Taxing The Rich Is A Loser’s Game

Several weeks ago I noted that even if voters approved the massive $735 Million tax increases in Measures 66 and 67, it would not be enough for the insatiable appetite of Oregon’s public employee unions and the state Democrats who are beholden to these unions for their funding, organizing and advocacy. And sure enough the newest General Fund Revenue Forecast released Monday proves the point.

At the close of the 2009 legislative session, the legislature adopted a budget based on a tax revenue forecast of $13.575 Billion (including the tax increases in Measures 66 and 67). That budget included a projected $233.8 Million surplus which would serve as a contingency if anticipated funds fell short. By September of 2009 the revenue forecast had fallen to $13.436 Billion and the “surplus” had dissipated to $94.8 Million. In December there was a further erosion as the revenue forecast fell to $13.393 Billion and the “surplus” shrank to $79.2 Million. (All of these figures can be found on the Office of Economic Analysis website.)

But the newest forecast trumps the previous three forecasts as a sign of a more rapid decay in Oregon’s economy then previously disclosed. The current forecast is $13,210 Billion. The entire $233.8 Million surplus has disappeared and the current budget is now $100 Million underwater.

And that is not the worst of it. The revenue forecasting methodology utilized by the state assumes revenue growth from any given point in time. When actual revenue collections fail to meet the last projection, the projection doesn’t turn downward, rather the “start point” is reduced and the same growth curve is applied to the lowered base. Given that Oregon’s revenue forecast has failed to meet projections for at least six quarters one would think that a forecast based upon “continued growth” in revenue would be suspect. Given the state’s constitutional requirement that the legislature balance the budget, the current “special session” will have to either cut spending by $100 Million or raise taxes by year another $100 million.

Despite the “growth model” used by the OEA, it is more likely than not that the next forecast, due in May, will show lower, not higher revenues. While not exactly forecasting that decline, the OEA certainly highlights the possibility. In its report under the title of Forecast Risks, the analysts note:

“Increased Volatility. With the passage of Measure 66, the state has increased the volatility of its personal income tax revenue stream. In past years, the relatively small number of taxpayers impacted by the measure — two to three percent — regularly accounted for two-thirds of the change in tax revenues from one year to the next. By increasing the dependence on this small group, relatively small changes in the economy can yield large changes in income tax collections. Essentially, the state can expect to experience greater positive revenue changes in good years and greater losses in revenue in bad years relative to the past.”

That is a mild suggestion given the fact that Measures 66 and 67 just removed $735 Million in potential capital investment from Oregon’s economy and prompted outrage from Oregon’s business community — not just a few of whom have threatened to either pull out or redirect growth to other states.

With the state budget now underwater by $100 Million, the legislature has the constitutional obligation to rebalance the budget. Given the likelihood of a further decline in the revenue forecast, the legislature would be wise to build in a $250 Million “surplus” thus putting the shortfall at $350 Million. Now the legislature can either reduce spending by $350 Million or increases taxes by another $350 Million.

Given the control exercised by Oregon’s public employees unions over the governor and the Democrats in the legislature, which option do you think they will pursue? The unfortunate thing is that given Gov. Kulongoski’s economic illiteracy, it is doubtful that anyone can see the sure signs of the downward spiral that accompanies the continuing increase in tax rates and the resulting decrease in tax revenue collections.

You can only “tax the rich” so much and then they will just get up and leave.