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Oregon Tax Plan Shows the Way for Minnesota

July 3, 2011

While the nation is celebrating its independence this Fourth of July weekend, few in Minnesota are in a partying mood. The government shutdown continues in the Land of 10,000 Lakes, with services stopped and 23,000 employees furloughed as a $1.4 billion, two-year budget gap remains unfilled. Republicans in both house of the state legislature would rather "shut it down" than raise taxes on the state's 7,700 millionaires (and, it turns out, give up their demands on abortion, stem cell research, school vouchers and other social issues).
But as the Minnesota GOP warns that Democratic Governor Mark Dayton's "tax the rich scheme perpetuates the moral hazard of progressive policy" which would also "penalize the exact people who we need to help us grow out of the recession" and "hurt small businesses," it's worth remembering we've heard this all before. In 2010, Oregon passed similar upper income tax hikes and the nightmare scenarios of the conservative chorus never came to pass.

It is worth noting that Oregon is a smaller state with lower incomes and much higher unemployment than Minnesota. The state has no sales tax and its largest metro area (Portland) borders Washington state, which has no income tax. (Sadly, Oregon is also home to the "Kicker," a fiscal train wreck of a law which rather than saving revenue surpluses returns them to taxpayers.) But just one after the anti-tax wave that swept Scott Brown into office in January 2010, Oregon sent an unmistakable message of their own.
Rather than completely gut school funding and other essential government services during a recession like most states, Oregonians voted to raise taxes on the wealthiest residents and boost the minimum corporate tax from its shocking level of $10 a year.
As the New York Times detailed, that special election became necessary when anti-tax advocates turned to Measures 66 and 67 to undo three quarters of a billion in funding for education and other programs:

The Legislature, controlled by Democrats, has already put the $727 million into the current budget. So if the ballot items, known as Measures 66 and 67, had been rejected, lawmakers would have been forced to hold a special session to find other ways to reduce spending or raise revenue.

And in what is a recurring theme for the nation as a whole, the New York Times in its election preview suggested who would vote for - and who would benefit from - the passage of the ballot measures in a state which hadn't voted for an income tax increase since 1930:

Yet if the measures pass, it will probably not be because of support here in largely conservative southwest Oregon. Too many times the state has proposed too many taxes, many residents here say, and this is no exception, never mind the school troubles.
Instead, experts say, if the measures pass it will be because Oregon lawmakers found a way to narrowly focus a tax increase that more liberal parts of the state could tolerate, even at a time when a tax increase could not be harder to digest.

Which is exactly what unfolded. In an election with 59% turnout statewide, voters approved both Measure 66 (which raises taxes on households with taxable income above $250,000) and Measure 67 (which sets higher minimum taxes on corporations and increases the tax rate on upper-level profits) by a comfortable 6 point, 90,000 vote margin.
But both before and after the passage of the ballot measures, high-profile business leaders including Nike's Phil Knight and groups with names like "Oregonians Against Job-Killing Taxes" warned businesses and millionaires would flee the state. While the Fiscal Times last September reported that "Controversial Oregon Taxes May Spur Corporate Exodus," Nike's Knight described the tax hike as "assisted suicide" for the state economy.
Despite the fear-mongers best efforts, that did not come to pass.
After the vote, BlueOregon suggested why:

[Oregon's] per-capita tax burden under measure 66 will be the 34th lowest out of the 50 states, up just two places from the 36th lowest before the measures were implemented.
Measure 67 replaces the 79 year old $10 corporate minimum tax with a graduated version that will start at $150. Oregon moves from the 3rd lowest business taxes out of 50 states to the 5th lowest in the US.

As the Tax Policy Center explained in November 2009, conservatives' dire warnings that "Taxing the 'Wealthy' More Will Cost 36,000 Oregon Jobs" and "Raising Oregon's corporate tax rate will cost 43,000 jobs" were based on "misleading analysis" and "fatally flawed assumptions." It's no wonder Chuck Sheketoff of the Oregon Center for Public Policy concluded, "No matter how many times they are repeated, the job-loss claims aren't worth the paper they are printed on."
That didn't stop Republicans and their water carriers from concocting a new myth to attack Oregon's budget-balancing upper income tax rate increases. In December, the Wall Street Journal raised the specter of "Oregon's Vanishing Millionaires":

Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million. The Eugene Register-Guard newspaper reports that after the tax was raised "income tax and other revenue collections began plunging so steeply that any gains from the two measures seemed trivial."
One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did. Funny how that always happens.

That always happens, of course, when the United States overall and Oregon in particular are pummeled by a devastating economic downturn. As Froma Harrop responded, "the Journal presents no evidence of a stampede out of Oregon after the 2009 tax raise":

The 10,000 "missing" taxpayers probably did move -- to a lower income level that's not high enough to activate the new tax. In case you didn't notice, there was an economic recession going on...
Did they really go poof? Or did the financial collapse of 2008 turn many million-dollar incomes into less-than-million-dollar incomes? Stock market crashes tend to do that.

Data from Deloitte LLP showed that the total number of millionaires nationwide dropped from 12.6 million in 2007 to 9.0 million a year later, a drop over a quarter. As OCPP's Sheketoff summed up the WSJ's "ludicrous" argument, "It's like saying that if a rooster crows at dawn the rooster's crowing is what causes the sun to come up."
And as it turns out, Deloitte's guidance for financial managers to the wealthy shows that Oregon is about to get a lot more millionaires. As BlueOregon again explained:

Millionaire households in Oregon will almost triple in number by 2020, according to a new study by Deloitte LLP's global financial consulting group, the Center for Financial Services. Deloitte projects that Oregon will have the third highest growth in millionaire households from 2010 through 2020 among all the states.

So much for that "phantom exodus."
Back in Minnesota, the shutdown over the millionaire tax is creating pain for average families and former governors alike. White House hopeful Tim Pawlenty is getting a lot of scrutiny for bequeathing a budgetary mess for successor and for having closed his last shortfall thanks to the very federal stimulus funds he decried. Meanwhile in Oregon, new Democratic Governor John Kitzhaber and a divided House just finished work on a budget balanced by steep spending cuts and added tax revenues from the state's wealthy and businesses. As the Oregonian put it:

In Minnesota, they're shutting down state government because Republican lawmakers and the Democratic governor can't agree on budgets and taxes. But in Oregon, lawmakers were remarkably harmonious in reaching bipartisan agreement to close one of the most difficult budget gaps they've ever faced.
Some of the most lavish praise that Democratic Gov. John Kitzhaber received when the Legislature quit work last week was not from members of his own party, but from GOP legislative leaders.

Republicans in the Gopher State would do well to heed that lesson from the Beaver State.


About

Jon Perr
Jon Perr is a technology marketing consultant and product strategist who writes about American politics and public policy.

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