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.