Gains Tax Should Be Repealed details why the Oregon capital gains tax punishes the very thing that encourages growth in the Oregon economy and puts the state at a competitive disadvantage with its neighbor to the north. The report was published as part of Cascade Policy Institute’s Oregon Economic Opportunity Project.

Why the Oregon Capital Gains Tax Should Be Repealed was written by Elizabeth Harrison. A recent valedictorian of Hillsdale College, Elizabeth Harrison has a degree in economics and mathematics. Ms. Harrison was a recipient of The Woodard Family Fellowship at Cascade Policy Institute. The Woodard Family Fellowship is a research position generously sponsored by a grant from The Woodard Family Foundation of Cottage Grove, Oregon.

“A high capital gains tax rate discourages investors from investing their capital in businesses and entrepreneurial projects that would create greater value,” writes Harrison. “Removing the tax would both encourage and reward the wise investment of capital in projects that would assist the growth of the economy”¦.

“While the capital gains tax rate has declined nationally, Oregon’s capital gains tax rate has remained high. Oregon’s high total capital gains tax rate increases the greater disparity between Oregon and other states. This encourages the departure of productive endeavors out of the state to other more business-friendly states, and Oregon suffers because of it”¦.

“A repeal of the capital gains tax”¦would help the largest group of capital gains taxpayers in Oregon: the middle class. There are approximately 48,000 middle-class capital gains taxpayers, compared to only 31,000 high-income capital gains taxpayers. A capital gains tax repeal would help high-income earners more in terms of gross dollar amounts (because they pay the most), but it would help a greater number of individual middle-class taxpayers.

“While the federal capital gains tax rate has seen a recent drop, Oregon’s capital gains rate has remained at 9%, placing Oregon as the third highest in the nation, behind New York and California. Given Oregon’s high capital gains tax rates, individuals and businesses have incentive to go elsewhere with their capital in order to protect their profits from an eventual sale. For any individuals attempting to decide where to invest, all other things being equal, a comparison of the capital gains tax rate could be the deciding factor.

“”¦In a study evaluating annual averages from 1993 to 2002, 337 residents moved from Oregon to Clark County, Washington with an average net capital gain of $114,117, as opposed to the $20,058 average net capital gain from the prior year. These residents likely moved from Oregon in order to avoid the high tax rate of 9% on capital gains (Washington has no income tax), and any residents who leave because of the high capital gains tax rates will take any possible revenue from their gains with them.”

Harrison concludes, “The United States Treasury acknowledges that lower capital gains rates benefit our economy, stating the following: “˜The lower the capital gains tax rate, the more the entrepreneurs and inventors of America will apply their energies and talents. Thus, a low capital gains tax rate is vital to maintaining the strength of the economy into the future.'”

Why the Oregon Capital Gains Tax Should Be Repealed is the latest publication of the Oregon Economic Opportunity Project. The Oregon Economic Opportunity Project seeks to engage the citizens of Oregon, the media, and state and local lawmakers in an in-depth discussion about economic opportunity in Oregon and to move forward in a direction that creates a healthy, dynamic economic climate in the state. More Cascade publications can be found at www.cascadepolicy.org.

# # #

For more information about this report and the Oregon Economic Opportunity Project, please contact Steve Buckstein.

Share
  • Jerry

    Oregon politicians from both parties are simply too greedy and too ignorant to reduce taxes. People and businesses will continue to leave the state.

    It is a sad state of affairs when inept politicians can cause so much damage to a state and no one seems to care.

    • David from Eugene

      Jerry

      It is not greed or ignorance that is stopping Oregon politicians from dropping taxes. It is the basic realization on their part that there is no such thing as a free lunch. All the services currently being provided by government at one time received the approval of either a majority of the legislature and the governor or a majority of the voters. Providing Government services costs money. Taxes and fees is how government gets that money.

      You may believe that some of the services that government is providing are unneeded, unwanted, frivolous or could be done better by someone other then the government. If this is the case, then you need to gather together a group of similar minded individuals and either lobby the legislature to eliminate the program or gather signatures to put it on the ballot. If you can convince a majority of the legislature or voters that you are right it will be eliminated.

      • Jerry

        Sadly, it is much easier to simply move to a state that is not so greedy….which is what most Oregonians are doing when they retire, in the event you have not noticed.
        Washington gets more Oregonians moving in than from any other state.
        Those retirees are no drain on the state services, they spend a lot of money – and none of it goes to Oregon – except the shopkeepers get some when they come over the border to buy things without sales tax.
        Oregon is foolish to continue policies that cause this flight, but, as you say, it is what the people want….

