Should Oregon Replace the Income Tax with a Sales Tax?

In 2007 Governor Ted Kulongoski appointed me to represent taxpayers on the legislatively created Comprehensive Revenue Restructuring Task Force. The Task Force reviewed and analyzed revenue and spending streams in the state, but did not recommend comprehensive reforms to the tax system.

At the first Task Force meeting in November 2007, Portland pollster Adam Davis presented his focus group work around tax reform. He told us that public negativity on government and politics was higher than he’d ever seen in his 30-year career.

One key finding stood out, and I believe this is an accurate paraphrase:

“Any sales tax is dead in this state―unless coupled with elimination of another tax. Reducing other tax rates won’t sell a sales tax.”

“Even when it was explained that reduced income and/or property tax rates could be locked into the Constitution, voters responded that ‘They’ll find a way to jack the rates back up.’”

Adam Davis recently told me that his firm later did more quantitative analysis which confirmed his focus group findings that Oregonians will not accept a third tax…period.

With that realization in mind, I proposed to the Task Force, and I propose now, that Oregonians should have a serious discussion about replacing our economically harmful income tax system with a less harmful sales tax system. Research finds states without an income tax have experienced higher economic and job growth than states with high income tax rates like Oregon. Last year, two economists who study this trend said:

“Every year for the past 40, the states without income taxes had faster output growth (measured on a decadal basis) than the states with the highest income taxes….

“Over the past decade, states without an income tax have seen 58% higher population growth than the national average, and more than double the growth of states with the highest income tax rates….

“The transfer of economic power and political influence from high-tax states toward low-tax, right-to-work ones is one of America’s most momentous demographic changes in decades. Liberal utopias are losing the race for capital.”*

While it seems clear that income taxes do harm our economy, sales taxes appear to do less damage, and therefore may be preferable when we cannot find voluntary ways to fund government services.

This month a state senate committee held two public hearings on bills that would impose a five percent retail sales tax while somewhat reducing income and property tax burdens. At the first hearing, Governor John Kitzhaber suggested that sales tax advocates (he among them) should first get a better sense of what voters think is wrong with the current system—and then get a “better handle on spending.”

One state senator suggested that a better handle on spending could be achieved by tying state spending to inflation and population growth, as a 2006 defeated initiative would have done. If it had passed, legislators would be sitting in Salem today with a significant budget surplus, instead of wondering how to wring more tax dollars out of a struggling economy. That may not be the kind of handle on spending the Governor had in mind, but it sure beats having no handle at all.

I testified at the second hearing, proposing that the bills (SJR 36 and SB 824) be amended so that they not only create a state sales tax, but that they prohibit income taxes in the Oregon Constitution (Article IV, section 32). If Oregon voters understand that it would be unconstitutional to tax their incomes, they might render a different verdict on a sales tax than they did when rejecting them nine times at the polls since 1933.

Eliminating the income tax completely is important for economic reasons, but also because, as focus groups and polls have shown, Oregonians simply don’t trust their elected officials to keep rates on other taxes down once a new sales tax is in place. I also believe they understand that states with so-called “three-legged tax stools” have budget problems, too, such as our neighbor to the south, California.

One of the perceived advantages of adding a sales tax to currently existing taxes appears to be that the mix of different taxes seems to reduce instability in the system. A number of people testified that budget stability is important to them, especially for local school budgets which are funded significantly from the state General Fund.

But at the hearings, I was the only person who questioned why the state budget should be more stable than our own business and family budgets. As a former and current member of the Governor’s Council of Economic Advisors wrote in 2007:

“It is not clear why government budgets should be more stable than private budgets. It is already the case, with the kicker and without any rainy day fund, that public employment in the state is 20% more stable than private employment.”**

If legislators are not careful, making state revenue more stable will make their constituents’ after-tax family budgets even less stable, and many of them will not appreciate that.

In conclusion, until we reduce the size and scope of state government, no third source of tax revenue will solve our state’s financial problems. It will simply mask them.

* “Laffer and Moore: A 50-State Tax Lesson for the President,” Arthur Laffer and Stephen Moore, Wall Street Journal, April 20, 2012.

** Excerpt from an email to then-State Senator Ryan Deckert from economist Randall Pozdena, Ph.D., dated March 6, 2007.

Steve Buckstein is Founder and Senior Policy Analyst at Cascade Policy Institute, Oregon’s free market public policy research organization.