A STATE AND LOCAL TAX PRIMER

Most states are in fiscal hot water, regardless of their tax structures

Figure one shows the year-over-year quarterly changes in state revenues from major tax
sources for all fifty states. Because this is a sum, it tends to smooth out inter-state
variations owing to differences in tax rates and bases, income recognition policies, and
the like. The figure also suggests that the portfolio effect from relying on a variety of tax
types is pretty small.

State tax revenues are volatile; Oregon’s are more volatile than most.

Figure 2 shows year-over-year quarterly changes in total state revenues over the past ten
years. While the fluctuations are less dramatic than in Figure 1, the revenue trend is
nevertheless characterized by a lot of volatility. These fluctuations are largely driven by
underlying changes in the real economy. Another way of putting it is that the systematic
component of state revenue growth is driven by changes in GDP. Variations in state
product is one explanation for state-specific deviations from the systemic component of
state revenue growth; differences in state tax structures and tax administration is another;
the rest is random noise.

Generally speaking the more progressive the overall tax structure the greater its volatility.
States that rely heavily on a progressive personal income tax, for example, tend to have
more volatile revenue growth than states that rely on more regressive tax sources. That is
the bad news. The good news is that the elasticity of revenue with respect to income is
approximately ergodic. You tend to obtain about the same results over a moment in time
that you get over a period of time. What that means is that revenue structures that are
more volatile because they are more progressive, also tend to grow revenue faster over
time, even without increases in tax rates or coverage.

Figure 2:

Oregon state relies heavily on progressive personal income taxes, as seen in Chart 1.

Chart 1
Moreover, while Oregon’s PIT is characterized by a flat marginal tax rate, its pattern of
exemptions, exclusions, and deductions renders it highly progressive on average,
especially where the household is treated as the unit of analysis, rather than the
individual. (I’d like to see the state eliminate the first step of its PIT and expand the
EITC, but that is a subject for another time).

Percent Change in State Tax Revenue

January-March 2008 to 2009, % change
PIT CIT Sales Tax Total
Regional Average: -23.2 12.7 -13.2 -18.1
Oregon -15.9 -70.4 NA -19.1
California -24 17.2 -13 -15.9
Washington NA NA -13.9 -15.5
Sources: http://www.rockinst.org/pdf/government_finance/2009-05-13-state_revenue_flash_report_personal_income_tax_revenue_decline.pdf

Oregon is a low tax state

That claim is true whether one looks at state taxes alone or state and local taxes combined
(although that claim would have to be somewhat qualified, if one were to take local user
fees into account – these are now the highest in the US by most measures). It is also true
whether one looks at average taxes paid or taxes as a proportion of disposable income.
Local Taxes
State Taxes Collected Collected State Tax/Population Local Tax Per Capita State Tax/PI Local Tax/PI
US $750,290,885,000 $484,389,831,000 $2,488 $1,606 6.5% 4.2% 10.6%
OR $7,742,862,000 $4,812,679,000 $2,066 $1,284 5.9% 3.7% 9.6%
CA $114,736,981,000 $52,402,146,000 $3,139 $1,434 7.5% 3.4% 11.0%
WA $17,692,767,000 $8,757,830,000 $2,735 $1,354 6.7% 3.3% 10.0%
Regional Total: $140,172,610,000 $65,972,655,000 $2,537 $1,194 6.3% 3.0% 9.3%

Total State and

Total State and Local Tax Local Tax as % of
Per Capita PI
US $4,093 10.6%
OR $3,350 9.6%
CA $4,572 11.0%
WA $4,089 10.0%
Regional Average: $3,731 9.3%
Sources: http://www.census.gov/govs/www/statetax07.html, http://www.census.gov/govs/www/estimate06.html

One might ask, how did that happen? It wasn’t very long ago that Oregon was near the
top of the tax tables – in the top quartile in terms of taxes paid per capita and the top
decile in terms of tax take as a share of disposable income. The answer is fairly
straightforward: caps on the rate of growth in the property tax (Measures 5 & 47), the
inability of the state to increase taxes (see Figure 3), and changes in corporate-income tax
assessment that were supposed to be revenue neutral that weren’t. Oregon also spends
more of its tax revenues on tax rebates than any other state (the Kicker).

Figure 3