T he Oregon Legislature approved a tax on business activity last week that will generate more than $1 billion per year for the state’s public school system. The responses have been predictably mixed. Some people (especially Republican lawmakers) consider the tax a blow to the state’s economic competitiveness, and others (especially Democratic lawmakers) consider it a long-awaited triumph for public education.
In reality, the so-called Student Success Act is a messy combination of the bad, the good and the unfinished.
There’s a lot of it, beginning with the fact that legislative Democrats, in establishing this tax, ignored the clearly stated preference of the state’s voters. In November 2016, Oregonians defeated a ballot measure that would have established a roughly similar tax. The margin of defeat exceeded 350,000 votes. Yet less than three years later, having gained legislative supermajorities with the assistance of the same public employee unions that sought the 2016 megatax, Democrats rammed through Measure 97 Lite.
Take that, voters.
The tax itself has some serious problems. Because it places a levy on commercial activity rather than income, it will siphon money from businesses regardless of their ability to pay. Such taxes are especially damaging to businesses with small profit margins, Bend Chamber CEO Katy Brooks explained in written testimony last month. The tax, Brooks argued, would punish “high-investment, high-growth and startup ventures” and create “even greater barriers for business retention and growth, and new recruitment.”
The tax did nothing to improve Oregon’s anti-business reputation.
Neither, for that matter, did it improve the Legislature’s growing reputation for establishing stealth taxes. A business activity tax is, among other things, a sales tax in disguise. To the extent that businesses can pass along increased costs to consumers, they will. Yet there will be no clear recognition at the cash register of the tax’s existence and impact, as there would be with a straightforward sales tax.
Hiding taxes from constituents is becoming something of a specialty for Oregon lawmakers, who recently levied a hidden tax on road fuels through the Clean Fuels Program.
The Legislature’s desire for revenue, it seems, trumps its supposed commitment to transparency.
There is some of this as well, beginning with the fact that tax revenue will ameliorate the damage that Oregon’s public pension system will do to public schools in the coming years. Thanks to an unfunded actuarial liability of $27 billion, the Public Employees Retirement System is expected to squeeze an extra $1 billion from cities, counties, state agencies and public schools during the 2019-21 biennium, according to an analysis by the Oregon Business Plan. Such increases will escalate for several biennia, with public schools shouldering roughly one third of the burden. The new tax will more than make up for additional pension costs for public education.
Meanwhile, for all of its flaws, the business tax marginally reduces Oregon’s reliability on the volatile personal income tax. Recognizing that the business tax acts as a hidden sales tax, lawmakers paired it with slight reductions in income tax rates for income up to $125,000 per year. So, even as the business tax generates well above $1 billion annually, rate reductions will cut income-tax collections by roughly $250 million per year during the 2021-23 biennium, and even more thereafter, according to the Legislative Revenue Office.
A more transparent approach that paired a straightforward sales tax with income-tax cuts would be simpler and more honest. But Sen. Ginny Burdick, D-Portland, was right to observe Wednesday that the new tax “will ensure that education has a stable and dedicated funding source, regardless of fluctuations in the economy.”
Without significant reforms, Oregon’s hugely expensive public pension system will soak up ever-increasing billions of tax dollars in the coming years. Lawmakers are aware of this problem — how could they not be? — but the approach proposed recently by legislative leaders is more smoke than substance. Two-thirds of the supposed savings would come from stretching out the repayment period for the current deficit by eight years, a maneuver that would shift more of the problem onto future taxpayers.
The plan does contain some proposals that would achieve real savings, The Oregonian’s Ted Sickinger has reported, including a limitation on salaries used to calculate some benefits and a temporary redirection of some money in PERS members’ defined-contribution plans into the PERS fund, which generates money for their defined-benefit plans. Meaningful reform would rely more heavily on substantive changes such as these, hated as they are by public employees, and less upon irresponsible payment deferral.
The need to address PERS is significant in the context of the Legislature’s hidden sales tax for two reasons.
First, the business tax will raise money for public education. It does nothing to ease the growing PERS burden for cities and counties and the taxpayers who fund them.
Second, reducing PERS costs would make the dollars raised by Oregon’s new tax go much further than they would otherwise. This would be a good thing both for taxpayers and for public employees, more of whom would be hired to teach, for instance, as less tax revenue was soaked up by PERS obligations.
The fact that PERS reform is, at heart, a public-sector jobs program won’t stop existing public employees from objecting to some reform measures. Lawmakers should ignore them. Legislators already have broken trust with voters by approving the business-activity tax. Meanwhile, the tax itself is highly regressive, damaging to many businesses and sneakily invisible to many who will pay it.
The least lawmakers can do now is ensure that new dollars go as far as possible.
— Erik Lukens is editor of The Bulletin.