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.