Despite how rosy Oregon's economic future might seem with $1.17 billion in income tax rebates expected to land in taxpayers' mailboxes this fall, state Sen. Alan Bates says the state needs to overhaul its tax system to prepare for the next economic downturn.
Oregon's tax structure generates too much money during the good times and too little during the lean ones leading to deep cuts when the economy tanks, the Ashland Democrat said in an interview Wednesday ahead of the state's quarterly economic and revenue forecast release on Friday.
"We are on a rollercoaster ride in Oregon," Bates said. "We are up one day, down the next."
One possible way for the state to gain a greater degree of financial stability would be through a statewide sales tax instead of either the state income tax or residential property tax.
"We have a massive underground economy in this state" that, Bates said, allows people to avoid paying their fair share of taxes. The state, for instance, loses millions from people working under the table and from tourists who "get a free ride" by not having to pay sales taxes as they would in nearly every other state.
Those states, including California, that depend heavily on a state sales tax to finance their state government have a "stable, steady" revenue stream and are able to make substantial investments in schools and public safety programs.
"Right now, in Oregon we have to charge huge fees to college students and others" to help make ends meet, Bates said. He added that with a state sales tax many Oregonians, particularly homeowners, would likely pay less in taxes each year.
Like Bates, House Majority Whip Peter Buckley, D-Ashland, said the state's overall financial outlook is good. Buckley worries, however, that the days of sunny forecasts could soon be a distant memory with the burst of the housing bubble.
"Overall, we are in good shape, but not solid," said Buckley, a member of the House Democratic leadership, pointing to statistics released Monday by the U.S. Census Bureau that show Oregonians' median income rose in 2006 while the number of those living in poverty shrank.
"We've got to get off this rollercoaster ride," Buckley said. "If we are not going to restructure our tax system in a significant way, we need to build up the rainy-day fund to where it can take us through downturns of any size."
The state's rainy-day fund, signed into law this year, redirected $290 million in corporate tax rebates into the state's first savings account.
In a favorable response, Moody's Investors Service, a Wall Street bond-rating agency, upgraded the state's credit rating that was near-junk bond status during the 2001 recession.
The state's new Aa-2 bond rating will make it less expensive for the state to borrow from the bond market for such things as capital construction projects.
Speaking of the rainy-day fund, House Republican Whip Dennis Richardson of Central Point said, "The headlines sounded pretty good, but then there's the fine print."
He said the one-percent of each two-year budget that must be socked away is "totally inadequate" to sustain the state in the event of a serious recession like the one that hit the Beaver State in 2001-03, when state revenues plummeted leading to deep budget cuts.
With the housing market beginning to slow, the subprime mortgage crisis growing and losses on Wall Street, he said the next downturn might be closer than people want to think.
"All of these are indications of a recession that could affect Oregon this biennium," said Richardson, deriding Democrats for placing their profligate spending habits ahead of the state's well-being.
Democrats, who control both chambers of the state Legislature and the governor's office, made the mistake last session of increasing state programs and "spending everything that comes in" rather than paying down the state's debt and squirreling away more money, he said.
"Who else can you blame but those who control everything," Richardson said.
Granted, he said, lawmakers did create the state's first rainy-day fund, but that is not going to be enough to sustain the cadre of new programs Democrats funded in the 2007-09 state budget.
"They spent $2.9 billion in anticipated revenues and increased out debt load by $900 million," Richardson said. "It's going to be a challenge for Oregon to keep up that kind of spending."
Like Bates, he said that a five-percent statewide retail sales tax is the fairest way to tax Oregonians.
"I am not advocating for a sales tax," Richardson said, "the only way I would support it is if it were a tax for a tax."
He added that replacing the state property or income tax with a sales tax would be a "nonpolitical, bipartisan" move towards a healthier Oregon.
covers the state Legislature for the Ashland Daily Tidings. You can reach him at email@example.com.
Up-and-down economy a concern