Tax Analysts Blog

Will Tax Free Shopping Be a Way of the Past in Oregon?

Posted on Mar 13, 2013

Could it be? Will Oregon, a historically sales tax free state, begin to impose a sales tax? That is the question on the table.

On February 20, the state Legislature proposed legislation that would enact a 5 percent sales and use tax on sales of tangible personal property and services. The legislation was introduced by three Oregon senators, all Democrats. They argue that revenue in the state is too volatile because of the heavy reliance on the income tax and that the volatility wreaks havoc on the budget and threatens school funding.

While there are other states that don’t impose a sales tax, Oregon arguably relies more heavily on the income tax than any of those states because of Oregon’s limits on the property tax. Measure 5 was passed in 1990 and imposes limits on tax rates. Measure 50, passed in 1997, cut taxes, introduced assessed value growth limits, and replaced most tax levies with permanent tax rates.

If a sales tax is enacted in Oregon, its sponsors say significant cuts could be made to the income tax and additional property tax breaks could be offered. In addition, a sales tax could generate an extra $1 billion a year in state revenue by tapping into taxpayers that are not currently paying any tax.

It all sounds rosy. But will the state do it?

The move by Oregon comes on the heels of other states that are considering eliminating their corporate and/or individual income taxes and relying more heavily on the sales tax. Still, Gov. John Kitzhaber (D) indicated he doesn’t think this year is the right time for tax reform. Kitzhaber would rather wait until 2014 to give voters a chance to get used to the idea.

Oregonians have historically been very opposed to a sales tax. In fact, a sales tax has been proposed 9 times, and each time has been rejected by voters. But voters in Oregon are apparently very opposed to the property tax as well, having enacted significant limitations on its effectiveness.

The mechanics of enacting legislation imposing a sales tax will also be a challenging task. Three-fifths of both the House and the Senate would have to approve legislation that may be disliked by anti-tax supporters and by liberals that view the sales tax as too regressive.

But the lessons here are simple: First, states (and more appropriately voters) can’t be opposed to all forms of taxation. Governments need a stable revenue stream to operate. Second, state tax systems are inevitably measured by their sufficiency. That is, their ability to provide the government with a predictable revenue stream. This does not mean that states must have an income, sales, and property tax (among other taxes), but it does mean that if a state is going to rely on one tax, the income tax isn’t the one to choose.

Read Comments (3)

Travis RechMar 13, 2013

You assert that "income tax isn't the one to choose" but there are no facts or
data presented to support that position. You just declaring it to be so does
not make it so. An Oregon senator declaring it to be so does not make it so.

Cara Griffith's picturecara griffithMar 13, 2013

You are right that my declaring something to be so is unlikely to make just
about anything true. That being said, I think you would be hard-pressed to find
an economist that would agree that a state could create a stable revenue system
based entirely on the income tax. I will admit that I am not a fan of the
income tax at the state level (particularly the corporate income tax) and think
states’ reliance on the income tax should be limited.

A state like Oregon that has no sales tax and Proposition 13-like limitations
on its property tax, will, over the long haul, be unable to sufficiently
provide revenue for required services. People in Oregon are beginning to
realize this fact.

The NCSL put out a nice study (updated in 2007) that addresses the principles
of a high-quality tax system. It argues in favor of a balanced variety of
revenue sources. The Tax Foundation has long argued against the income tax as
being destructive to economic growth. In a previous blog, I noted a Harvard
study that addressed the instability of state income taxes. The point being
that the income tax is a less stable form of revenue than the property tax and
the sales tax. So in the end, I will still argue that if a state is going to
choose a single major tax, the income tax simply isn’t the right chose.

travis rechMar 14, 2013

Thank you for the response. I do agree that the best system for state
government taxation is a spectrum of taxes. Unfortunately, the regressive
nature of most state tax schemes gives me serious pause.

Stability of the tax system is very important, especially since states usually
cannot run significant deficits. However, fairness and burden should be just
as important a goal as stability. It is entirely possible to create a stable
tax system that is onerous and unfair, and also to create a fair system that is
unstable. The question is where is the line drawn.

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