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Friday, May 15, 2009

Let me tell you how it will be

The new 11% state income tax bracket that the Oregon Legislature is considering for rich folk is sure to provoke a lot of commentary. But taking their cue from Obama, the wily solons in Salem are defining "rich" as having income greater than $250,000 a year. If that's the dividing line, then I say lay on, McDuff!

As I recall, the state actually had a 10.8% bracket there for a while in the 1980s. And it didn't kick in at any $250,000, that's for sure. I think I even paid it!

Comments (52)

Raising taxes in a recession. Blue state logic at work!

Of course, if it's at $250,000 that will shield most of us shlubs.

Problem with $250,000 is small business owners will hit that to easily and it will hurt them (and us).

"Problem with $250,000 is small business owners will hit that to easily and it will hurt them (and us)."

This is an outrage!!! Without small business owners we would have far fewer minimum wage jobs without health insurance.

This is just the beginning, rentier s**m. You are going to be taxed again, again, and again.

Excuse me, but as a small business owner who happens to pay WAY more than minimum wages AND pays for my employees health insurance, I take serious exception to your remark, yuan. But perhaps I have missed some irony?
The big box stores have stolen the small business revenue, shipped the jobs overseas, the dollars out of our local communities, and evicerated the local economies of this nation.

This approach is actually a good example of a trend that ought to be disturbing. Instead of across-the-board income tax rate increases, or across-the-board increases in other taxes, our legislators (both state and federal) have become more clever. If they propose tax increases that only affect one group at a time (the "rich", "hedge-fund managers", oil companies, smokers, etc.) then the masses will not get behind any opposition, because the increase doesn't appear to affect them. I am not enthusiastic about any income tax rate increases, but if they really are necessary, they should affect everyone's rates, not just one group. Then everyone has a stake in questioning the necessity of the increase.

Original Bob

Small business owners needn't worry. This is an income tax, not a sales tax. Doesn't matter how big or small your business. The tax doesn't apply unless you report net profits. Nobody goes broke paying income taxes.

My fear is that raising the rate on these people is just going to drive more higher income people out of the state and deter others from moving here. We need these people to live here and spend their money here to boost our economy.

I also fear what it's going to do to Oregon's reputation for having the highest income tax rate in the nation.

People like Mary Nolan feel good about taxing the "rich," but are we really harming ourselves in the long run.

I think it's pretty surprising that in a state of 3.6 million people, only 31,000 people are affected at these income levels, which are not that high. That tells you something about how bad our economy is at income generation.

We need a sales tax.

Oregon thinks we've figured out something about the sales tax that everyone else is missing. Really, they all get it and we're just dense.

Ms. Nolan(D) is brilliant. But I think the $250,000 is too high, it should be $150,000.

If you're going to pull numbers out of thin air the $150,000 would be a better number because you would only be affecting 7% of the population. What would they care? Not enough of them to do something about it.

Right now, Oregon's income tax is unusually flat compared to other states and kicks in at a very modest level of income. Lower income folks, not the upper income, have something to complain about. And with a severe property tax limitation in place and no sales tax, Oregon's tax structure doesn't discourage any wealthy people from coming here or staying here. On the other hand, inadequate funding of certain public services, like education, may discourage the wealthy from making Oregon their home.

The state needs the revenue, especially in a recession, and those who have the means to contribute more should contribute more. What about the idea of helping out others in their time of need when you're capable of helping? If you've got a decent job, and especially if you've got one that pays more than $250,000 a year, you're not hurting in this economy--and you should be willing to assist those who are.

My highest income came in a year I received severance pay. Since the layoff was near the end of a year, that coupled with my earning for that year made it seem like I was wealthy.

Richard, I don't disagree with you that people of means should be willing to contribute more during hard times. But I think you're wrong if you think our income tax rate doesn't discourage many high income people from wanting to move here. Oregon's property taxes are not really low, even with the limitations in place, and higher income people care a lot more about the income tax rate they'll pay than the sales tax rate.

Although I don't support income taxes as a whole, given that we have them, it still seems like we can do better at them.

For example, rather than picking an arbitrary limit called "rich" ($250k), wouldn't it be better to simply have Oregon pass a surtax on earnings (from any source) that exceed the payroll tax cutoff?

That is, when you earn your $108k (or whatever it is this year) and you no longer have social security withholding from the feds, Oregon would automatically apply an income tax of that exact same percentage so that your take-home would remain exactly the same in December as it was in January (presuming a level monthly income0.

It's simple to administer, and fair: lower-income folks have the payroll tax on their entire income, and now the better-off folks will too. There's no deductions, offsets, credits or anything else to complicate things.

