Where do We Go from Here

The economic news nationally continues to be depressing although some economists say the recession will end by first quarter of 2010. While some will credit President Obama’s massive spending spree as the reason for the recovery, most credible economists will tell you that the recession simply ran out of gas — excessive inventories were finally absorbed, weak producers were eliminated, foolish credit policies were curtailed and irresponsible senior managers were fired.

With the exception of “foolish credit policies” little of the Bush/Obama stimulus plan had anything do to with this recovery. When history is written, in all probability, we will discover that Obama’s massive spending program actually delayed the recovery — much like President Roosevelt’s spending delayed the recovery from the Great Depression. And the “foolish credit policies — lending money to people who could not afford to repay it — had its origins in the Democrat Congress and the failure of the Bush Administration to drive a stake through its heart at an early opportunity.

But as bad as the national economy may be, Oregon is even worse. Oregon’s unemployment (12.2%) remains the second highest in the nation and exceeds the national average (9.5%) by almost thirty percent. Oregon has experienced a year over year job loss of over 100,000 which followed a 7,000 job loss for the preceding year. Despite the unemployment figures remaining relatively flat for the last two months, the actual number of jobs in Oregon continues to decline at an average rate of nearly 8,000 jobs per month.

So where do we go from here? Well Gov. Kulongoski and the Democrat controlled legislature think raising taxes and fees by approximately $1.6 Billion is the answer. A public response to that proposal will be forthcoming as taxpayers attempt to refer nearly $750 million in new taxes to a public vote this Fall. I make no prediction on the outcome of such a referral since the public employee unions will utilize whatever amount of the nearly $60 Million biennial war chest is necessary to sustain the tax increases — the public employees unions being the singular beneficiary of the tax increase.

If the tax increase is sustained it will virtually kill future capital investment since the tax increase also applies to capital gains. Oregon has already experienced a venture capital reduction from $74.8 Million in the first half of 2008 to an anemic $33 Million for the first half of 2009 — a percentage reduction ten percent greater than the nation as a whole.

But, assuming that voters reject the tax increases as they have done repeatedly in the past, where do we go? At the risk of inspiring condemnation and derision by other conservatives, moving to a sale tax, even a sales tax that replaces the income tax, is not the answer. By that I do not mean that there aren’t significant economic benefits, I simply mean that it isn’t going to happen in Oregon — not now, not ever. The politicians have made a run at a sales tax at least nine times and have been beaten back by voters at least nine times. Opposition to a sales tax is now so ingrained that even a reasonable proposal — like a sales tax as a replacement for the income tax — will not pass electoral muster.

Well, a possible solution may come, inadvertently, from Oregon’s leftist “think tank.” Every other year, about midway through the legislative session, and just when budget considerations start heating up, the Oregon Center for Public Policy rolls out its looney assertion that the Oregon’s single largest budget expense is “tax expenditures.” “Tax expenditures” you might ask? How does revenue become an expense you might ask? Or better yet — what the hell is a “tax expenditure?”

For those challenged by liberal lexicon, “tax expenditures” the deductions taxpayers make when calculating income subject to tax — you know, like deductions for mortgage interest, deductions for child care, the $4500 per person exemption, deductions for federal income taxes paid, etc. The whole concept of a “tax expenditure” is premised on the assumption that all of your revenue belongs to the state and any reductions in the amount you must pay is an expenditure by the “true owner” of the revenue — the state. That moronic concept is in keeping with the general philosophy of the far left — the state (government) is primary, its citizens are secondary.

Leaving aside the balmy notion that tax deductions are “expenditures,” an argument can be made that personal “tax deductions” can drive non-economic decisions. For instance, would you invest in solar panels for your home without tax credits and utility rebates? Would you purchase an alternative fuels vehicle if you weren’t exempt from gasoline and diesel taxes used to pay for the roads? Would you use light rail if you had to pay the full cost of the construction, maintenance and operation of the system? The answer to each of these questions for all but the PC challenged is a resounding “NO.”

So let us create an income tax system largely free of “deductions.” Here is what the new personal income tax return would look like:

Gross income from salaries, wages, tips, etc. $48,730
Less: Oregon’s Minimum Wage X 2000 hours ($16,800)

Earned income subject to tax $31,930
Gains (losses) from sale of capital assets
times one-half (Table 1) $500
Income (losses from dividends and bonds
(Table 2) times one-half) $250

Total income $50,700

Personal exemption (number of dependents
times $5000) ($20,000)

Total Income Subject to Tax $12,680

Tax rate for first $100,000 — xxx percent
Tax rate for income in excess of $100,000 — yyy percent

Following is an explanation for each line used.

1. The figure for the gross income represents median household income in Oregon.
2. The figure represents annual income at the minimum wage. Eliminating this amount recognizes the difficulty of existing at a minimum wage level. It also adds proportionality to taxes on total income by recognizing that the ratio of taxes paid to income earned increases for each dollar earned over the minimum wage. Finally, if state tax revenues are reduced each time the minimum wage is increased there will be less ardor to increase the minimum wage to the detriment of business.
3. Capital investment spurs economic development. Continuing to tax gains (losses) as if it were regular income discourages investment.
4. Dividend and bond income are the result of capital investment. The same argument as set forth above is applicable.
5. Personal exemptions recognize that the costs for a maintenance of a family increase with each additional member of the family.
6. I have left the tax rate for each of the two categories undetermined. The tax effect of various alternatives is a closely held calculation available only to legislators and those wealthy enough to create their own extensive and expensive data base. I am neither. The revenue that should be generated should be roughly equivalent to the current revenue from state income taxes prior to the pending tax increase.

(The example above does not treat deductions allowed to businesses. For purposes of calculating those taxes, deductions allowed for federal tax purposes for calculating gross operating income including amortization of capital investments should be used.)

And so, you might ask, what does such a proposal have to do with energizing an Oregon recovery? Well, just about everything. Economic recovery and growth require two critical elements: capital availability and economic predictability. A reduction in the burden on capital investment results in greater capital availability. An elimination of the ever changing landscape of deductions, credits and tax incentives provides greater economic predictability. Economic growth means jobs. Economic growth means increased revenue for business and for those newly employed. Increased revenue for business and the newly employed means increased tax revenues for business. But then again, everybody but Oregon’s governor and Democrat legislature knows that. Presidents Kennedy, Reagan, and Bush proved it with tax cuts.

A brief review of economies experiencing relatively robust and steady growth (i.e. Eastern Europe) indicates that either no income tax or flat taxes are part of the formula for such growth. A look across the Columbia River and the advertising from the Port of Kalama indicates that that lack of an income tax is a significant incentive to locate in Washington. A look at economic statistics indicates that Washington leads Oregon significantly in capital investment, job growth, and business migration. The only place that Oregon leads is in unemployment.

It’s time for a change — and this one we don’t have to “hope” about because we know it has worked everywhere it has been tried.