      • Bad Boy Brown

        It really doesn’t matter what you say about changing anything with the tax structure in Oregon. It won’t happen, because this state is tied to the income tax and too stupid to replace it with a sales tax.
        Besides, why waste time dealing with some ignorant pols when one can move to Nevada or Washington and get better government at lower cost.

  • Bob Clark

    Buckstein’s seat at the state’s planned tax look might make a state capital gains cut possible but events at the federal level are turning against reduced longterm capital gains tax rates. Under either of the Democrate nominees for president. longterm rates would likely rise from 15% to 20% at a minimum. (On the other hand, Obama has mentioned free enterprise zones where corporate taxes would be lowered to retain U.S business.)

    I’ll just be happy if the state doesn’t raise the marginal income tax rate to above 9%, and doesn’t take away more deductions and credits. Or, doesn’t add a sales tax or additional fees to extend the tax structure to beyond the income tax. Given government employee unions effectively run government in Oregon and these unions seem pretty intent on padding the wages and benefits of existing government employees, no change in tax rates and tax structure would be a victory in my book.

    • rural resident

      Oregon needs to change the structure of its income tax, regardless of what is done with capital gains. A balanced tax structure includes some progressive, some regressive, and some proportional taxes. Since the income tax is essentially a “flat” tax (the 5% and 7% brackets are so narrow that they’re almost meaningless), the state currently relies on two proportional taxes for the majority of its revenues.

      My proposal would be called the “3/11” solution. I would institute a 3% bracket at the low end, on the first $10-$15K of taxable income. This would provide some tax relief for low- and middle-income taxpayers. To compensate for the revenues lost at the low end, add an 11% bracket on taxable income above $150K to $200K. This would make the income tax more progressive, as it was originally intended to be.

      I would also increase the standard deduction and the exemption credit. The standard deduction hasn’t been increased appreciably since the 1960s; the exemption credit, even though it’s indexed for inflation, doesn’t come close to doing what it is supposed to do: provide a reasonable tax reduction for dependents.

      By coupling this with the capital gains reductions I describe below, middle income taxpayers would gain needed relief.

      • eagle eye

        Not with you on that one. An 11% tax rate would probably be the highest in the country. Disastrous. It would drive out the high income people and entrepreneurs. It might even reduce revenue.

      • dmf

        I agree 11% would be too high. Yes, I know higher income people make more money, but when you take a look at the difference between 9% and 11% you could have more people leaving the state.

        An Oregon taxable income of $180,000 taxed at 9 is already $16,200.00 That’s a chunk in anybodies book.

        at 11% that amount would be $19,800.00, Add that to the already high rate charged that same person at the Federal rate, that seems more punitive than helpful.

        • rural resident

          Your calculations are incorrect. We don’t determine which tax bracket taxpayers fall into and apply that rate (now 9%) to all of their taxable income. At present, some of your taxpayer’s income is taxed at 5% (about $5,800), some at 7% (approximately the next $8,500), and the balance at 9%. The tax (before exemption credits, since I can’t tell how many dependents your fictional taxpayer has), assuming a joint return, on $180K of taxable income (the amount AFTER standard/itemized deductions and some other adjustments) is $11,741.

          Let’s assume the following rate structure: 0-$10K, 3%; 10K-17.5K, 5%; 17.5K-25K, 7%; 25K-100K, 9%; 11% over $100K. Your taxpayer’s tax before exemption credits on $180K would be $16,950. This isn’t an inconsequential jump, but a taxpayer with $180K of TAXABLE income (which means they very likely have a gross income of at least $200K) isn’t exactly “middle class.” In fact, under the rate structure above, taxpayers wouldn’t actually pay more taxes until their taxable income hit $132,646. That would seem to provide a lot of tax relief for middle-income and upper-middle income taxpayers.

          This doesn’t include the positive effects of changes that I’ve recommended in the capital gains tax rates for low- and middle-income taxpayers, the adjustments in the standard deduction, and the increase in the exemption credit – which would further reduce taxes on most taxpayers, and eliminate state taxes altogether for those at very low income levels.

