Oregon is facing a budget shortfall of $1.4 billion or more in the coming biennium, but here’s the kicker (literally): Oregonians are likely to get a tax refund designed for when the state experiences an unexpected revenue windfall.
Oregon’s 1979 taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. rebate law, commonly called the “kicker,” provides refunds to taxpayers when actual biennial revenue exceeds forecasted revenue by 2 percent or more. Adopted in the wake of California’s Proposition 1978 at the height of the “tax revolt,” the kicker was intended to require the state to return surpluses to taxpayers, but lacks the safeguards necessary to limit its effects to periods of actual growth. A $1.4 billion shortfall is not, after all, the situation for which the kicker was created.
It is, however, the situation the state faces now: a projected $1.4 billion shortfall in the coming biennium and a kicker worth about $400 million to close the current one. That’s because the state is expected to end the current biennium with more revenue than originally anticipated, and must dedicate all the “surplus” revenue to tax rebates.
States have experimented with a range of tax and expenditure limitations and tax triggers over the years, the former as a constraint on state revenue growth and the latter generally as a means of phasing in tax reform. The Oregon kicker is something of a hybrid, and in this has much in common with Colorado’s Taxpayer Bill of Rights (TABOR): it is closer to a tax and expenditure limitation program than a tax trigger.
Tax triggers are focused on phasing in long-term reform, while the Oregon kicker simply provides one-off tax credits without doing anything to improve the state’s tax structure. Still worse, it uses projected revenue as its baseline, meaning that it only matters whether the state collects more revenue than anticipated, not whether it has experienced actual revenue growth. Kicker credits going out while the state faces a significant revenue shortfall clearly bespeaks a fundamental design flaw. As we wrote in a broader survey of tax triggers:
Oregon’s “kicker” dates to 1979, but the method of refund has changed over the years. Through 1994, refunds were offered through tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. s, but from 1995 through 2011 they were issued as checks. Beginning with the 2012 tax year, the tax credits approach was readopted to reduce administrative costs. The “kicker” is refundable, meaning that it can result in a refund if the amount exceeds a filer’s tax liability, but to claim it, the individual must have paid taxes the previous year.
Because the credit is keyed to revenue over projection, and not year-over-year growth or revenue growth against some other baseline, it is possible for taxpayers not to receive a credit subsequent to years with considerable revenue growth (provided revenue projections anticipated that growth), and also possible for taxpayers to receive the “kicker” in years of economic contraction, so long as the revenue decline was not as steep as forecasters predicted. The effect of the tax credit is not to limit growth to a certain amount, but rather to return surpluses to the taxpayer, whatever expenditures were in a given year.
When designed properly, tax triggers can be a responsible way to implement meaningful tax reform. Poorly designed tax limitation programs like the kicker, however, can exacerbate shortfalls and put pressure on lawmakers to impose new taxes to cover the lost revenue. Especially as state lawmakers contemplate the creation of an economically damaging new gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. to raise revenue, the existence of the kicker is doing little more than kicking Oregon while it’s down.
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