I agree, we need a sales tax. This two-legged stool of a tax system is not stable. Keep the tax rate demonstrably lower than Washington and California, and we'll still capture the spending of the border towns.

higher income people care a lot more about the income tax rate they'll pay than the sales tax rate.

Of course they do. Because they know that the sales tax is a regressive tax and that they'll pay a smaller percentage of their income in sales taxes than poor people will. A Washington State Department of Revenue study determined several years back that people making less than $20K paid sales taxes at a percentage of their income three times that of those making over $130K. It's a soak-the-poor tax.

I think it's pretty surprising that in a state of 3.6 million people, only 31,000 people are affected at these income levels,

You think that only because you're not paying attention to statistics. For one thing, the 31,000 figure is households. You can't compare it to the gross population of the state. There were 1.45 million households in the state in 2005, according to the Census Bureau. 31K households is just over 2% of the households in the state. Nationally, about 2% of households have an income of more than $250, so Oregon is right on the national average, despite having a high income tax rate.

Original Bob,
Your theory that these should be across the board increases so everyone would get riled up together, assumes they were fair to start with - something that is not the case.

Hedge fund managers have had more power to influence the tax code because they are so wealthy and Congress can be bought. I remember reading that this was going to be addressed but suddenly it just stopped because of their influence. They have all kinds of loopholes like equity swaps, etc...but I also remember reading that they paid a lesser rate than their secretaries.

In the same article it said one hedge fund manager made more money than all the public school teachers in New York City combined. The thought that the hedge fund manager also was getting special treatment from the code, is why we need some targeted increases.

Besides, the idea that something should apply to everyone equally smacks of communist tendencies. (I'm kidding.)

This plan would have a lot better chances if the income tax increase were couched as temporary (like California has done). But there's no indication from Mary Nolan that it will be anything but permanent. That means the legislature will have a new revenue stream that they will permanently be addicted to.

Small business owners needn't worry. This is an income tax, not a sales tax. Doesn't matter how big or small your business. The tax doesn't apply unless you report net profits. Nobody goes broke paying income taxes.

Right, but if you own that small business, your income taxes go up too. Say you work out of your home. You would have to pass that on to your customers to keep your profit margin the same, or you could go broke.

The three-legged stool argument is pretty funny, considering how much economic trouble California's been in for years.

It's also fallacious, because studies of actual economic data from California over the past three decades have shown that the sales tax is actually more volatile than the income tax. A 2003 Oakland Tribune story reported on the study, calling the sales tax the "ultimate roller coaster." So sure, let's replace stable property tax revenue and volatile income tax revenue with an even more unpredictable revenue stream that's also highly regressive.

The other old chestnut: that a sales tax would bring in a windfall of tourist dollars is hoary, as well. For one, a state study reported in 2004 that half of the overnight trips made in Oregon were by Oregonians, which tends to cut down on the amount of outside dollars to be tapped. And I'd love for someone to tell me the last time they planned an extra 8% into their travel budget for taxes. If you've got $100 to spend, you spend the $100. If a portion of that $100 gets taken up by sales taxes, you buy less stuff from the local merchants, they make less profit, then they pay less in income taxes. Extra money doesn't just appear out of some hole in space-time because you add a sales tax into the mix.


I don't disagree with you about the regressive nature of the sales tax (though it can be made less regressive by excluding certain items). I'm just saying that you don't attract many high income people by having the highest income tax rate in the country.

Your figures about household income might be right. I still don't think our state has done a good job creating a strong economy or an economy that creates high paying jobs. Maybe the income tax has nothing to do with that. My guess is that it does.

Sorry - in that previous post I mistakenly identified myself as darrelplant. Stuart wrote it.

Bill, the "carried interest loophole" is not something that benefits only hedge fund or venture people. (It would be helpful if journalists actually knew something about the subjects they write about.) It is a feature of the income tax code that affects any partnership, and has been part of the code since the beginning of time. If you and a friend buy a house, with him putting up the money and you agreeing to do the work to fix it up, with the deal that you split any profits 50-50, you just got a carried interest and under tax law since the beginning of time, any gain you ultimately get is a capital gain (taxed at capital gain rates, not ordinary income rates), just like the guy that put up the cash. The change in the works is that this rule that applies to everyone would not apply to hedge fund and venture guys. (Professor Bogdanski, please correct anything I said that is not correct.) So, this is exactly a tax increase targeted at one, unpopular group. (I am not saying that there are not special provisions in the tax code that benefit limited groups; I'm just saying that the carried interest rule isn't one of them.) Bob

Oregon's tax rates have another "tier" of progressivity when we consider that upper income Oregonians are "capped" on the amount of federal income tax they can deduct for state tax purposes at an indexed $5,500 currently.

