Oregon Sets Referendum on Highest State Income Tax

On January 26, 2010, Oregon voters will decide whether the tax plan enacted by the Legislature earlier this year (and suspended pending the outcome of the election) will receive their approval or rejection.

Prior to the summer, Oregon enjoyed a relatively flat yet high income tax (top rate of 9% on income over $7,600) with its no sales tax. As part of the state budget, officials passed a new 10.8% tax rate on income over $125,000 and a new 11% rate on income over $250,000, all retroactive to January 1, 2009 and expiring December 31, 2011. For 2012 and thereafter, a 9.9% rate on income over $125,000 would become permanent.

The 11% rate ties with Hawaii as the highest state income tax rate in the United States. The Oregon budget package also included increases in corporate minimum tax and corporate income tax. The total amount raised is $472 million.

Opponents launched a veto referendum and in early October, the Secretary of State certified the two measures for the ballot, suspending their effectiveness. After a kerfuffle about the ballot title, the election was set. Measure 66 will impose the income tax increases; Measure 67 will impose the corporate tax increases.

For both measures, the taxes in each will apply retroactively to January 1, 2009 if passed. (Hence, Oregon officials are advising state residents not to file their taxes until after the referendum occurs.) If either measure fails, its tax increases will be cancelled. Current withholding does not seem to account for the tax increases, so passage could mean a nasty surprise for some.

Proponents note that most people won’t pay the tax increases. This is true, but a reason why it’s bad tax policy. As we wrote last summer:

Oregon lawmakers are foisting the bulk of the state’s budget problems onto the shoulders of a small group of high-income individuals, instead of spreading the burden across more of the beneficiaries of state government or making deeper cuts in state spending. By tacking on two new personal income tax brackets and one new corporate income tax bracket, Oregon will sacrifice simplicity and equity for a politically easy beat on the drums of class warfare.

As California has recently demonstrated, such a top-heavy tax structure can damage a state’s finances on two fronts. Boom-time revenues from high-income earners often encourage profligate spending commitments with the assumption of further booming revenues, but the inevitable downturns that follow wipe out tax revenue from top income earners much more severely than revenue from more modest earners, leaving the state with massive budget shortfalls. Broad-based, flat-rate income taxes both encourage more production from high-income earners in good times and keep revenues from falling through the floor in bad times. Oregon is moving in the opposite direction, unfortunately, increasing the likelihood of major budget crises down the road.

Significantly higher income taxes on the most mobile group of individuals and corporations may also convince a portion of these key economic actors to say goodbye to the Beaver State, and discourage others from entering. While California’s imploding economy and even more onerous tax structure might not lure these Oregonians south, some firms and high-income individuals for whom sales taxes are not a major consideration might regard Idaho’s 7.8% top income tax and flat 7.6% corporate tax rate as attractive. Washington and Nevada, meanwhile, both scrap income taxes altogether in favor of broad sales taxes. Now facing the highest state income tax rate in the U.S., Oregon’s high-earning individuals have no shortage of greener tax pastures elsewhere.

More on Oregon here.