While activists favor cutting tax breaks, history does not

The first bill Rep. Mark Hass pushed through the Legislature was an income tax credit for employers who offer scholarships to their workers.

Hass, a Beaverton Democrat, has since become one of the Legislature’s leading advocates for closer scrutiny of such breaks.

But once they’re approved, tax breaks are almost impossible to remove. Hass found that out last session when he proposed limiting the mortgage interest deduction for second homes. “I heard from every realtor in the state,” he said.

Oregon, like many states, spends more on tax breaks than it does in direct spending on programs and services — an estimated $27 billion in 2005-07, or 56 cents of every dollar that could be collected if all loopholes were closed.

That looks mighty appealing to unions and other groups seeking to protect schools and human services in the face of a possible $1 billion budget shortfall.

But even though money is so tight that the governor proposes adding video slot machines to help pay for state police, lawmakers are unlikely to get rid of any breaks.

Tax breaks “allow politicians to appear to be reducing the size of government (reducing taxes) while actually increasing it (increasing spending),” C. Eugene Steuerle of the Urban Institute, an economic and social policy research group, wrote in a 2000 article.

Spending through the tax code is detailed in a thick document called the Tax Expenditure Report, distributed every two years on the same day as the governor’s budget — and promptly ignored by most lawmakers.

Unions and other groups want to change that when the Legislature convenes Jan. 10.

“We need to apply the same scrutiny to the money we give away in tax breaks as we do to the money we spend in direct services,” said Tim Nesbitt, president of the Oregon AFL-CIO.

They unsuccessfully pushed that strategy in 2003, and it won’t be any easier in this session.

The political climate is hostile to anything that smells like a tax increase. Voters have rejected significant tax increases twice in two years. From Democratic Gov. Ted Kulongoski on down, lawmakers of both parties say they got the message. They’ve all but ruled out tax increases to balance the budget.

Eliminating or reducing a tax break clearly is a tax increase, which takes a three-fifths vote in both chambers. A tough vote, union leaders acknowledge, but they hope lawmakers will find it even harder to approve the level of cuts needed to balance the budget.

“I think after all the cuts made to vital services over the last three years, the Legislature will find the burden of more cuts too grim to bear,” said Kris Kain, president of the Oregon Education Association, the state’s largest teachers’ union.

Kain and others want to change the language of the debate, talking about “revenue recovery” instead of a tax increase.

Nesbitt calculates that if tax expenditures were limited to 1995 levels, the state would collect another $1.3 billion in 2005-07, enough to wipe out the potential shortfall in the $11.9 billion budget.

To many economists, there is no difference between direct spending for a particular purpose and giving out tax breaks to achieve the same purpose. But politically, there is a world of difference. Spending programs are harder to sell initially and become more vulnerable when tough times strike.

Every tax break, no matter how small, has fierce defenders. The first — and so far only — time lawmakers took a comprehensive look at the tax expenditure report, in a series of well-attended hearings in 1999, they eliminated one minor tax credit — for fish gleaning.

The issue also involves a fundamental philosophical debate. Fiscal conservatives don’t buy the underlying idea that a tax break is the same as a spending program. It’s the taxpayer’s money to begin with, not the government’s, said Russ Walker, executive director of FreedomWorks, the group most responsible for defeating the Legislature’s $800 million tax increase proposal last year.

“To come here and eliminate some of these credits to find new money to spend on something else — we see that as a tax increase,” Walker said.

Oregon’s largest tax expenditures involve the property tax, which pays for schools and local governments. In 2005-07, governments will collect an estimated $8.2 billion in property taxes but spend twice that much on exemptions.

The largest property tax exemption by far is for intangible personal property such as stocks, copyrights and patents. Exempting that property will cost schools and local governments more than $10 billion. Taxing intangible property is considered an administrative nightmare, and few states try it.

Most income tax breaks result from Oregon’s connection to the federal income tax code. By adopting the federal definition of taxable income, Oregon accepts all the federal exclusions and deductions from income, although not federal tax credits.

The 2005 Legislature will decide which changes to adopt since the state last connected to the federal code in 2002.

Most of highest-cost tax breaks benefit workers, middle-class taxpayers and senior citizens. Tax breaks for individuals, which include noncorporate businesses, far outweigh corporate breaks.

One of the biggest is the deduction for home mortgage interest, which will cost the state $958.6 million over the next two years — almost 100 times the general fund budget for the Housing and Community Services Department.

Critics focus on business breaks, such as research and development tax credits.

“All business tax breaks should have to demonstrate they attract or sustain good jobs in Oregon,” Nesbitt said. He supports the Strategic Investment Program, which offers property tax reductions for industrial development, because it links the tax breaks to job creation.

Republicans who control the House probably will not support taking away business tax breaks.

“Not on my watch,” said Rep. Tom Butler, R-Ontario, chairman of the Revenue Committee, where all tax increases must begin. “I don’t want to remove the incentives for business to locate or continue in Oregon. I think that sends the wrong message.”

Hass says it’s unrealistic to expect the Legislature to make serious inroads into tax expenditures, given the clout of interest groups. He proposes an independent commission to analyze the expenditures’ effectiveness, similar to the process Congress used to farm out the politically impossible job of shutting down military bases.

“It makes some sense to sunset all of them,” Hass said, “and then start over from the top.”

James Mayer: 503-294-4109; jimmayer@news.oregonian.com