Plain Sense Economics

In my University Seminar class we are looking at the arguments, pro and con, on Oregon Measures 66 & 67. For out of state readers these measures raise taxes slightly – for higher end income earners (families with incomes over $250,000 and individuals with incomes over $125,000) and corporations (raising the minimum corporate income tax from $10 – yep a sawbuck.)

The proximate cause for these measures appearing on the ballot is a classic squeeze felt by state and local governments. During times of economic contraction state tax revenues fall quickly, particularly if their state income tax is progressive in design. Why is that? Progressive tax structures impose higher tax rates on higher income individuals. When incomes fall families pay based on those lower incomes plus they pay a lower tax rate.

The other side of the state/local squeeze is that demands on government spending go up in hard times. These increases are usually automatic. More people qualify for state assistance as their incomes fall, and programs put in place automatically have to step up.

State and local governments can’t engage in deficit spending – which is the solution used by the federal government and recommended by Keynes back in the Great Depression. They don’t have the ability to borrow for regular operating costs. (They can borrow for larger projects that have an income stream. For example, selling bonds to build a bridge and then using toll revenues to pay off the bonds.)

Oregon has a particularly progressive income tax structure, and it doesn’t have a sales tax (regressive) to add a moderating force during hard times. Its biennial (every 2 years) budget has a huge hole.

Univ. of Oregon economics professor, Mark Thoma examined the two tax measures in this opinion piece for the Portland Oregonian. There are two important pieces to his examination and I recommend you look for them in the commentary:

1. Thoma is using positive economics (rather than normative) which means he avoids adding personal values or preferences to his analysis. In an early section of the piece he compares the impact on economic efficiency between taxing more versus cutting spending to fill the budget hole. He comes out mildly on the side of increasing taxes.
2. He has some new (to me) ideas about how to escape this state squeeze between declining revenues and increasing needs. He advocates some federal solutions, including providing a loan facility for state governments at favorable interest rates, and federal grants to help states bridge this gap.

On another level but the same topic a friend of mine is likely to vote against Measures 66 & 67 – feeling that the state legislature needs to control spending, and that tax increases just reduce the pressure for more fundamental spending reform.

What do you think?