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Thursday, October 22, 2009

Get your kicks on Measure 66

They finished up the ballot titles and explanatory statements in Salem yesterday for the two tax increase ballot measures that we Oregonians will be voting on in late January. These are Measure 66, on individual income taxes, and Measure 67, on corporate taxes. The folks who are opposed to the measures are griping about how this week's drafting went, and now they'll get the chance to make their arguments to the state Supreme Court. It could have been worse for them, but there are a few things to complain about.

Probably the biggest complaint heard so far is that both titles contain the statement that the measure "maintains funds currently budgeted for education, health care, public safety, other services." The opponents say that even if the measure fails, the regularly scheduled "special" session of the legislature could come up with other ways of funding those categories of services, and so it's unfair to threaten service cuts indirectly in the ballot title. Maybe, but will that be enough for the court to throw the titles out?

I have a different, perhaps more nitpicky, objection: The Measure 66 title and statement say that the new, higher tax brackets being imposed on the wealthy will kick in a certain high levels of "household income." But Oregon income taxes are imposed on taxpayers, not households. Married couples and registered domestic partners are allowed to file jointly, and if they do, their income is pooled. But other households -- such as those with domestic partners who aren't married to each other -- don't file jointly and don't pool their incomes. And so the reference to "household income" is technically inaccurate.

Turning from the ballot title and statement to the substance of Measure 66 itself, first of all, as best I can tell, this is the actual bill that we're voting on. In addition to imposing new 10.8% and 11% percent tax brackets on upper-incomers, the bill reduces the amount of federal taxes that the rich will get to deduct on their state tax returns. Under present law, Oregonians get to deduct up to $5,500 of their federal taxes from their taxable income for Oregon purposes, but under Measure 66, if one's adjusted gross income is $125,000 or more ($250,000 on a joint return), the deduction for federal taxes is cut back -- and if adjusted gross income is $145,000 or more ($290,000 on a joint return), the federal deduction is lost entirely.

I loathe that provision, on three levels. First of all, it adds a layer of complexity when the tax laws scream out for simplification. Second, the only theoretically defensible way to handle federal taxes on a state return is to make them completely deductible, without a cap of $5,500 or any other amount. You can't pay state taxes out of the part of your income that was grabbed by Uncle Sam under the federal tax laws. And since income taxes are supposed to be based on one's ability to pay, that's just wrong.

Thirdly, and perhaps most importantly, "phase-outs" such as the one being employed here are just sneaky ways of jacking up the top marginal tax brackets without people noticing. The legislature has us all looking at those new 10.8% and 11% brackets, but for some the "phase-out" of the deduction for federal taxes will put them in a higher marginal tax bracket.

For example, picture a single taxpayer with an adjusted gross income of $124,999, and taxable income of $110,000. Her marginal Oregon income tax rate is 9%. But now watch what happens under Measure 66 if she makes another $20,001: Her adjusted gross goes up to $145,000, a $20,001 increase, but her taxable income goes up to $135,500, a $25,501 increase, because of the loss of the deduction for federal taxes. That $25,501 will be taxed as follows: 9% on the first $15,000, and 10.8% on the rest. When you work it all out, if I've done the math right, she pays $2,484 of additional tax on the extra $20,001 she made, and that, friends, is a tax rate of 12.42%.

As I say, it's sneaky.

The other thing they've thrown into Measure 66, and deemed it so important that it made the ballot title, is an exemption for the first $2,400 a year of unemployment benefits a taxpayer receives. The proponents of the tax bill are confident that this will help the measure's chances for success in January.

Several points about this: First, it's merely conforming Oregon tax law to a new federal tax law which, for the first time, excludes the same amount of unemployment from income tax in 2009. If Oregon had taxed it when the feds didn't, there would have been loud howls of protest, and so this feature of Measure 66 is not the bold action that the proponents might have you believe.

