A Responsible Sales Tax
Ending the Fear and Loathing
By Larry Huss

Like the lemmings to the sea, Oregon’s politicians periodically embark on a self- destructive march in quest of the elusive sales tax. Each time (nine by my count) the voters of Oregon have rejected the proposed sales tax and, seemingly, by larger numbers each time. And, they’re at it again. Senators Ben Westlund (R) and Kurt Schraeder (D) have introduced a new sales tax measure in this legislative session. And it is destined for the same ignoble defeat as its predecessors and for the same reason – it is simply a means by which to exact more taxes from an already overtaxed citizenry.

Having said that, I am still a huge supporter of a sales tax – but a sales tax with very strong fences built around it. It is the construction of these fences that can make a sales tax palatable to taxpayers, aid economic growth and perform as expected.

First, there must be a spending limitation. Oregon’s legislature has demonstrated a consistent inability to live within its means. Oregon’s politicians take great delight in pointing out that Oregon’s tax burden as a percent of personal income ranks 46th among the fifty states.

Those same politicians drop their voices when it is pointed out that Oregon ranks in the top ten in spending per capita (usually about number seven). And for good reason – it is simply not logical. The fact is that revenue and spending are usually just about equal if you have a constitutional requirement for a balanced budget and Oregon does. You can’t be the fifth lowest in taxation and the seventh highest in spending.

Spending is easily verifiable – it is simply the money appropriated each biennial session. Taxes are a somewhat more elusive term – in the immortal words of former President Bill Clinton, it all depends on what “is” is. For government purposes, “taxes” apparently only includes income, corporate and property taxes. Accurately, taxes include all revenues extracted by a government from its citizens; that includes income taxes, corporate taxes, property taxes, sales taxes, cigarette taxes, gasoline taxes, inheritance taxes, franchise taxes, fees, etc. (The only extraction by government that doesn’t fit that definition is lottery proceeds since that is a voluntary contribution by people who choose to gamble.)

Spending by state government has increased annually by double-digit figures over the last decade. (It would have continued even during the most recent recession but voters turned back two significant tax increases and forced the legislature to reduce its spending.) It has increased faster than inflation, faster than population growth, faster than inflation plus population growth and faster than the growth in personal income. In the normal course of human events, if you consistently spend more than you make, you go broke, bankrupt, and in some instance you go to jail. But in the political world, if you spend more than you make, you raise taxes. You raise taxes directly by increasing the rates (Measure 24 and Measure 30) or you raise taxes indirectly – you increase fees or reduce deductions. And sometimes you try to scam citizens by adding new taxes in the name of “tax reform.” And that is precisely why the sales tax has failed in every instance in Oregon’s history – a sales tax in Oregon has always been proposed as a means of increasing spending in a state in which spending is already out of control.

Imposing a spending limit as a prerequisite to adopting a sales tax will ensure that the current tax burden per capita remains constant – in other words, if a sales tax is proposed, then other taxes must be reduced proportionally. If a sales tax is increased, other taxes must be reduced proportionally.

Quite the opposite is true with the current proposal by Sens. Westlund and Schraeder. Under their proposal income taxes will be reduced but not proportionally. In fact, they gleefully announce that their proposal will increase revenue, and thus spending, by $1Billion dollars. That is an additional $1Billion tax burden on Oregon’s already overtaxed citizens. No wonder according to a recent poll more than sixty percent of Oregon voters oppose a sales tax. Without a spending cap, a new sales tax is simply an invitation to spend more and to increase the tax as spending continues to outpace economic growth.

That brings us to the second element of the fence around a sales tax – exclusivity. I favor a sales tax to replace an existing form of tax – in this case, the personal income tax. Of the five states relying primarily on the personal income tax to fund state government (Alaska, Delaware, Montana, New Hampshire and Oregon) none would be described as an economic engine and none rate in the upper regions of economic and job growth.

Even in these categories, Oregon ranks dead last for a variety of reasons including land use controls, regulatory burden and business climate.

In contrast, of the seven states with no income tax, five (Florida, Nevada, South Dakota, Texas and Wyoming) have strong vibrant economies and Florida, Texas and Nevada rank amongst the top twenty in economic growth.

Oregon is dead last. Even Washington, which has struggled more during the economic downturn than many states and finished below the national average, still beat Oregon by over 40%.

Exclusivity also means that local governments should be barred from imposing an income tax when the state eliminates its income tax. We have already seen the consequences of Multnomah County imposing the only county income tax west of the Mississippi River. Portland and Multnomah County are a drag on the state’s economic recovery. Unemployment in the Portland area remains higher than the rest of the state and job growth remains lower. While businesses continue to make investment decisions to avoid that tax, there are several counties that appear to be salivating at imposing their own version of the county income tax and thus hasten their economic downfall similarly. It should not be unexpected that Oregon fairs poorly when compared to states without an income tax. Tax policy is one of the most important elements for a business in choosing to locate and/or grow its business. Elimination of Oregon’s burdensome income tax would be a boon to business development.

The third element of the fence is a constitutional cap on the rate of the tax. One might suggest that such a cap is redundant if a spending limitation is already in place and I would normally agree. However, most states that allow for a sales tax (whether singularly or in combination with a modest income tax) allow local governments to also impose a sales tax. In most instances, the growth in the rate of the sales tax has been almost exclusively at the instance of local government. A cap in the overall permissible rate for the sales tax would militate against spending sprees by local governments and would prevent migration of business to avoid significant rate differentials (as is currently occurring with Multnomah County’s income tax surcharge).

And finally, some final words for those who claim that a sales tax is the most regressive form of tax: baloney.

A sales tax is a consumption tax, the more you earn, the more you consume. An income tax can be determined to be just as regressive as a sales tax if it is applied to all income – but it is not. We meet societal concerns for the poor, the elderly and the sick through exemptions and deductions. Similarly, societal concerns can be addressed through a sales tax by excluding particular items from the tax (e.g. certain foods, pharmaceuticals, heat, etc.). The most regressive tax is a property tax because it is without regard to the ability or willingness to pay. And, in contrast to the income tax, the sales tax is less vulnerable to the fluctuations of the state’s economy than is the income tax. When the economy turns down as it did recently, people lose income and the state loses income tax revenues. However, in an economic downturn people tend to reduce their consumption more slowly, choosing instead to use savings and refinancing to maintain their lifestyles. And since a sales tax is a consumption tax it will also recede more slowly.

Oregon must do something about its burdensome income tax if it ever hopes to develop long term, sustainable economic growth. A sales tax is a viable, in fact, preferred, alternative to that income tax. However, the only way that the voters of Oregon will adopt a sales tax is if they can be guaranteed that it is not just another name for a tax increase. That can be accomplished through a constitutional spending limit. So first, the legislature should refer a constitutional spending limit and then it should refer a sales tax as a complete replacement for the state’s income tax.

BrainstormNW - May 2005

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