Over the years, Oregon’s volatile tax system has been the subject of dozens of studies, with legions of recommendations on possible changes.
But none of the plans passed muster with voters, leaving a system propped up by property taxes for local governments and income taxes for the state, enough to keep public services flush when times are good, and begging when the economy turns sour.
Now, though, a new 30-member group is girding itself for another comprehensive look at tax reform.
“This is, or should be, the primary focus of the 2009 session,” said state Sen. Frank Morse, R-Albany, who long supported changes to the tax system.
So far, it’s not yet clear exactly what shape tax reform might take. But at least one intriguing proposal has surfaced, championed by conservative Republicans like Rep. Dennis Richardson of Central Point.
The idea is an offset, reducing an existing tax and replacing it with a different one, so that individuals don’t pay more, but the overall system is more insulated from the economy’s twists and turns.
One possibility is a phasing out of property taxes for all residents who own property assessed at less than a certain amount, be it $1 million or $10 million, or somewhere in between. In its place would be a sales tax, perhaps set at about 5 percent, and shared at least in part with cities and counties, who currently rely on local property taxes for much of their funding.
Andy Shaw, a policy analyst with the League of Oregon Cities, said municipalities across the state are intrigued by the idea, after struggling with restrictions on the growth of property taxes, which by law can’t increase more than 1.5 percent per year. But property taxes are at least a stable, predictable source of income, he added, making it a risky proposition for local governments to give up a large chunk of that revenue.
Sales taxes, proponents say, allow governments to capture revenue from sectors of the economy that are currently virtually tax-free, like the so-called “underground economy,” fueled by under-the-table cash payments, and the state’s flourishing tourist industry.
Taxes have long been a fraught topic in Oregon, with the state’s voters repeatedly turning back any attempt to institute a sales tax. Elections in the state can be lost over a candidate’s support for tax increases.
But Morse and others think Oregonians are ready for a serious discussion of tax reform.
For one, they say, Oregonians got a serious dose of the downside of the state’s current system when the 2002-03 recession hit hard. Schools closed down early, prisoners were let out of jails, and the Oregon Health Plan was pared way back, because the income tax revenues coming in just weren’t paying the bills. With that experience still relatively raw, the need for reform may have come into sharper focus, Morse and others said.
“We are still counting on the most volatile revenue system that you could invent to sustain critical programs,” Morse said. “And that volatility will return. It is just a matter of when.”
Democratic Gov. Ted Kulongoski, in a conversation with reporters at the end of the legislative session, pointed to another factor seemingly in reform’s favor: In November 2006, voters had the chance to weigh in on a handful of citizen ballot initiatives that would have pared back government and cut taxes, all of which lost decisively. Kulongoski has said that election was a virtual watershed, suggesting that a tide may truly have turned.
There’s also the matter of the payments that the federal government has been making to rural counties affected by the slump in the timber industry. The state’s Congressional delegation managed to secure a one-year extension of the program, but its future looks dicey. Now, local public services are being slashed as a result, and the state is being called on to backfill the cuts.
The new commission, which the legislature funded with about $117,000 in public money, by law must have representation from a wide variety of groups, including cities and counties, organized labor, small businesses and large corporations, and taxpayer groups.
That last is critical, because such groups have often led campaigns to scuttle previous attempts to change the tax system, and consistently crusade against any hint of new taxes.
Russ Walker, who heads the anti-tax group FreedomWorks, said his group is willing to at least come to the table for the discussion.
“The difficult thing is, can you get the public in Oregon to trust us that we are doing the right job, that it is not some backdoor attempt to raise taxes?” Walker said. “If they didn’t include us, they would have real problems. And even with us, fundamental tax reform in Oregon will be difficult.”
Still, Walker said his group was ready to talk about changes that would keep the amount of money coming into the state at current levels, but be “more broad-based, more friendly to economic development.”
Appointing the members of the new committee is up to Kulongoski; a spokeswoman said he’ll probably begin making appointments to the 30-member group by late summer.