Considering that Oregon currently allows no break on capital gains and occasionally loses high income entrepeneurs to income tax-friendly Washington and Nevada, I believe an across-the-board tax surcharge would serve better and more fairly to bridge the current funding shortfall.

And in future years-of-plenty the first priority should be enhancing the rainy day fund rather than instant gratification and rwards for political support.

Original Bob,
I'm talking about a hedge fund loophole - not something that applies to a broader group. Darn, now I have to dig up an old Paul Krugman column:
"... the hedge fund tax loophole which allows executives at private equity firms and hedge funds to pay a tax rate of only 15 percent on most of their income.
Only a handful of very wealthy people benefit from this loophole, while closing the loophole would yield billions of dollars each ear in revenue."

Bob, I trust you'll except Krugman as a source. I mean, the man did win the Nobel Prize for economics. This was the poster child for unfair taxes, but it couldn't be corrected because Senators protected their rich buddies. I also remember Warren Buffett wondering why he was paying less taxes as a percentage than his secretary.

I don't disagree with you about the regressive nature of the sales tax (though it can be made less regressive by excluding certain items)

The extreme regressivity of the Washington state sales tax is .after basic items like food and prescription drugs are exempted. The more items are exempted from a sales tax, the more volatile it gets: the only way to to have stable revenue from a sales tax is to tax things people must buy every day, like food staples. As you exempt non-discretionary items, the tax becomes more subject to economic vagaries.

In any case, there's no way to make a sales tax anything but regressive. Adding it into a tax system that's progressive or even neutral is going to increase the regressivity of the tax system, shifting more of the tax burden onto the poor.

My question is, what is your proof -- aside from a general feeling -- that it's the income tax that drives people away? Sure, some people might not come here because of it, but since the state's in the middle of the national average for households with incomes over 250K, the income tax isn't driving away so many to make us less fall below average. I'd worry more about middle-class people leaving the state because of funding cuts for the public schools and universities, gigantic potholes in the roads, and unmedicated crazy people on every street corner.

Now that Jack has put that tune in my head, I realize that we ought to include the next line "That's one for you, nineteen for me" -- referring to the marginal tax rate of 95% in postwar Britain.

Even if rates are bumped to 11%, our Oregon Taxman would be singing "that's eight for you and one for me" ... not quite the same sting, is it.

Perhaps some reliable study has been done on whether modest marginal increases at the high end of state income taxes drive wealthy people away the states doing the increasing. But until one of us points to such a study, we're left to speculate. And I just don't buy the notion that making a new top bracket that's 2 percent higher at $250,000 in income is going to have much if any impact on the behavior of very wealthy people--especially when it comes to a decision as important and multi-faceted as where to live.

I mean, we're talking about a tax increase amounting to $1000 for a household earning $300,000. An increase of $5000 for a household with half a million in income. Members of this class are the ones who spend $200 on a restaurant meal, $1000 on a suit, $10,000 on a vacation, $75,000 on a car, a million on a house--are they really going to move away, or fail to come here, because of a couple of thousand dollar increase in taxes? Personally, I doubt it.

I'm with the others who point to decent government services--resulting in low crime and providing good schools, for instance--as more crucial factors in attracting and retaining the wealthy. Want to entice wealthy people by appealing to their wallets? One of the best ways is to make the public schools that serve the wealthier neighborhoods so good that the rich don't feel the need to send their kids to privates schools. Schools like Wilson and Lincoln have saved a lot of wealthy families tens of thousands of dollars in private school tuition.

As for the across-the-board tax increase that someone above proposed, Oregon's rates, as I mentioned earlier, already kick in low (at the first dollar of income after personal deduction) and kick in high (at 5 percent). Increasing taxes on the lowest wage earners really would be a potentially life-changing burden.

Bronson, you are absolutely right. Washington and California's three legged stools have prevented massive deficits.

I just can't figure out why CA is near bankruptcy and WA has a $12 Billion dollar deficit-a 300% increase in deficit. Can you explain?

I'd be curious to see the results of a study that shows how many people in Portland that make over $250k/year that would move over a river just north of Portland should this transpire.

What a smart idea from our incredibly far-sighted legislators.

What's that I hear?

Ah, that's the sound of Vancouver real estate agents wheeling out the welcome wagon and laughing all of the way to the bank.

Bill McDonald, If he said what you think he said, Krugman is wrong. The rate on carried interest gains is 15%, but that's because they are treated as capital gains, and it's a feature of partnership tax law, not some special hedge fund deal. (Check with Professor BoJack if you don't believe me.)

