A public finance expert considers the way forward for Oregon after the Nov. 3 blue wave.

By OJP Staff/ Oregon Journalism Project

In the wake of the Nov. 3 election, and as Oregon begins to grapple with the impact of looming federal tax cuts on a variety of entitlement programs, including Medicaid and food stamps, OJP wanted to talk to an expert in public finance. We found one in Sarah Emmans, who advises governments in Oregon and across the country from her home in Olympia, Wash. Emmans, 46, previously worked for ECOnorthwest, the Brookings Institute, the Pew Research Center and the Washington Legislature. This interview has been edited for brevity and clarity.

OJP: What message do you think the Nov. 3 election sends to state leaders and policymakers in Oregon?

Sarah Emmans: It’s pretty telling that the governor, who hadn’t been super popular, won. It’s encouraging that she seems to want to work in a bipartisan way, especially on her “Prosperity Roadmap.” What Nov. 3 showed us is it’s a lot easier to unite against somebody who’s distasteful [President Donald Trump] and a lot harder to unite around an agenda that requires collaboration. Hopefully, it can move forward into something positive.

The Oregon Business Council just released a report that shows a disconnect between state government revenue—which is rising—and overall economic growth. Can you explain that and the consequences of it?

The numbers do show a disconnect, and I think it is worrisome. In Oregon, state tax revenues are going up faster than the economy is growing. In other words, tax revenue is increasing without jobs increasing. That’s concerning. I went back about three years with Oregon Office of Economic Analysis and Department of Revenue data, and looked at when this disconnect started to happen. It’s pretty recent. So it seems like the gap is growing.

Why is there a disconnect between the overall growth of Oregon’s economy and tax revenues?

Oregon is one of the states most heavily reliant on personal income taxes—and also on capital gains, which aren’t job based. And the estate tax is also a big source of state revenue. That tax depends on people dying, so it has nothing to do with jobs.

So what’s the problem?

There are some structural aspects of these taxes that have caused revenue to grow, not because of a growing economy, but because of bracket creep, where you have taxpayers paying more taxes because of inflation rather than because the economy is creating new jobs.

But isn’t the growth of tax revenue from Oregon’s personal income tax a reflection of the health of an economy?

Personal income is a measure of the health of the economy, but personal income tax is not necessarily. That’s where the structural aspects of Oregon’s tax system come into play. In Oregon, the top tax bracket—9.9%—is not indexed. That means the income threshold at which you pay the top tax rate does not increase, even as people get paid more. Since 2012, that top rate applies to single filers who are making over $125,000 or joint filers over $250,000. Those thresholds, where the top tax rate hits filers, have not increased since 2012. The effect of that is a lot more people are paying the highest rate—it’s grown from 2% of taxpayers in 2012 to 7% of filers now. In other words, middle class earners are now paying the highest rate.

OK, so Oregon depends on personal income, capital gains and estate taxes. There’s been a big argument here because Oregon’s estate tax is the most punitive in the nation—it kicks in at $1 million, a lower threshold than any other state. What do you think?

States have to balance their budgets, and when you have a volatile tax base, that’s a challenge. With capital gains, a market downturn can pull the rug out from under the budget. Estate taxes are also based on the increase in the value of the stock market and the value of homes, and that’s just not great. Ideally, you’d have a broad, stable tax base growing in sync with the economy.

The estate tax is a transfer of wealth, and taxing the hell out of it is pretty unconscionable. You’ve got relatively middle class boomers, who are trying to pass along wealth, and more people dying, so that’s kind of one I think that just has to change.

What’s your overall takeaway?

Oregon is the state with the highest share of its general fund coming from personal income tax. As a result, things look better than they are. In Oregon right now, tax revenue growth doesn’t really come from job growth.

Oregon is one of the few states with a corporate activities tax. Critics, including the governor’s Prosperity Council, say the tax makes Oregon uncompetitive with other states because taxation starts at a low level—$1 million in revenue—and the effect of taxing every corporate transaction, called pyramiding, raises prices. But the tax does raise about $1.5 billion a year for K–12 education, and it’s a stable and growing source of funding for a vital service. What are your thoughts?

Any single tax viewed alone has pros and cons. But when you have layered taxes hitting the same base and the same taxpayers many times as you do in Oregon, that is problematic. I do like the link between a business-funded tax and K–12, where you’re trying to educate your future workforce, but finding a way not to layer taxes on your economic engines probably should be part of the conversation.

Some people have proposed a restructuring—swapping income tax for a sales tax in a way that’s revenue neutral. Is it a good idea, and is it feasible?

I think it would be a good idea. I’ve worked in a lot of tourism towns in Oregon, and it’s really too bad that there’s no local way to capture some revenue from this tremendous economic activity you’re bringing into the state from the tourism industry. The sales tax has performed pretty well in Washington state. It would definitely diversify the tax base and allow you to get some revenue from visitors. Is a sales tax in Oregon feasible? That, I don’t know. It’s a tough sell in many places, and I can’t imagine that the Portland crowd would be very happy about that.

Oregon’s neighbors—Idaho, Nevada and Washington—have lower income taxes. How much should Oregon policymakers worry about staying competitive with tax structures in other states?

I’m not totally convinced about the impact. I do think people care. But people and businesses care perhaps more about quality of life and how well their government is performing and stability—and just knowing what they’re getting for their tax dollars—than just a lower rate. In terms of trying to attract businesses, I just am not convinced it’s only the tax environment. I think it’s got to be the answer to the question—what are you getting for your tax dollars? Are the services delivered well? Do you believe that you know your workforce is going to be educated with the tax dollars you’re spending?

This story first appeared on OregonJournalismProject.org and is used with permission