PERS, Tax Reform and The Oregonian

Right From the Start

Okay, the problems must be serious now. After more than a decade of witnessing the abuses of a distorted tax system and an out of control Public Employee Retirement System (PERS) – made worse by Oregon’s dominant public employee unions – the Oregonian – always late to the misfortunes caused by liberal social welfare policies – has proselytized in sonorous tones about the evils of each.

With regard to PERS the Oregonian’s editorial board noted:

“The Oregon Public Employees Retirement System board did the expected on Friday when it announced that public employers must pay a lot more during the 2013-2015 biennium than they do now. Still, the numbers are stunning.

“The increase alone will divert $900 million from cities, state agencies and, of course, school districts, which are struggling already to teach kids in crowded classrooms. Beaverton School District Superintendent Jeff Rose told parents via email last month that ‘many of our teachers … are tired”‘after only two weeks of school. The district’s PERS contribution will jump 59 percent, which will leave even less money for teachers and staff. How do you suppose they’ll be feeling in 2015?”

The editorial board then goes on to conclude that the expense of the PERS system is unsustainable. While that is true, it’s pretty late in the game for the Oregonian to have stumbled on to the problem. As early as 2003, the Legislative Fiscal Office and the actuarials hired by the PERS board indicated that the unfunded future liability for PERS exceeded the biennial general fund budget for Oregon. For those of you forced to endure an education in Portland’s public school system that means that if you spent every dime raised by taxes and fees for the general fund for the two year period on PERS it still wouldn’t cover the future liability costs. And that’s before you included the future unfunded liability costs for healthcare for PERS retirees.

The legislature – then controlled by Republicans – undertook a series of PERS reform measures, most of which were initially resisted by then Gov. Ted Kulongoski. Mr. Kulongoski preferred a weaker solution that did little to address the problem and, instead, papered over the bulging deficit until after his re-election campaign in 2006. A group of business executives utilized the services of one of Oregon’s premier economists to peel the veneer off of Mr. Kulongoski’s proposal and confronted him with the results. Fearing the embarrassment of disclosure, Mr. Kulongoski conceded a number of fixes to the proposal and the legislature promptly passed the reforms.

But Mr. Kulongoski need not have feared implementation of the reforms because his friends and former colleagues on the Oregon Supreme Court – all beneficiaries of the PERS system – promptly torpedoed most of the reforms. The Oregon Supreme Court declared that PERS was a constitutional right conferred upon public employees on the date of their employment and while it could be improved, it could never be reduced, even prospectively as all other pension plans for the private sector can be. Not a single justice disclosed his conflict of interest and not a one recused himself from rendering the opinion.

And where was the indignation of the Oregonian? Outside the paraphrasing of the administration’s press releases, there was almost complete silence. And so, why at this late date – a decade later – is the Oregonian loosening its mighty pen? Why this new found concern that a program that has been unsustainable for at least a decade is now “unsustainable” in the eyes of the editorial board?

Well no one can be sure of the machination of the Oregonian’s editorial board but there just may be a hint as to the reason for their concern in the body of their editorial piece:

The second reason public employees should support PERS reform in 2013 is that tax reform will depend upon it. Gov. John Kitzhaber announced recently that he wants to mount another campaign to change the state’s tax code, though he doesn’t expect lawmakers to present voters with a menu of revisions until at least 2014. Ideally, voters at that time will be asked to approve some things many of them don’t like (a sales tax and/or changes to the kicker) in exchange for some things many do like, including reductions of other taxes and, of course, comparative revenue stability.”

And that brings us to the second editorial remonstrance on the need for tax reform. Not surprisingly, the editorial board’s description of Mr. Kitzhaber’s task reform “campaign” parallels Mr. Kitzhaber’s own description. And while the Oregonian, to its credit, focused on the business killing capital gains tax, Mr. Kitzhaber is solely focused on adding a third leg to the tax stool and increasing revenue. There will not be a “revenue neutral” proposal coming from Mr. Kitzhaber and Oregon will retain is reputation as being one of the highest taxing states in the union.

But back to the Oregonian’s editorial position on capital gains tax:

Of all the beneficial changes one might make to Oregon’s tax code, perhaps none is as vulnerable to simplistic ideological parry as cutting the capital gains tax. Why, the response goes, would you even consider giving rich guys a tax break when teachers across the state are losing their jobs?

“It’s hard to argue with that. Never mind that what it suggests — that capital gains serve no purpose but to further enrich the wealthy — isn’t true.”

Actually, it is easy to argue with because the truth is always easier to defend than a lie.

The Oregonian continued:

Yet Oregon’s tax structure, which taxes capital gains at the standard income rate, is famously unfriendly to investors and small business owners alike. For long-term capital gains, Oregon’s top combined federal and state rate, 21.4 percent, is higher than every other state’s except California’s (21.7 percent) and Hawaii’s (22.2 percent), according to a March study by the American Council for Capital Formation, a Washington, D.C.-based organization that advocates for low taxes on capital gains.”

What Oregon’s liberals fail to recognize is that because of increased mobility and communications capability, states must now be competitive to attract, grow and retain businesses and their attendant jobs. Oregon’s tax system is not competitive and nowhere is that more prevalent than with the capital gains tax.

And finally, the Oregonian puts the icing on the cake:

“Numbers provided by the Oregon Department of Revenue illustrate the phenomenon. In tax year 2007, for example, 297 Oregonians with capital gains income moved to Clark County, Wash. Their average capital gain that year was $166,455, or four and a half times the size of the average capital gain reported by the roughly 264,000 capital gains payers who remained in Oregon. And the year before packing up for tax-friendly Washington, the tax emigrants reported, on average, $32,468 in capital gains.”

Oregonians can, and do, migrate out of Oregon to more tax friendly environments every year. Just take a look at the list of former chairmen of the Portland Business Alliance who have fled Oregon at retirement and just before they exercise their stock grants. (The irony in this is that many of those fleeing Oregon endorsed the efforts of previous Democrat governors in Oregon as they raised one tax after another.

But it isn’t just the capital gains tax that is lost to Oregon. It is the capital also; the capital that is used to create, expand and protect businesses and, therefor jobs, in the state. It is also the future income that is earned from these investments. And lastly it is the experience of these business leaders that is lost forever.

So now the Oregonian has cast its lot with regard to tax reform. Now we’ll see if it is more important for them to support a governor who is just looking for more revenue (a sales tax) under the guise of tax reform, or a real tax reform that will rectify the problems of Oregon’s capital gains tax.