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Thursday, April 7, 2011

Fighting the "kicker"

Governor Retread and Treasurer Ted are pushing the state legislature to set the wheels in motion to get rid of the state income tax "kicker," under which Oregon refunds taxes to taxpayers if tax collections exceed budget estimates. We need to "build up a savings account" in good economic years, they say, to provide a cushion in lean economic years.

The problem with this argument, of course, is that even in lean times, Oregon spends money on unwanted and unneeded junk like a train from Portland to Milwaukie -- and the bureaucrats will borrow money if necessary to pay for the toys. Given that reality, trying to sell a tax increase as building a "savings account" is going nowhere fast. If the "kicker" money is kept by the state, it will surely be spent on baloney, or used to pay credit card debt on previously purchased baloney.

They might be able to get rid of the corporate "kicker," but the individual version isn't going away any time soon. It's in the state constitution, and the votes just aren't there in the electorate to change it.

Comments (19)

So what they are saying is they want to overtax us and keep the change.

Exactly - If this group of clowns had the discipline to actually lock money up in a box and then use it ONLY for emregencies - OK.

However, when the emergency becomes Homer not being able to make a payment without a streetcar line, fageddaboutit.

Beisdes, if you look at the allfunds since M5 (about 20 years), its gone up at a compound rate of 13% or so every biennium - And they still couldn't save a penny. Giving them another honeypot isn't going to change a lack of discipline or priorities.

So what they are saying is they want to overtax us and keep the change.

That isn't anywhere close to being right. Nothing in the kicker determines tax rates. Or even spending rates. It merely forces "dividends" to taxpayers based on the state's economic predictions. That's why it works so perversely.

The kicker has been de facto spending limit that prevented even more massive spending increases during what the David Sarasohns like to now call the "go go 90s when we had too much money".

Strangley that wasn't what the "stakeholders" claimed at the time.

Governor John Kitzhaber
Inaugural Address
January 9, 1995

"Today we stand perilously close to the brink of a chasm, and all our minds and all our energies have been concentrated on avoiding a fall. But with courage and honesty, with cooperation and balance, we can again find ourselves poised on the wings of promise to take flight toward our highest aspirations."

"That's why it works so perversely."

Explain that - They set a two year budget (I should be happy they have enough self-control to do that), then the excess is returned to taxpayers.

I'd assume that budget has plenty of "fudge" factors (they are pols after all), so there should be some headroom to address surprises.

I just don't think giving them extra implies it will be spent any more wisely.

Just to add to Allan's point:

Let's say that you have a business that operates under the same mechanism as Oregon's kicker.

Every 2 years you'd have to forecast how much revenue you expect to take in over the next 2 years.

Then, if your actual revenue exceeded your previous forecast by more than 2%, you'd have to issue rebates to all of your customers, equal to the difference between what you forecast and what you actually took in.

Under that system, rebates would be issued not because the company "overcharged" for its products, but simply because more of those products were sold. Or, perhaps, because a larger number of customers bought more expensive items than expected.

Keep in mind that this is based on revenues, without regard to expenses. So even though your costs may have been higher than expected (along with your revenue), you still "owe" your customers a rebate even if that will result in a net loss for the 2 year period.

Would you agree to operate a business under those conditions?

The arguments about government spending every penny (and more) that it takes in are certainly valid, but they do not make the kicker mechanism any more rational.

Jack is correct that getting rid of it (the personal kicker, anyhow) will be well-nigh impossible, but it's still a bad policy.

That isn't anywhere close to being right. Nothing in the kicker determines tax rates. Or even spending rates. It merely forces "dividends" to taxpayers based on the state's economic predictions.

No, the kicker doesnt determine tax rates. But its the only thing keeping tax rates down because they know they cant keep the extra money. And its not a dividend. Its a refund of my money because they didnt need it.

The whole point of the kicker is we get our money back if they collect more taxes than they budgeted for. In other words, they took more than they needed. Excessive taxation.

"Every 2 years you'd have to forecast how much revenue you expect to take in over the next 2 years."

Private business needs to make long-term projections for capital expenses and employees all the time. Do you think Intel decides to spend a few $B here just based on a good quarter or even good year?

"you still "owe" your customers a rebate even if that will result in a net loss for the 2 year period."

I'd study how companies who issue stock and pay dividends manage to do it. The kicker only happens if the state shows a "profit" (i.e. it took it more than it budgeted to spend two years prior.)

I guess what I am saying is that the gourp of legislators/gov are just horribly under-equipped intellectually or discipline-wise to manage a state that is spending $52B every two years.

"But its the only thing keeping tax rates down because they know they cant keep the extra money."

Qualification - "its the only thing keeping effective tax rates down"

They'll raise taxes as much as they can get away with.

