In late 2007 I was appointed by Governor Kulongoski to the 30-member Task Force on Comprehensive Revenue Restructuring. I held one of two seats reserved for taxpayer representatives. The Task Force was supposed to find ways to make Oregon’s state and local government revenue systems more stable, among other goals. After meeting for about 14 months, no grand tax reform plans emerged, but several narrower recommendations did. The most prominent proposal took the form of Senate Joint Resolution 29 (SJR 29), which would amend the Oregon Constitution to, among other things, direct income tax kicker money into the existing rainy day fund.
The Task Force found, and I agree, that establishing more reliable state income forecasting and more prudent budgeting are worthy goals. I do not agree, however, that the state is the best repository for ending balances under a proposed new forecasting method. That money rightfully belongs to the individuals and corporations who earned it.
The Resolution requires the Governor to develop a point estimate for corporate income tax revenue and for all other General Fund revenue (primarily from the personal income tax) and a range for both estimates. This would be an improvement over the current point estimate approach, which is almost always wrong.
The problem lies in the Resolution’s requirement that only revenue above the top of the forecast range be returned to taxpayers in the form of a kicker. This will have the practical effect of eliminating most kicker refunds that Oregonians have come to expect when state revenue exceeds estimates by more than two percent.
The Resolution also requires that revenue above the point estimate but below the top of the forecast range be placed in the rainy day fund. The intent is to grow a more substantial fund that can help the state deal with recessions like the one we are in right now.
SJR 29 had a public hearing on March 12th before the Senate Committee on Finance and Revenue. I told the committee members that locking the entire Resolution into the Constitution will simply make it easier for the state to avoid exercising the kind of fiscal discipline that Oregonians should expect. The effect would be to permanently transfer billions of dollars from the private to the public sector into the foreseeable future. I also told them that in my opinion it would be relatively easy for opponents to derail the effort by telling voters that it was simply an attempt to “steal our kicker.”
How to build a rainy day fund without “stealing the kicker”
I explained in my testimony that the Resolution is based on a fallacy. It supporters assume that the kicker has somehow prevented the state from building a substantial rainy day fund, when in reality there has been no prohibition against lawmakers budgeting for less spending than the point estimate forecasts would allow.
If, for example, the revenue estimate for a biennium is $15 billion, the legislature is free to budget spending of $14 billion, and budget one billion dollars toward the rainy day fund.
Under the Resolution however, if the point estimate is $15 billion and the top of the range is $16 billion, the legislature can budget and spend $15 billion and must save the additional billion dollars. The effect is to transfer one billion dollars from the private to the public sector, and effectively grow government faster than the people have allowed it to grow under the current kicker law.
Therefore, the Resolution as written would make it easier for the state to avoid exercising the kind of fiscal discipline that Oregonians should expect.
My recommendation was to accept the part of the Resolution that improves state revenue forecasting, but reject the part that, over time, would transfer billions of dollars from the private to the public sector.
Then, if legislators wish to grow a substantial rainy day fund, they can ask voters to change the Oregon Constitution to require that they can only budget to spend up to the low end of the forecast range, and save everything else up to the point estimate until the rainy day fund has reached some predetermined level. This would leave the kicker law intact, restrain the growth of government, and grow the rainy day fund all at the same time. It would be reform that many taxpayers could enthusiastically support.
Legislators table the Resolution
In early May it was reported that key sponsors of this Resolution had decided to table it for the time being, afraid that sending it to voters now might get in the way of other tax-raising measures they want voters to approve. This is both good news and bad.
Not asking us to transfer billions more dollars to the state from our private pockets is a good thing. But not reforming the revenue forecasting method, and not looking for other ways to spend less and save more, is a lost opportunity. Hopefully, insightful legislators will figure this out, and find a way to exercise the political discipline needed to really do right by the taxpayers.
Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.