"Increasing taxes on the lowest wage earners really would be a potentially life-changing burden"

In principle, that may be true. But do the true "lowest wage earners" pay Oregon state taxes? By comparison, federal taxpayers include a fairly large number of filers who get back every dollar (and sometimes more) of federal taxes after applying various tax credits (child credit, earned income, etc.) intended to help those in need. Such filers tend to be young and single, unmarried heads of household, and those less than full time employees. Anyone know how this compares regarding Oregon state income tax?

Just one more reason, along with the capital gains tax why we're gone from Oregon after October.

"but as a small business owner who happens to pay WAY more than minimum wages AND pays for my employees health insurance"

Take offense all you want:

50-99 employees - 93% have coverage
99+ - 100% have coverage

Source: Kaiser Foundation and Sloan Work and Family (http://www.familiesandwork.org/site/research/reports/2008nse.pdf).

And that sad song about small business owners being killed by big bad outsourcing corporations is poppycock. Most small business owners sell the same cheap shite sold in big box stores. They just do it less efficiently (both economically and environmentally).

should read:

less 50 employees - 40% have health coverage
50-99 employees - 93% have coverage
99+ - 100% have coverage

Here's an editorial by a Harvard economist that goes to Richard's comments about whether the tax increase will cause people to leave Oregon.


Richard has it exactly right. If this "soak the rich" tax is enacted, and I make $500,000, I'm going to have to cough up an extra $5,000 to the State of Oregon. Never mind that I will also be able to pay $2,000 less to the Feds, the net cost to me is going to be $3,000 -- MORE THAN HALF OF ONE PERCENT OF MY NET TAXABLE INCOME!!!! Surely, under the prospect of this crushing burden, I'll take a big (non-deductible) loss on my Lake Oswego house and move across the Columbia.

I looked at the latest data (2006 tax year) from the state revenue department at http://www.oregon.gov/DOR/STATS/101-406-08-toc.shtml
The data show that about 2/3rds of the filers earned under $50,000 in AGI and they paid an average of 4.3% to state taxes. On federal returns (from http://www.irs.gov/taxstats/article/0,,id=171535,00.html_) we find that they paid 5.8% in federal taxes. So the state tax appeared high relative to federal.

However, because of how deductions and exemptions work out, the Oregon tax is more progressive than I thought. Below is the percent of AGI paid in state tax by AGI (2006 in thousands $):

Less than zero 0.0%
0-5 1.7%
5-10 2.1%
10-15 2.7%
15-20 3.3%
20-25 3.8%
25-30 4.2%
30-35 4.4%
35-40 4.6%
40-45 4.7%
45-50 4.7%
50-60 4.8%
60-70 5.0%
70-80 5.2%
80-90 5.4%
90-100 5.6%
100-250 6.3%
250-500 7.3%
500 + 7.6%

"modest marginal increases" ??

At 9%, Oregon already has one of the highest state income tax rates in the country. Bumping it to 11% is more than a 20% increase.

Allan L, you may be right that the guy already here who makes $500,000 a year may just suck it up and pay his extra $10,000 per year in state income taxes (after this increase), on top of the $45,000 he already pays. What you don't see will be the potential high earners and business owners who decide not to move here in the first place in part because of an 11 percent state income tax. The other major point your comment misses is that the Oregon guy who is about to sell his business for a $10 million profit, faced with a state income tax of $1.1 million, has plenty of reason to move across the river, keeping that entire $1.1 million in his pocket, and plenty of them have made the move. If Oregon wants some of that money, it should consider a lower tax rate on capital gains.

You are right. People will move when faced with extraordinary earnings. Only about 63% of taxable income in Oregon comes from wages. When somebody sells a business or, as is likely to happen in large numbers, converts traditional IRA to a Roth, they would move their tax address out of Oregon.

When Multnomah County started the income tax, many high income people "moved" to other counties.

I'll take a big (non-deductible) loss on my Lake Oswego house and move across the Columbia.

If you earn income in Oregon, it doesn't matter where you live, you get taxed on it in Oregon.

If you have a lot of non-Oregon-source income and you live in Oregon rather than Washington, you are crazy, even without the proposed tax increase.

But remember, if you move to the Couv, you have to live in the Couv.

There are a lot of gorgeous houses in Camas and Washougal for sale right now at dirt cheap prices. And you can get one on a small acreage as well. A pal of mine is an IBM manager. He lived in Portland and commuted to Beaverton. Then he moved to Clark County and he gets two paychecks from his company -- one for the two days or so that he drives to Beaverton for meetings and one for his other 18 days a month that he telecommutes. Not only did he get a 9% raise, but his company came out ahead as well.