    • David from Eugene

      Bob

      Protecting jobs and Insuring reasonable levels of compensation is what Unions are supposed to do for their members. Assuming that the wages and benefit package provided to government employees are better then those provided in the private sector, the question is, are government workers being paid too much, or private sector works paid too little? Warning this is a bit of a trick question. Before you answer that please remember that the private sector employment market operates under a restrictive cap created by monetary policies coming from the Federal Reserve System that do not impact government sector employment.

    • Steve Buckstein

      Bob, Governor Kulongoski appointed me to the Task Force on Comprehensive Revenue Restructuring as a taxpayer representative. As such, I’m looking at ways to make Oregon’s state and local government revenue systems more taxpayer friendly. Eliminating the state capital gains tax would be a good step in that direction for reasons set out in this post. Whether I can convince my fellow task force members to adopt this proposal is yet to be seen.

      • rural resident

        Steve … I agree that there are other reasons for reducing capital gains tax rates. However, given the current political climate — both nationally and in Oregon — you’re going to have a hard sell that we should provide a great big tax break that, at least in dollar terms, mainly benefits the wealthiest taxpayers.

        Mr. Harrison’s point that, “There are approximately 48,000 middle-class capital gains taxpayers, compared to only 31,000 high-income capital gains taxpayers” is a thin attempt to use middle class taxpayers as a tool to gain a benefit that, in dollar terms, largely accrues to the relatively wealthy. (Who, under my proposal, would get at least some potential tax relief, as would every other Oregon taxpayer with capital gains.)

        High-income taxpayers aren’t exactly leaving California in droves, and it has high marginal income tax rates, a hefty sales tax, and huge property taxes (tied proportionately to property values and readjusted for the most recent sale (something we don’t do in Oregon). And their property values in the most desirable — and populated — areas are out of sight compared with ours. Thus, it is hard to conclude that there is a direct relationship between tax rates on capital gains and factors like migration to/from a state and the incidence of people starting/expanding businesses.

        What I’m trying to do is come up with a somewhat politically palatable proposal while updating the tax structure and providing at least some incentive for entrepreneurs and investors.

  • Anonymous

    Who said the people running for government were intelligent.

  • rural resident

    Steve … If the goal is really to help the middle class, why not do the following: eliminate capital gains taxes altogether on the first $50K of capital gains (either short- or long-term) on any Oregon tax return. Reduce the rate by half on the next $100K per year. Allow an additional reduction on capital gains taxes on PRIMARY personal residences (not second homes, etc.). (The changes in rules at the federal level have eliminated much of the taxation on residences anyway, but the increase in home values will result in some amounts being taxed upon disposition by some taxpayers.

    • Steve Buckstein

      rr, while eliminating the capital gains tax will help more middle class taxpayers than high income ones, I don’t see that as the primary goal. The economic benefit to the state may be greater by eliminating the tax on higher income people, since they probably create more businesses and jobs. Rather than choose between these two classes of people, let’s eliminate the capital gains tax on everyone, and benefit everyone.

      • rural resident

        Steve … Sorry. My comment from above (2008-02-25 at 21:42) should have been posted here.

  • eagle eye

    How about this — it might even have a chance of getting enacted — Mannix ran on something like this when he lost to Saxton — cut the capital gains tax rate in half. It might even increase revenue.

    • rural resident

      The justification for reducing capital gains tax rates is that current rates hurt the middle class (even if somewhat broadly defined). If the goal is to help that group, then cutting the overall rate for everyone on all capital gains provides relatively little relief for the lower and middle classes and proportionately more for the wealthy. I think my original proposal would be easier to sell to the majority of voters. They might actually see themselves getting something out of it.

      • eagle eye

        The justification for cutting the capital gains rate is mainly that the high capital gains tax in Oregon is a drag on business growth, especially entrepreneurial businesses, so it’s a drag on prosperity in general. Anybody who wants to make it big starting a business is going to look elsewhere than Oregon.

  • eagle eye

    Even if your proposal would sell — I don’t the 11% has a prayer — it would be a destructive thing.

    I think giving all classes a break on capital gains is the way to go — the high tax on capital success is one of the biggest things holding Oregon back, is my guess.

  • David from Eugene

    This argument in support of treating capital gains different from straight income is based on a consideration of only a segment of a much larger and more complex chicken or egg cycle. In very simplistic terms, increasing consumption increases demand, which in the long term causes an increase in investment that causes an increase in production which creates jobs which causes an increase in consumption causing an increase in demand and around we go again. Taxes where ever in the cycle they are imposed negatively effect this cycle. Just as cutting capital gains taxes can increase investment, cutting income taxes can increase consumption. Thus showing the real underlying question in this debate, who’s ox is going to be gored.