Second, if you're living on unemployment, welfare, gifts, savings, or any of the above, you may not have been taxable in Oregon, anyway. Oregon income tax allows an exemption credit of around $170, which at low levels of income is like an exclusion of around $3,000 of income. And so exempting unemployment may not cut recipients' tax bills all that much. Even at 9%, the exclusion saves a big $216 in Oregon tax, and if you itemize your deductions, you'll lose that much deduction on your federal return.

And finally, the law as drafted seems flawed. The Oregon exemption is determined by "the amount allowable as a deduction under section 85 of the [federal] Internal Revenue Code." Section 85 does not allow a deduction. It provides for an exclusion from gross income. The two things are definitely not the same. And so unless a generous Department of Revenue honors what the legislature tried to say rather than what it actually said, unemployment might be taxable in Oregon even if Measure 66 passes.

Speaking of which, will it pass? Hard to say. Most taxpayers won't be affected by it at all. And for that very reason, in a world where people sing, "Don't tax you, don't tax me, tax that man behind the tree," it's got a shot. But as the failed cigarette tax of a few years ago proved, the fact that only a small minority is being taxed is no guarantee of success.

I've often said that late January is a heck of a time to try to get people to vote in favor of tax increases of any kind. They're all broke from Christmas. There's going to be some serious money thrown in both directions on these two, that's for sure. It will be interesting to watch -- but the ads will no doubt be quite tiresome by the time the votes are counted.

Measure 67, the corporate tax increase bill, poses some interesting tax policy questions, too, and on that one, everyone probably will pay, because corporate taxes are most often passed on to consumers. But we've played our tax lyre long enough for one afternoon. We'll take up Measure 67 in a post of its own.

Comments (20)

I dislike both tax bills (i.e., the ones that are subject to Measures 66 and 67) from a tax policy point of view, but I intend to vote "yes" on both referenda. I do have a soft spot in my heart for Oregon's initiative & referendum system, but its weaknesses are painfully obvious now.

I wasn't paid to go to Salem every weekday for several months and try to figure out the way out of the current budget mess. Having had a front-row observer's seat for a similar fiscal disaster in another state, I know that it's really hard work. So, even though I don't like parts of the solution that the legislature came up with, I respect that they came up with a solution, albeit an imperfect one. Thus, I will be voting yes on both.

Don't think the legislators didn't play games of their own with the referendum. They could have done the unemployment exemption in a different bill. Did they stick it into this one to buy votes for the tax increase on the rich?

As I say, it's sneaky.


How could such a large majority be thought to employ such underhanded tactics?

Surely it's all altruism and progressivity and you're just being unfair to point out these trivial issues. Just soooo unfair - *sob*.

The majority wouldn't try to fool their own constituents with "sneaky" bills, would they?

Oh, the humanity...

They're raising taxes with the second worst unemployment in the Western U.S.?

Might as well put up a sign that says "Recessions last longer Here"

So, what's the solution? An across-all-brackets increase in the income tax rate? Would that have a prayer of surviving a referendum? I think the strategy here was to craft a tax that would corral a lot more revenue, but only impact a minority of voters. Looks pretty unfair if you're in the effected tax bracket, but maybe it has a chance of passing with the voters. Guess we'll find out soon enough.

Yes Frank, we'll know soon. Before we know, the average Joe should know that on the Corporation Tax increase, it will be a hidden tax to all those that think they won't be affected.

I'll explain. Take your coffee beans you buy. A small, local roaster here in Portland trying to even show a 3% profit margin on gross sales will experience a $16,000 dollar increase in the corp. taxes. They have four choices;

1)take a loss from here on out;

2) cut employees after they have already laid off 15%;

3) or raise bean prices to you-a tax on you, indirectly;

4) or go out of business.

They've done the first three, don't want to do the last, so they'll tax YOU.

Enjoy the aroma.

You can't pay state taxes out of the part of your income that was grabbed by Uncle Sam under the federal tax laws. And since income taxes are supposed to be based on one's ability to pay, that's just wrong.

I don't understand this argument. There are lots of things that my income goes to that are "mandatory" (housing, food, clothing) that reduce my ability to pay state income taxes. Why should we deduct federal taxes and not all those other expenses? I also think to most people it makes sense that if you have taxable income of $75k, the feds tax you on that $75k and the state taxes you on that $75k. They're each taking a piece of the same pie.

