Yesterday, Oregon voters ratified two tax increases, one on high earners, and another a revision of the state's corporate income tax. This is their strategy for plugging an enormous budget gap, like the ones that have opened up in state budgets around the country.
Conservatives, predictably, say this heralds disaster for the state, as the rich and corporations flee. Liberals, predictably, view this as a victory. Which is it?
- The fact that Clinton raised taxes, and then the economy recovered, is not proof that raising taxes has no effect on the economy. Most people thing that there is at least some dampening effect, which is especially problematic in a downturn.
- Realistically, income tax response gets more elastic as the tax region gets smaller. Oregon borders two states with attractive migration possibilities. California's taxes are no bargain--but Oregon's relatively lower tax rates may have attracted wealthy individuals and businesses that will now find it not so attractive.
- The Tax Foundation says that pre-tax, it was on the top ten list for business tax climate. That suggests that it has relatively more room to increase taxes than other states.
- The business tax changes apparently include a gross receipts tax, which is really an awful tax, especially during a downturn. Companies which are actually losing money may still owe taxes, which could hasten their closure, and the evaporation of any jobs they provide.
- Trying to close the gap with only taxes on high income makes state revenues very dependent on a very small group of people. Ask New York and California how that's going.
- Since state income taxes are deductible from federal taxes, this doesn't entirely raise new tax revenue--much of it will be transferred from the Federal government.
- There aren't that many attractive revenue-raising measures for state budgets during a downturn, nor is cutting services always optimal, since demand for them rises when the economy tanks. Ideally, states would run surpluses in the good years. Practically, it almost never happens.