    That question aside there seems to be a basic unfairness inherent in treating the different types of income differently. Consider the artist who, early in his career, paints two pictures, one he sells one to a collector and the other he holds on to. Decades when the artist is famous and his work much more valuable both paintings are placed on the market and sold at a price many times higher then the price the collector first paid. Question, why should the artist’s profit, considered straight income, be taxed and the collector’s profit, considered capital gains, not be taxed?

  • Friend of Meatpuppet

    The demo-licans do not care and have never done anything to remove a robbery mechanism from public service, why would they start now? Only if it came from Al gore would they give their blessing.

  • Jerry

    If reducing taxes could help with global warming they might do it, but I doubt it, as global warming is a joke anyway. We now have the most snowfall cover in the US since 1966.
    The very most!!!!
    I know all about the climate vs. the weather stuff, too, so save your time.

  • dean

    Ms Harrison admission that fewer, higher income capital gains taxpayer would gain more than more, middle income taxpayers says it all. What she is proposing is another tax break for the rich disguised as a tax break for the middle class. Yet the programs that will have to be cut to pay for it , i.e. public schools, benefit the middle and lower classes the most. The rich send their kids to private schools like Catlin Gable, with smaller class sizes, newer books, and fewer poor kids cluttering up the halls.

    Oh…but in the long tradition of tax cutters since Ronald Reagan himself, she does not mention program cuts. So never mind.

    And forget that we also have Mannix with a new program to throw more people in jail at a cost of $200 million. Cut taxes, build and staff more jails. What is that math on that Ms. Harrison?

    • Steve Buckstein

      Dean, the author did not need to mention program cuts because the next recession will do the job for her. In the last recession, Oregon’s capital gains revenue dropped by about 90% with no change in rates. The drop in stock prices and other asset values wiped out the capital gains tax revenue pretty thoroughly. That would have been a perfect time to eliminate the tax altogether without causing any program cuts, because no programs were receiving hardly any cap gains revenue anyway. The next time to make such a move may be coming up shortly if we really do enter another recession. The state shouldn’t be dependent on such a volatile revenue source in the first place, so it’s hard to blame program cuts on its elimination.

  • David

    Jerry wrote:
    > I know all about the climate vs. the weather stuff, too,

    Apparently not, or you’d know that one cold winter in one particular place means nothing in the global climate record.

    Funny how you cherry-pick the last three months, while ignoring the last run-up in temperatures in the last 25 years.

  • Jerry

    Oh my gosh! Did I cherry pick? The sky is falling. The earth is burning. Maybe you failed to catch this article on global cooling – here is a snippet…

    Over the past year, anecdotal evidence for a cooling planet has exploded. China has its coldest winter in 100 years. Baghdad sees its first snow in all recorded history. North America has the most snowcover in 50 years, with places like Wisconsin the highest since record-keeping began. Record levels of Antarctic sea ice, record cold in Minnesota, Texas, Florida, Mexico, Australia, Iran, Greece, South Africa, Greenland, Argentina, Chile — the list goes on and on.
    No more than anecdotal evidence, to be sure. But now, that evidence has been supplanted by hard scientific fact.

    All four major global temperature tracking outlets (Hadley, NASA’s GISS, UAH, RSS) have released updated data. All show that over the past year, global temperatures have dropped precipitously.

    But, I know you are right. We better change our lifestyle, ruin our economy, and foolishly chase the global warming demons outta here!
    I love this madness. Keeps people so focused on sham science that they hopefully won’t do anything else to hurt us.

    • dean

      Jerry…even if what you say true, 1 year does not a climate make. And nearly all previous global warming skeptics (including George Taylor) now acknowledge that the earth is indeed warming, though they still dispute the rate and cause.

      We do not have to “change our lifestyle, ruin our economy, etc…” to deal with this isue. This is crying Chicken Little. Changing light bulbs, driving more fuel efficient cars, living in better insulated homes located in neighborhoods where can walk to the store, paying a bit more for electricity in order to finance non-polluting wind, geothermal, solar, and other energy sources…none of these measures requires radical changes in lifestyle or economy. And with oil running out, prices now over $100 a barrel, gasoline poised to go to $4 a gallon, it only makes sense to conserve and adjust our energy use with or without global warming.

      But if human caused global warming is the real deal, and we fail to act, THAT my friend will change lifestyles and potentially ruin the economy of our kids and grandkids.