On the overall referenda, I have no problem with what the legislature did. There is no direct connection between unemployment and state income tax rates, anymore than there is between business activity and sales tax rates (hint: ours is 0%). It is a lie to say that the state could have just cut waste in order to patch the $3 billion budget hole. The cuts were already significant, and without this new revenue they would have been devastating. I'd like to see the opponents be specific in terms of where they would find the $700 million. It has to come out of schools, health care, or public safety.

I also think to most people it makes sense that if you have taxable income of $75k, the feds tax you on that $75k and the state taxes you on that $75k. They're each taking a piece of the same pie.


For people who itemize their deductions, the federal tax law allows an unlimited deduction for state and local income or sales taxes. The feds acknowledge that you can't pay federal tax out of what you pay to the state. Some rich folks get their itemized deductions partially "phased out," but federal law always allows them to deduct at least 20%.

Unlike the federal tax code, Oregon does not allow an unlimited deduction for federal taxes paid. It caps the deduction at $5,500, meaning that whatever more you pay to the feds is also taxed by the state. For a married couple, you pay $5,500 of federal tax at the level of $42,233 of taxable income. If you make more than that, part of your income is taxed twice.

That's bad enough. With Measure 66, the state is saying that folks who make more than $145,000 or $290,000 (and that's before any itemized deductions) should have to pay the double tax on all of the federal tax. It takes things from bad to worse, and definitely is not the approach taken by the federal system.

We have too much government, too many state employees, and they accomplish too little. I made two separate trips to the DMV office today and I still can't renew my driver's license...Why? Because our highly inefficient State Government doesn't take debit or credit cards. Even the USPS has caught up to the 1990's, but not the State of Oregon. Look at the prisons, the roads, the parks, the regulators: they are all expensive and poorly maintained.

The problem isn't inadequate taxation.

Jack deserves a Nobel Prize for a post on these taxes that doesn't use the words "vital services" or "job killing."

AJS says: "There are lots of things that my income goes to that are 'mandatory' (housing, food, clothing) that reduce my ability to pay state income taxes."

You're joking, I hope.

With housing, food, and clothing, you have a choice of how much you spend and what you spend it on. Uncle Sam does not give you the luxury of choosing how much you "invest" in his enterprises. In addition, Uncle Sam's long arm reaches into your paycheck before your income hits the bank. Unless you get a refund in April, this is money you never see.

We do all understand, don't we, that total state spending in the current biennium is up 9.8% from last biennium?

While the private sector is shrinking fast, the government sector continues to grow. And if that means a tax on the shrinking private sector, that is what the public masters will do.

Does anybody else think this is crazy? Private sector employment is down 125,000 jobs while government jobs have GROWN by 7500!


I can't wait for your commentary on the business taxes. Should be very interesting...

Jparker, I agree with you. The previous state biennium budget was $14 Billion and for 09-11 it jumped up to $16 Billion.

All state spending has expanded, redistributed in some ways, state employees received wage increases and even bonuses for some.

Then the Oregonian and others tell us there is a deficit. Hello again.

God am I glad to live in Virginia, where income tax rates and unemployment are about half of what they are in Oregon.

How's your sales tax? Must really hurt when you buy a car.

Sales tax rate is 4%, with local add-ons of no more than 1%. Cars are less at 3%, but there is is the dreaded personal property rate of 4.57 percent, which makes Virginia the used car state. It's much cheaper to own three cars, any one of which is operable at a point in time, than to own one that is reliable.

And I forgot to add, hey who cares about car taxes, we're gonna get steetcars.

Jack - Just to clear things up, the federal tax deduction for Oregon for 2008 is $5,600 not $5,500.

Thanks, I was using the 2007 figure. It gets increased for inflation every year, and so for 2009 it might even be $5,700. Which makes the sneaky, unstated tax rate slightly higher than the 12.42% that I calculated.

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