How to cut 9% of Oregon PERS liability (legally)

by Eric Shierman

Oregon’s Public Employee Retirement System benefits were once tax free. In 1991 the Oregon legislature tried to pass a rather modest reform to require public employees to at least pay taxes in retirement like everyone else, but it was struck down by the Oregon Supreme Court in Hughes vs. State of Oregon. The court gave Oregon a choice. It could continue exempting public employees from paying taxes in retirement, or it could tax these retirement benefits if the state enacted a monetary remedy by increasing PERS benefits by 9% in compensation. Oregon chose the latter.

If the state no longer taxed income, this monetary remedy would no longer be required. Tier 1 benefits could then be legally reduced by 9% across the board. This would have an immediate material impact on Oregon’s budget.

Oregon’s income tax could easily be eliminated in a revenue neutral way by replacing it with a sales tax – a policy shift that comes with its own advantages. One of the first memories I have in Oregon state politics is listening to John Lim’s radio ads as a high school student that he aired on the Portland area’s Z100 during the 1991 Oregon Republican gubernatorial primary which he would ultimately lose to David Frohnmayer. Lim ran very smart ads extolling the virtues of a sales tax that fell flat upon the ears of Republican primary voters back then but were instrumental in piquing my curiosity about the world of public policy.

It was only later when studying economics in college that I learned about the broad consensus among economists recognizing that it’s better to tax consumption rather than income. Replacing Oregon’s state income tax with a state sales tax would not only have the added benefit of legally implementing a needed PERS reform that was struck down by a judge two decades ago; it will also more efficiently raise revenue with less negative economic impact than we currently suffer under.

Eric Shierman lives in southwest Portland and is the author of A Brief History of Political Cultural Change. He also writes for the Oregonian’s My Oregon blog.