Raising taxes on mobile producers makes as much sense as raising trimet fares to increase income. Folks, the captive audience ain't that captive.

Not that anyone with any self respect will be paying attention to this thread now that it's 6 o'clock on a beautiful spring Friday, but I can't resist trying to correct a basic error that some commenters are making. Let's remember that when we're talking about income tax rates, we're talking about MARGINAL rates.

So, Original Bob, the guy who makes $500,000 would be paying an additional 2 percent in tax only on the amount that he earns above $250,000 under the proposed 11-percent plan. That means he'd be paying an additional $5000, not $10,000, under the proposal. By the same token, JMH, the proposed tax increase is not a 20-percent tax increase on anyone, and would only approach a 20-percent increase for the Phil Knights of Oregon--and I believe we only have one of those, and that one is probably smart enough (and has a smart enough tax lawyer) to generate most of his wealth through capital investments rather than income.

That folks frequently ignore the marginal nature of tax rates is what often frustrates me in discussions with those who claim that its unfair to "soak the rich" by instituting higher tax brackets. Basically we all pay the same amount in taxes on a given amount of income. The person who earns $15,000 a year and the person who earns $150,000 pay about the same amount on that first $15,000. To me, that seems fair--anyway, the system certainly isn't unfair to the rich. I believe everyone, except those who can barely provide for their own food and shelter, should pay taxes on their income. To the extent that income rises beyond what is needed to pay for necessities, that extra income should be taxed more heavily.

I swear to all of you that when I start earning more than $250,000 per year (when hell freezes over), I'll be glad to pay more in taxes on that additional income. I won't be looking to find a job in another state in order to avoid the marginal increase in taxes. I doubt that I'm unusual in that respect.

Richard, you are of course correct on the marginal rate point. My bad on math on the guy making $500,000.

You seem to imply at the end of your second paragraph that Oregon taxes capital gains at a rate different from ordinary income. If that is your assertion, it's wrong.

The underlying point in my comment is correct though, both as to the effect this has on possible immigration to the state and the effect Oregon's rates have on people about to sell their businesses (assuming they can be structured as stock sales).

The Original Bob W -

There is a long-standing tradition of small business owners "moving" to Vancouver shortly before selling their business here in Oregon. This proposed 2% increase won't accelerate this practice in any material degree - it's already rampant. Just like real estate developers scrambling to qualify for long-term capital gains and doctors, lawyers, dentists, etc., claiming to qualify as "real estate professionals" under the IRC when they build their own office buildings, you don't need to look for bumps in the marginal tax rate to find folks trying to squeeze every last tax advantage they can out of the federal and state rules.

It's the American way.

Washington and California's three legged stools have prevented massive deficits.

Just to be completely fair, Washington doesn't have a "three legged stool" because it doesn't have an income tax.

Sales Tax? Wow now there's a great idea. California and it's "three legged stool" taxing system has only a 15.4 BILLION shortfall, that's B as in BILLION.

As a banker, I have analysed the tax returns of many hundreds of high-income individuals. In the vast majority of cases, the AGI is not an indication of actual income. In fact, tax returns are so complicated, and there are so many laws and regulations regarding the reporting and taxability of income, that most loan officers use a software program titled "Taxanalysis" to determine the true cash flow. In many cases, actual cash flow exceeds AGI, at times significantly. When compared to their actual income, many high-income individuals pay little in the way of taxes (as a percent of income).

When compared to their actual income, many high-income individuals pay little in the way of taxes (as a percent of income).

You need an income analysis program to tell you that?

"But do the true 'lowest wage earners' pay Oregon state taxes?"

Believe me, they do. And not only that, many of them (myself included) have to cough up more to send to Salem when tax time rolls around.

And after I pay my rent and utilities and buy meager amounts of food each month I have about $100 left over for everything else - savings, emergencies, health, etc. I don't own a car, a cell phone, an I-Pod, a Blackberry or a cable TV nor buy anything new with exception of food. Who can afford it?

And yes, I work a 40-hour+ week at a time when (in the past) I might have been retired. Two advanced degrees and several certificates and lucky to have a job.

A sales tax or a bicycle tax or insurance requirement would be insupportable burdens.

Here's an Oregon business owner & employer who moved his business & residence to the Couv due to taxes.


Oregon has one of the highest unemployment and UNDERemployment rates in the nation. As unemployment goes up, reliance on social services (a cost to the state) also goes up. We have more BAs and BSs employed as coffee baristas and retail sales people than we do jobs that pay a living wage. Raising taxes on executives and chasing the few we have left out of the state won't help our employment situation.

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