Tax Swap: Would a sales tax be better than OR’s high income tax?

By   /   April 18, 2013  /   News  /   6 Comments

TAXING QUESTION: Should Oregon consider adopting a sales tax?

By Shelby Sebens | Northwest Watchdog

PORTLAND — Oregon voters have rejected a sales tax nine times, but lawmakers aren’t giving up.

They want to stir that pot once again, if only to get people talking about  a move on a sales tax.

A proposed resolution, which got two public hearings this week, would implement a 5 percent sales tax — Oregon is one of five states with no sales tax.

Income and property taxes, however, would remain.The proposed legislation exempts water, food, clothing, drugs, medical and mobility equipment and utilities.

Another piece of legislation includes lowering the income tax rate  — one of the highest in the country at up to 10 percent for high earners — and making way for other tax credits, basically adjustments intended to make up for the additional cost to taxpayers.

Lawmakers supporting the legislation say they don’t expect it to pass this session. It’s a conversation piece, so to speak.

“The purpose of this is more of a dialogue as opposed to getting in the weeds on the legislation on this,” state Sen. Mark Hass, D-Beaverton, said during a public hearing on the proposal Wednesday.

Gov. John Kitzhaber testified during the first public hearing Monday, saying something must be done to fix the state’s unstable tax code. Public support, he said, is a priority. He and other Democrats, at the questioning of state Sen. Larry George, R-Sherwood, said spending reduction needs to be part of that discussion. George is vice chairman of the Senate Finance and Revenue Committee.

But questions over raising the sales tax leads to even more questions, which many states are trying to answer as they struggle to bounce back from the 2008 recession. Is one type of taxation better than the other? Which is fairer and which is better for job creation?

Oregon’s neighbor to the north, Washington, has no income tax and one of the highest sales tax rates in the country at 6.5 percent statewide, plus high local sales and use-tax rates. But that state is facing a $2.6 billion budget shortfall and has fared among the worst in the nation in terms of economic recovery since the recession, budget policy experts say.

From Louisiana to Nebraska, governors have entertained the idea of repealing state income taxes. Seven states don’t impose the tax, but research is mixed as to whether states with no income tax do better than those without.

Michael Mitchell, state policy fellow with the Washington Budget and Policy Center, a progressive budget policy group in Washington, said the state’s tax revenue remains $1.4 billion below the state’s pre-recession levels. Washington loses millions to cross-border shopping, as consumers often head to Oregon, according to Washington Department of Revenue.

But there’s little political will in Washington to consider an income tax.

Part of the problem is a distrust in government. What’s to stop elected officials from raising taxes after residents agree to them?

That’s an issue Oregon could face, Cascade Policy Institute Senior Analyst Steve Buckstein said. Buckstein, who served on then-Gov. Ted Kulongoski’s tax restructuring task force from 2007 to 2009, said researchers found then, and have since confirmed, a sales tax is dead unless coupled with the elimination of another tax.

“I want to be clear that I don’t like sales tax very much either,” Buckstein said during the public hearing Wednesday. But, he said, it’s time to start a serious discussion about swapping the income tax for a sales tax, which would be less harmful to the state. But for Oregonians to support it, the state would have to make an income tax unconstitutional.

“Rip it out by the roots,” he said.

The debate over implementing a sales tax in Oregon focused largely around those who oppose it, calling it a regressive tax that unfairly hurts low-income residents, to those who support it if the funding stream is dedicated to education.

Contact Shelby Sebens at [email protected]

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Shelby formerly served as staff reporter for Watchdog.org.

  • marvinmcconoughey

    Mr. Buckstein is in the wrong on this issue. It is not the time to start a conversation about a sales tax, swap or no swap. It is, however, the right time for the legislature to achieve major and lasting PERS reforms. The reforms should protect the youngest workers and soon-to-be workers by ensuring that the excessive cost of PERS are not kicked down to road to later explode like Boston bombs in the midst of future workers.

  • OvertaxedOregonian

    Only way I would go for a sales tax in Oregon is if all other taxes were removed from the system, otherwise forget it.

  • Bob Clark

    Theoretically, I support a constitutional amendment (requiring a super majority to over turn by popular vote) that would eliminate all local and state income taxes in favor of a Washington type tax structure (sales tax with some local fees and taxes). That said, I also think in practice its too dangerous to even entertain talk of a sales tax, as we are likely to end up with an income tax like now but also with a sales tax, making us more like California. We want to be more like Washington than California. Washington’s tax structure actually rewards being productive and making income. But Oregon discourages making income, and this is probably reflected in a recent study documenting how Portland white collar workers seem to seek less demanding work; and probably seek government employment as it is hard to fire government employees, they have over sized benefit packages which aren’t taxable, and you get to retire very early.
    I know about the latter because I am very sensitive to Oregon’s 9 percent income tax rate (which when added to the Federal income tax rate of 25%, takes more than a third of any additional income one might try to make). Actually I am sensitive to both Federal and state income tax rates, as I seek to keep income moderate so as to avoid the higher income tax rates for high earners; in exchange, I retired very early and take it much easier than otherwise.
    Look at how Washington’s per capita income is growing steadily faster than that of Oregon in the past two decades or so. It’s clear Oregon should move to a Washington state type tax structure; but getting there is too dangerous, what with public employee unions dominating Oregon politics at most all government levels and whose interest aligns with continually expanding the government. The paradox to all this is if Oregon went to encouraging production and income making, it would actually more easily fund state and local governments, as a stronger economy would feed government revenues much more robustly.

  • marvinmcconoughey

    Any “conversation” originating from legislators concerning the sales tax will be driven by cynicism and manipulation. Not one legislator seriously expects the demise of the income tax or of property tax. No matter how many words are poured into discussions, what comes out would be a new and additive burden on the wallets of Oregon taxpayers.

  • Am emphatic NO. NEVER give politicians a new tax because you will NEVER get rid of or reduce the one they are promising. It just doesn’t happen. How about reducing existing taxes by cutting unneeded ENTITLEMENT programs and not trying to “replace” it with another tax? Just CUT taxes. Period.

  • MAALAN

    I generally agree. I support a consumption tax v. income tax on a number of grounds: internalization of costs of consumption, and elimination of perverse disincentive to productive activity generally reflected in income. We’d still have SocialSecurity & Medicare taxes, as well as Federal income tax, and Workers Comp & other state/local employment related taxes.