Realigning priorities: A new look on government growth

Oregon state government is largely dependent upon the income tax for its revenue source. Over time it has proven to be the most volatile and undependable source of tax revenue – particularly for a government with a voracious appetite for growth and a disdain for efficiency. That volatility is easily demonstrated by a look back over the last twenty years. According to the Oregon Legislative Fiscal Office (LFO), from 1987-89 to 1995-97, during Oregon’s boom cycle, the biennial general fund and lottery funds budget grew from $3.8B to $8.2 B, an increase of approximately 116% or 11.6% per year. In contrast as Oregon’s economy began to flatten the biennial general fund and lottery funds budgets grew from $8.2B in 1995-97to $10.6B in 1999-2001, an increase of about 29% or about 7% per year. And when the recession hit, the biennial budgets went basically flat for four years.

One might say that such fluctuations are appropriate and that government ought to feel the pain as much as its citizens do during times of economic stress. And therein lies the rub. While Oregon’s heavy reliance on the income tax should force government to curtail spending during economic downturns, it doesn’t. When Oregon’s citizens began to feel the pain of the 2000 recession – a recession that began earlier and ended later in Oregon than it did nationally – Oregon government tried to continue its growth and spending – growth and spending beyond its means. Despite the recession, the governor and legislature tried to increase the budget by 12.4% in 2001-03 and by 11.3% in 2003-05. Their solution was to raise taxes. It was only the intervention of the voters that forced budgets to reflect economic reality.

You see, there is no absolute correlation between the economic health of the citizens and the ability or willingness of government to spend. It is an irrational system that would allow the government to further burden its citizens with increased taxes during a time when their incomes have declined. It is an irrational system that requires the citizens to intervene to force government to act rationally as was required when they turned back Measures 28 and 30 – the back to back tax increases adopted by the legislature with the support of the governor.

A business that establishes an irrational system is soon confined to the scrap heap of economic failures.

A rational system would be one that aligns government’s interests with the well being of its citizens. A rational system would be one that allows government to grow as a result of, rather than in spite of, the prosperity of its citizens. In such an instance, government would adopt policies that would promote economic growth so that it may grow. Conversely, government would avoid policies that would substantially hinder economic growth.

But until government revenue growth is tied to the economic growth of its citizens, there will be no incentive for government to act rationally. In more visual terms, think about the government standing next to you instead of in your way. Think of a government seeing the same opportunities and challenges facing you, acting in concert to seize those opportunities, overcome those challenges and thus share in your success.

The rational way to achieve such an alliance is to peg government spending to a percentage of the total personal income of its citizens. (Total personal income is usually defined to include both active and passive income and, therefore would include wages, profits, and investment income.) As total personal income grows the ability of government to grow increases proportionally. For instance, Oregonians total personal income grew from $49.95B in the 1987-89 biennium to $97.97B in the 1999-01 biennium. During that period, the state budget was about 9.35% of the state’s total personal income. I don’t pretend to know whether that is a good number at which to peg state spending, but it is a rational number based upon past experience. Had Oregon state government utilized that methodology and acted in the same fashion that it did, the state budget would have grown from $4.95B for 1987-89 to $9.75B for 2001-03. In order for government to have achieved the $10.4B budget that it actually adopted in 2001-03, it would have had to act in a fashion that stimulated the growth in total personal income by a mere one-half percent per annum. As important is that there would have been no pressure to increase taxes because spending would have remained well within available revenues.

In such an instance, government would have had to look seriously at its policies to determine what inhibited growth, what encouraged business to migrate elsewhere, what discouraged business to create jobs, to locate, grow, and remain in Oregon. In other words it would have had to act like its citizens and its businesses with an eye toward the future and continued prosperity. It isn’t too late to impose such discipline on government and fundamentally change the economic future of Oregon.

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As a postscript, on behalf of myself and others like me who never place a sucker’s bet on the Oregon Sate Lottery, I would like to thank all of those Oregonians who support Oregon’s second largest source of tax revenue. The lottery is my favorite form of taxation – completely voluntary.

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Posted by at 08:11 | Posted in Measure 37 | 3 Comments |Email This Post Email This Post |Print This Post Print This Post
  • Good analysis but your missing one critical argument that is necessary to make a spending control readily accepted by the general voting public.

    Primarily your frame the issue that Government is ‘an antagonist that needs to feel the same pain as the tax payers.’ This fails to consider what government really is to most voters; a supplier of services that become even more needy in times of recession. Because you frame your argument in the context of government being an antagonist whom you do battle with you remove a middle ground for those who are more liberal but still wish to see reform from their government.

    Instead you should mention right off as the top priority of this proposal is that it requires a prioritization by government of expenditures. It also causes the legislature and the executive branch to come back to the voters for every proposal. No more sudden expansions of the OHP, additional PERS/entitlement benefits to government employees, and hopefully an end to schools being held hostage every recession.

    It also doesn’t hurt to also mention that this is a superior way to enact a rainy day fund. Ten years of a program like this passing excess revenue off into a rainy day fund and the state will be protected forever from short falls. Furthermore you could argue that this program is easily repealed in the long term (look at Colorado) which is proof of how succesful it really is. The politicians must go back to the voters to restructure government spending and therefore our government’s priorities are in the hand of voters as it was meant to be.

  • Zippy

    Rational? As long as government has the guns, they have little incentive to tax and spend in a rational manner. Taxes are about 5 times too high, and there’s no real and immediate path of remedy.

  • Bert

    You don’t mention that the state expanded in the 1990s in part because of the requirement and then willingness of both dems and republicans to fill in for Measure 5 related funding gaps for schools. By 1997, the state funded 2/3rds of education. In addition to voting for constraints like Measure 47, voters put multiple spending measures through. They voted for mandatory minimums; they also voted for increases in tabacco taxes to be allocated to health care, and for lottery allocations to parks and salmon recovery.

    So DarePdx has a point, voters wanted services as well as constraints.

    As for Zippy, if you want to reduce taxes by 5 times, try living for a year in some banana republic complete with corruption, kidnappings, and widespread poverty. There are plenty to choose from. Or, if you have an exemplar country with a 5 to 7% national tax rate or an exemplar state with a 2% state/local tax rate, please let us know.

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