Property tax for sales tax: A fair trade for Oregon?

Panel is considering proposal as part of state revenue reform

James Sinks / The Bulletin /

SALEM — Oregon may take a new tack in the effort to shore up its oft-criticized fiscal structure — and if you own property, it could make you very happy.

One potential overhaul that’s been presented to a state task force that’s considering potential tax code changes: Vastly reduce property taxes, and eliminate them altogether for homes worth less than $1 million.

As a result, most Oregonians would stop paying property taxes.

Of course, there’s a catch.

You’d also need to agree to pay a 6 percent sales tax.

Details are still murky, and the task force won’t release any recommendations until the end of the year, but pollsters have told the panel that Oregonians are unlikely to support the creation of a sales tax unless another tax is eliminated.

“For the most part, this proposal does that,” said Redmond mayor and nonvoting task force member Alan Unger. “But all the ideas are good ideas, and we’ll be working through them.”

Another suggestion before the committee would also create a property tax exclusion, but it would be more modest and exempt the first $25,000 in home value.

That proposal also would significantly reduce income tax rates and replace the lost revenue with a 5 percent sales tax.

Ultimately, any major tax system reforms would likely be sent to the ballot — so it would be folly to pursue an idea that lacks public backing, Unger said.

Tim Nesbitt, deputy chief of staff to Gov. Ted Kulongoski, said it’s too soon to say which direction the task force will go, and that members will need to decide first whether they even want to pursue a sales tax in any capacity. Oregon is one of five states without a general consumption tax, along with Delaware, New Hampshire, Alaska and Montana.

Oregon lawmakers have floated the idea of a sales tax before — but it has proved to be a spectacularly unpopular idea, failing nine times by wide margins at the ballot box, most recently in 1993.

However, never has a sales tax proposal been tethered to a simultaneous cut in property taxes.

State Sen. Frank Morse, R-Albany, a task force member who is touting the $1 million exemption, said the plan would eliminate property taxes for more than 98 percent of residents and also will help get more people to what he calls an “aha! moment” — the realization that the tax structure needs to be diversified.

Oregon’s tax structure

Oregon’s tax structure long has been criticized as an unpredictable roller coaster because it relies heavily on income taxes, which rise and fall suddenly based on economic swings.

The downside of that equation looks to be evident this year, with the state and national economy in the midst of a slowdown.

“When fiscal doldrums set in, the state falls faster and farther than most others,” says Governing magazine in its 2008 ranking of state tax systems, in which Oregon earned a C+.

Income taxes pay for state services, while property taxes have traditionally supported cities, counties and schools. That’s also the case nationally: Local services and schools rely on property taxes for an average of 72 percent of funding, according to the Denver-based National Conference of State Legislatures.

But property taxes have also proved unpopular in Or-egon. In two ballot measures in the 1990s, voters limited property tax rates to $15 per $1,000 of assessed value and then capped the annual increases to 3 percent.

Because of Oregon’s voter-passed limits, the lion’s share of dollars for K-12 public schools now comes from income taxes.

‘A tax for a tax’

State Rep. Dennis Richardson, R-Central Point, in May 2007 asked residents in his conservative-leaning Southern Oregon district about the concept of a significant property tax exemption in exchange for a sales tax and found surprising support: An e-mail survey found more than 80 percent of people would favor it, as long as it was locked into the constitution, he said.

“It is a tax for a tax, which is something you can put on a bumper sticker,” he said.

The suggestion appeals to conservatives and liberals alike, albeit for different reasons, he said.

Conservatives don’t think they should have to pay rent to the government in the form of property taxes. Liberals want a more robust revenue source for services.

In addition, local governments would celebrate since they are increasingly pinched because property tax receipts aren’t keeping up with the costs of doing business, Richardson said.

Oregon is the only state that does not offer some kind of a property tax exemption, known as a “homestead exemption,” said Bert Waisanen, a property tax analyst for NCSL.

The exemptions can be blanket and applied to all property owners, or targeted to people such as senior citizens.

Homestead exemptions reduce property taxes for all home-owners by sheltering a certain amount of a home’s value from tax.

They are considered a progressive approach to property tax relief, according to the Washington, D.C.-based Institute on Taxation and Economic Policy. That’s because lower- and middle-income people pay a bigger share of their incomes as property taxes.

Oregon is not alone in considering a reduction in property tax rates — while offsetting the lower revenue from another source, Waisenan said.

Texas lawmakers cut property taxes as part of a school finance reform package and replaced the lost dollars with a combination of a $1 per pack cigarette tax increase and a larger business tax. Idaho and South Carolina hiked sales taxes by 1 percent and eliminated school-related property taxes, he said.

Among the specifics that still need to be looked at, if such a plan is considered in Oregon: How would it affect local bond measures, such as school construction levies? Redmond Mayor Unger asked.

Also, he said, how would the sales tax dollars be divvied up between state and local governments, especially when rural counties have less commercial activity? And how would it affect businesses and people with vacation homes?

The 2007 Legislature formed Oregon’s 30-member Comprehensive Revenue Restructuring Task Force in response to long-standing concerns about how the state and local governments raise and spend money.

State Sen. Ben Westlund, D-Tumalo, who has long argued for a fiscal structure overhaul, said he believes some kind of a property tax exemption ultimately would be part of whatever plan is advanced by the task force, in part because it would help make the property tax more progressive.

“I think there is merit to the concept, especially if we can virtually eliminate the property tax on most homes and not make it any more expensive on the rest,” he said.

Increasing urgency

Talks about revenue-system reform have gained urgency because it increasingly appears that federal timber subsidies to rural counties are ending, and many of those counties don’t collect enough in property taxes to maintain police and government services.

Oregon’s unique kicker law is also cited as part of the state’s C+ grade by Governing magazine.

When times are good and income tax receipts soar, Oregon can’t set aside unexpected dollars because of the state’s unique kicker law, which requires money to be returned to taxpayers.

In December, taxpayers were mailed kicker checks totaling $1.1 billion.

Two months later, economists lowered their projections of revenue for the current 2007-09 budget cycle by roughly $170 million.

That’s eerily similar to 2001 when, just after the state shipped kicker checks, the economy soured, and income tax fell more than $1 billion shy of projections. The Legislature was forced to pare programs and employ accounting gimmicks to balance the budget.

“Hopefully, we will not be painfully reminded in the near future of our last recession’s revenue collapse,” said Westlund, who was the House budget chief from 2001 to 2003.

What's next

The 30-member Comprehensive Revenue Restructuring Task Force will meet through 2008 and make recommendations to the 2009 Legislature. The next meeting is April 24 in Salem.

For more on the Comprehensive Revenue Restructuring Task Force, visit www.leg.state.or.us/comm/lro.