More economic damage from Measures 66 and 67

Cascade Policy Institute just released a major economic study which uses two different methods to analyze the impact that the higher tax rates of Measures 66 and 67 will have on Oregon’s economy if approved by voters on January 26th. Written by two prominent Oregon economists, Drs. Randall Pozdena and Eric Fruits, the study concludes that:

“¢ Preliminary estimates made last June by Drs. William Conerly and Randall Pozdena of 70,000 jobs lost over time are entirely plausible and may even be conservative.

The study measures the likely economic impacts of the measures in these two ways:

1. Using a database spanning 31 years for the 48 continental states, the effects of tax rate increases on job growth are measured empirically using regression analysis. This exercise finds that the proposed tax rate increases will perpetually impair the rate of job growth in Oregon.

2. Using recent Internal Revenue Service (IRS) Statistics on Income (SOI) data, the pattern of migration of tax filers between Oregon and the other 49 states is examined statistically.

Among its conclusions, the study finds that:

“¢ The literature is clear that raising marginal tax rates is an impediment to economic growth and employment growth.

“¢ Between 47,000 and 55,000 jobs will be lost by 2018 from the increase in top marginal tax rates alone in the two measures. The study did not attempt to measure the job loss impacts caused from the phase-out of the federal tax deduction for higher incomes in Measure 66 or from the increased corporate minimum taxes in Measure 67.

“¢ Net out-migration of tax filers will be approximately 80,000 greater than otherwise over a ten year period. These lost filers are likely to have significantly higher incomes than the average tax filer. Again, this estimate is only based on the increase in top marginal rates; not other features of the measures.

“¢ The average biennial loss in Adjusted Gross Income (AGI) from Measures 66 and 67 is approximately $1.1 billion dollars— 50 percent higher than the $733 million first-biennial transfer of income from the private sector sought by the measures. Over ten years about $5.6 billion in AGI is expected to be lost. Such loses reduce the likelihood of the measures generating their full, anticipated revenue.

“¢ Finally, positive impacts of public infrastructure spending on state level output, if any, may be less than the negative consequences of suppressing private activity. In the literature, the case for raising taxes even to preserve education or health spending is not clear when the offsetting, long-run impacts on the private sector are considered. Raising taxes to preserve transfer payments has an even weaker justification when long-run impacts are considered. Thus, although maintaining public spending may seem to be a well-intentioned “safety net” policy, the result of diverting funds from the private to the public sector may actually prolong the return to prosperity of individuals affected by the recession.

The authors warn that even if the State does phase-out the tax increases to some degree (as the measures contemplate), it may be difficult to undo the perception that Oregon selectively burdens business and higher-income households rather than prudently restraining State spending. This perception will weaken investment in the state and lead to even larger job losses and net out-migration of tax filers than their models predict.

Oregonians now have two independent ways to judge the economic impact of these tax measures. Both confirm that we are likely to lose tens of thousands of jobs and tens of thousands of the very people who invest in businesses and create jobs in our state.

This study makes clear that Oregon may be embarking on a policy that will likely suppress and repel economic activity in the state. Doing this during good times would be bad enough. Doing it during one of the deepest recessions on record is very hard to understand.

Oregonians need to recognize that capital and people are mobile—especially the corporations and high-income individuals targeted by these two tax measures. If they move, Oregon loses the jobs that their companies, spending and investments create. Even for those that remain, these higher tax rates will reduce the motivation to work harder and create more jobs. The result will be damaging for countless Oregonians that tax proponents claim won’t be affected by these measures.

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Tax Policy and the Oregon Economy:
The Effects of Measures 66 and 67
By Eric Fruits, Ph.D. and Randall Pozdena, Ph.D.
Cascade Policy Institute “¢ December 2009

Steve Buckstein is founder and senior policy analyst at Cascade Policy Institute, Oregon’s free market public policy research center.