Are the rich in Oregon paying enough taxes?

by Dan Lucas

State spending in Oregon doubled in ten years, growing from $30 billion to $60 billion. The Oregon All Funds budget doubled from the budget ending in 2001 to the budget ending in 2011. The state’s General and Lottery Funds’ budget, a subset of the All Funds budget, went up by 35% during that same time.

In the current budget cycle, state spending and taxes have generally been held in check. In the coming legislative session, though, there will be significant pressures to increase taxes to pay for PERS increases, to pay for Governor Kitzhaber’s expansion of government-run health care and to restore funding to schools. I’ve written previously explaining why additional taxes won’t solve these problems – it will take fixing PERS and funding schools first to start with (Three articles calling for a state budget “Core Fund” & 3-part series on Oregon PERS Crisis 101). Astonishingly though, not everyone has read my articles or agrees with them, and so there will be those in Salem who pursue additional taxes.

More taxes are never popular, and so a common method of selling additional taxes is to have them be paid for by someone else. In cases like Oregon’s Measure 66, that someone else was “the rich.” More recently, in the campaign cycle that just ended, the airwaves and mailers were full of accusations of “tax breaks for the rich,” which shows that “the rich” not paying enough taxes must be a focus group-tested concept that sells.

Although it apparently does well in focus groups, it isn’t true. Nationally, half of all Americans don’t pay federal income taxes. The top 20% pay 68% of federal income taxes. The top 1% pay 22% of federal income taxes.

Here in Oregon, high-income earners also already pay the bulk of the income taxes. The top 10% pay for just over half of the state’s income taxes. The middle income earners about cover for themselves – they are 30% of tax filers and they pay 35% of Oregon’s income taxes – and the bottom 60% pay only 13% of the income taxes.

The top 1% in Oregon pay 20% of the personal income taxes. The bottom 20% in Oregon pay less than 1% of the personal incomes taxes. And the number of “the rich” in Oregon has been going down. The number of Oregonians earning over $500,000 dropped by 36% between 2006 and 2009, the most recent years those numbers are available.

Another problem with taxing “the rich” is that many of the high-income earners are actually small businesses who create jobs. According to a 2011 IRS study, high-income earners make up 24% of all small businesses that have employees. Here in Oregon, state reports showed that 2/3 of the tax filers targeted for the Measure 66 personal income tax increase were small and family-owned businesses or farms. Increasing taxes on these small business owners reduces the amount of capital they have available to grow their businesses and hire more employees.

Finally, taxing “the rich” doesn’t always work out as planned, for a variety of reasons. For example, Oregon’s Measure 66 brought in less than 3/4 of the taxes projected when it passed.

Is it “fair” to further increase taxes on high income earners, “the rich”? I don’t think anyone actually believes that it is. What comes first is the perceived need for more taxes, and then the justifications follow.

Politicians have learned that when the numbers line up – where the many can vote more taxes for the few – it’s possible to pass these envy taxes. That doesn’t mean that they work, or that they’re right.