I'll consider kicker reform when the legislature repeals the permanent tax increase under measure 66. Until then, forget about it.

It's so much easier to support something if you recast it as something you like.

Private businesses don't operate under a "kicker"? If a private business takes my money coercively (say, by getting a court judgment against me) and takes more than I owe, you damn well better believe they're obligated to give me back the difference.

The state sets a budget and estimates how much tax money they'll raise to fund it. If they take in more than they expect, they damn well should give back the difference. If they want to "save for a rainy day" (a laughable argument from most governments, and certainly from ours), they can BUDGET for it. If the economy booms (no thanks to them), and they get a windfall in taxes they do not--and should not--get to keep it.

It's so much easier to support something if you recast it as something you like.

Of course, thats why everything is "for the children." And why we have "fees" for anything and everything.

Allan L and David:

REI is an example of a business that gives back to its customers. If REI makes a profit, a rebate is sent to customers each year, depending on how much the customer spent.

USAA Insurance company is another example of a company that does this; my subscriber account is credited every year, and can be cash in my pocket, or credited directly to my premiums.

Another, better example are regular or special dividends paid to investors of companies who manage to make a profit. And those special one time dividends are especially nice when companies exceed their profit forecast. Profit sharing companies may also pay their entire work force bonuses.

Now before some of you say that only the executives benefit in that latter scenario, it will likely come in the form of an income bonus that is taxed as ordinary income, not as a preferential dividend.

In summary, businesses have several ways to reward customers and employees when they are profitable.

As for the kicker? Yes, the state should take a look at reserve funds that are perhaps more visible, but with restrictions on how those funds can be spent in tough times. Keeping all the extra tax revenues is simply wrong.

David Wright's analogy of the kicker to a private business is the wrong analogy. The taxpayers are not the "customers" of the state; we're the "owners". We are in the position of shareholders of a business that is not profitable, and every year we have to (involuntarily)"invest" more in the business to keep it afloat. If the "business" needs less money than was expected, the "owners" should expect to get the excess back.

Having said that, the kicker is a dumb way of accomplishing this result. The money doesn't go to the people who overpaid, and it has no impact on influencing taxpayer behavior (though it does put some breaks on the legislature's spending plans). If we could (1) put in place some other mechanism to control the growth of spending and (2) reduce tax rates in some meaningful way (or create a trustworthy way of creating some kind of rainy-day fund or, better yet, repay existing indebtedness with what would otherwise be kicker proceeds), that would be better than the kicker (in my opinion at least).

My analogy was admittedly less than perfect.

However, those of you injecting the concept of "profit" in relation to the kicker (a la dividends for businesses) are also off the mark. The kicker doesn't apply because the state took in more revenue than it *spent*. It applies because the state took in more revenue than it *expected*, WITHOUT REGARD to how much was actually spent.

Yes, many government expenses can be budgeted and will essentially be fixed for the 2 year period.

But many government expenditures may vary from the budgeted amounts, not through any mismanagement on the part of the government but instead because of variable need.

For example, what if more school kids move into the state over the 2 years than were originally expected? Presumably those extra families would contribute to the higher than expected income tax revenue, but they would also contribute to higher than expected school expenditures. So the state may not be "profiting" from that extra revenue after all.

I'm not here to defend government spending. I'm most certainly NOT a fan of big government. But treating unexpectedly high tax revenues for a 2 year period as "overcharging" the taxpayers, or automatically considering any extra tax revenue as "profit" for the state, is just plain wrong.

"It applies because the state took in more revenue than it *expected*, WITHOUT REGARD to how much was actually spent."

So you're telling our legislators would just start spending and ignore revenue forecasts?

I wish I could buy into the sudden pop growth, but in bad years population will shrink because of the economy.

Besides at all funds growing at 13% per biennium, this is far outpacing popgrowth * inflation.

It boils down to discipline. If the state gets an upside in revenue, suddenly Ted goes on a hiring binge and all the legislators will fund their pet projects. Hec, Ted threw 20% more at education in 2007 and it didn't make one diff in the classroom experience for "the kids". More money won't solve that character flaw.

What the Governor, Treasurer and too many legislators fail to acknowledge is that neither the kicker law, nor any other state law prohibits them from saving for a rainy day right now.

All they have to do is budget to spend less than the revenue forecast tells them they will have to spend, and save the difference. Why they never do that is a political question, not a legal one.

I wouldn't mind the kicker so much if it were used to ameliorate the extreme inequity of Oregon's income tax structure. If there are refunds to be given, start with those taxpayers at the very bottom of the income scale (Oregon's income tax, unlike the federal one, reaches well below the poverty line) and work up, zeroing out the tax bills of the poorest households. In addition to providing some modest relief to those who need it most, such a system would also yield the biggest possible economic stimulus, as these are the people who will spend every penny they get back.


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