SALEM — Gov. John Kitzhaber has yet to announce whether he’ll seek an unprecedented fourth term. But if he does, he’s made clear what will be on his agenda: overhauling the state’s tax code.
Fresh off a victory from a special legislative session, where he convinced Democrats to cut public pensions and Republicans to raise taxes, Kitzhaber is busy setting the stage for restructuring the tax code. He’s playing peacemaker between union and business groups, hoping to keep divisive measures off the 2014 ballot, according to Kitzhaber’s spokesman Tim Raphael.
Most of the state’s revenue comes from one source: personal income tax. “(The problem with) being so reliant on the income tax is it tends to exaggerate economic trends,” said Sen. Ginny Burdick, D-Portland, who chairs the Senate Revenue Committee. “When the economy goes up, tax revenue goes way up ... But when the economy goes down, revenue tends to plummet even beyond where the economy is going.”
Instead of stability, proponents of an overhaul say, there’s whiplash.
Raphael said Thursday the governor is still working on finding a “solution space” and has “no preconceived notions” of what a tax overhaul could look like. But in Oregon, when “tax reform” is mentioned, voters brace for a sales tax.
Oregon is one of only five states without a sales tax. The state’s individual and corporate taxes are among the highest in the country, to offset low property taxes and the lack of sales tax. Oregon voters have been pretty clear, voting a sales tax down nine different times, most recently in 1993. To garner support for an overhaul, Kitzhaber will have to dip into his political capital.
“He needs to get opinion leaders from across the political spectrum to say, ‘Yes, we have to do this,’” said Jim Moore, a political scientist at Pacific University.
Then Kitzhaber steps back and becomes the cheerleader. “He puts his political capital on the line ... but the other people are saying, ‘It’s in our (best) interest’ to do this,” Moore said.
He will have to build coalitions. And even then, it could take the majority of a fourth term to craft some kind of package.
“It’s important for people to remember that this has been tried before. It takes years to put things like this together; 2016 would be the earliest voters see it; it might be 2018,” Moore said. “It usually takes a couple of legislative sessions, negotiations, depends on outcomes of elections. ...”
Deschutes County Commissioner Alan Unger was a member of a task force created in the last decade to tackle similar issues. Unger found out quickly there was no magic bullet.
“I think I still have some of the scenarios. The best one I heard was what if we were to give property tax owners an exemption of property tax on their principal residence ... in trade for a 3 percent sales tax,” Unger said. Most scenarios included some kind of consumption tax, he said.
Burdick noted tax reform can come in many ways, but the key is to have a diversified tax system.
“The volatility is a huge problem ... When the economy goes down, the need for social programs go up and at the same time, the revenue is tanking. It’s not a sustainable business model,” Burdick said.
She’s also an advocate for boosting the rainy day fund. “Otherwise, you find yourself in 2009 when you’re forced to raise taxes during a recession, which is just crazy,” Burdick said.
Rep. Vicki Berger, R-Salem, a longtime member of the House Revenue Committee, said she hopes the governor will target the state’s property tax system, which she called a nightmare. Measure 5, approved by voters in 1990, limited annual property tax increases to 3 percent. One consequence of the measure was a shift in funding for local schools from property taxes to income taxes.
Adding a consumption tax, Berger said, isn’t an automatic fix.
“We have a huge retail sector because we don’t have a sales tax. If he’s going to change that, he needs to look deeper. What would that do to our job base? Because it would have a significant impact,” Berger said.
And she noted, Washington state has had its struggle with budget issues recently.
“And they are totally dependent on sales tax and they keep talking about adding an income tax, that tells you there is no perfect system,” she said.