Measures 66 & 67 were a disaster

by Bill Valentine

Rarely can you convincingly “prove” anything to anyone about the economy. Economics is a social science, not a natural science like physics, chemistry, and biology. The Scientific Method doesn’t work with the social sciences. There aren’t real-life opportunities to test economic theories in a vacuum, and cause-and-effect is virtually impossible to substantiate. That’s what makes economics so interesting.  That we’re still debating the effectiveness of Roosevelt’s New Deal, and Keynesianism, and Supply Side theory, and so on, shows how little consensus there is around the central ideas that make up the study of the macro economy.

However, there are rare times when an argument can be supported deductively—if not in total, then at least persuasively so. Allow me to put forth one such argument, and let you arrive at your own conclusion based on the direct evidence now at hand. And it regards the impact of Oregon’s recent tax experiment.

In 2009, the Legislature of the State of Oregon put forth changes to state tax law to address its yawning deficit (later taken to the voters as Measures 66 and 67).  Measure 66 raised the personal income tax on the state’s highest-earning individuals to as much as 11% for 2009-2011, and then by a lesser amount going forward [1].  Measure 67 raised corporate income tax rates, and imposed a vastly increased minimum “excise tax”—a schedule based on revenue for corporations that don’t have earnings.

Supporters said M66/67 would help balance the budget, prevent cuts to valuable services like education, health care assistance, and public safety, and thus make Oregon a more attractive state for people and businesses to locate.

In reality, what it really meant to its key proponents was preventing scrutiny of compensation arrangements and employee benefits for unionized workers which continue to put an ever increasing amount of the strain on state and local budgets in Oregon.  The funding for the pro-66/67 message at the time came almost entirely from the state’s inordinately powerful unions via their thinly veiled 501(c)(4) advocacy organizations.   Proponents vastly outspent opponents and their message got out.

The rest of the nation watched with curiosity to see if a state would be able to raise taxes in the throes of a recession.  Oregon did not disappoint.  On January 26, 2010, voters passed both measures, and they applied retroactively back to the beginning of 2009.

So, how has Oregon fared in the wake of these new tax increases?

Let’s start by addressing the primary objective of the tax increases: balancing the budget to prevent having to cut spending on services.  Not only did Oregon not solve its deficit problem through the additional tax revenue, things have gotten worse. By the latest count, Oregon will be more than $3.5 billion dollars in deficit for the current 2011-2013 biennium.

Measures 66/67 failed to raise the money they were supposed to.  Measure 67 raised $249 million, versus $261 million, during the last biennium—a $11 million shortfall.  It’s expected to fall another $29 million short for the current biennium versus projections.

More alarmingly, Measure 66 proceeds haven’t come close to what they were supposed to.  Over the last budget cycle, Oregon raised nearly one-third less from Measure 66 taxes ($349 million vs. $504 million [2]) than was projected.   The latest estimates project that we’ll raise just above half of what was originally projected for the current biennium.  

All in, taxes raised from M66/67 will be $356 million short – about three-fourths of what was expected for the current and past biennia.

So what happened to the missing $356 million?  The Wall Street Journal has some ideas.   In an article from December of last year titled “Ducking Higher Taxes –  Oregon’s vanishing millionaires”, the Journal points out that vanishing millionaires are a well documented phenomena.  When Maryland instituted its own “millionaire tax” in 2008, one-third of that state’s millionaire households vanished.

Where might Oregon’s millionaires have vanished to?  It’s pretty clear a lot went to our neighboring state to the north.  The Department of Motor Vehicles (DMV) in Washington state publishes data on the driver’s licenses issued to, and surrendered by, citizens in Washington, by state.

For example, if an Oregonian takes up residence in Washington, they surrender their Oregon driver’s license and are issued a Washington one.  And if a Washingtonian does the same in Oregon, that information too is tracked by Washington DMV.  It’s an imperfect measure of state migration, but I think it’s a pretty good proxy.

I recently downloaded the data, and found that for the decade ending in 2008, there had been an average of 1.9 people moving to Washington from Oregon for every one going in the other direction.  Check out 2009.  Oregonians flooded Washington, with 4.5 people moving north for every one moving south!

Unfortunately, when individuals with financial capital relocate, they also take their intellectual capital with them.  98% of Oregon’s companies are small businesses and they rely to an extent on the intellectual and financial capital of successful types, the likes of which are increasingly calling the Evergreen State their home.

Interestingly, not long after Oregon passed M66/67, Washington tried its own “millionaire tax” (Initiative 1098) and it was shot down two-to-one.

The loss of people and money to Washington, and other more tax-friendly states, is what’s known as an “externality” and an “unintended consequence” that I believe can be directly tied to M66/67—there are no other reasonable explanations for the exodus in 2009.

But outmigration isn’t the only unfortunate development for Oregon, post-M66/67.

Supporters of the tax hikes made the case that we needed to pass them to improve the perception of the state to outsiders.  Surely a state that was willing to raise taxes in a recession to support services was one that should draw people and businesses.  Let’s set aside the “giant sucking sound” from people flowing to Washington, and take a look at some prominent surveys and rankings of states.

Upon the passage of M66/67, the Tax Foundation dropped Oregon eight spots on its list of states ranked by business climate, citing the referendum as its reason for doing so.

More recently, Kiplinger released their ranking of states by tax-friendliness for retirees.  Oregon has the dubious distinction of now being named the fourth most tax-unfriendly state in the nation for people considering where to retire.

This past June, the American Legislative Exchange Council (ALEC) released the fourth edition of its annual Rich States, Poor States report.  This report ranks the states along such metrics as income tax rates, property and sales tax burdens, recently enacted tax policy changes, debt service as a share of tax revenue, and public employees per 1,000 residents and more.  Oregon ranks 43^rd, down eight spots since 2008.

Setting others perception of us aside, Oregon ranks 38^th by unemployment rate and 47^th by “un- and under-employment” rate[3], a sad footnote to the whole deal.

So as we head into 2012, Oregonians find themselves living in an apparently less desirable state, with one of the worst employment situations, the fifth worst spending problem in the country, and no real reform proposals on the table.

Hopefully, the recognition of the failure of Measures 66/67 will prove sufficient to prevent a reincarnation of similarly ill-fated attempts to solve a spending problem with a revenue solution.

Bill Valentine is the founder of Valentine Ventures, LLC, a wealth management firm based in Bend, Oregon. Bill is a member of The CFA Institute – Portland Society and American Mensa. He is also a member of the Board of Trustees of The High Desert Museum. Previously, Bill served on the boards of Habitat for Humanity – San Francisco and The Cinnabar Arts Corporation.

[1] Starting in 2012, taxable income above $125,000 (single filers) and $250,000 (joint filers) is subject to a new, permanent marginal rate of 9.9%.