My appointment to the Senate Interim Committee on Revenue has served to place me near the center of the continuous debate regarding sources of revenue and government spending. That debate can be distilled down to whether we have the will to address our State’s structural budget deficit or whether we will continue to increase our revenue stream through enhanced taxes, charges, fees, permits and licenses. Shall we prioritize our spending and require our state agencies to be accountable for what a tax dollar will buy or shall we continue to tax and spend as usual?

Some of the several topics of debate include whether the income tax “kicker law” should be changed, to what extent we should support our state and local infrastructure through system development charges, to what extent changes in tax expenditures could enhance our stream of revenue, and how severely the federal government’s proposed phasing out of the “county payment program” will impact our local schools and roads.

“THE KICKER”

Both the personal income tax “kicker” and the corporate excise tax “kicker” were imbedded into our State Constitution by the people of Oregon. The personal income tax “kicker” requires that when the actual state income taxes collected exceed the state economist’s estimate by more than two percent (2%) the entire excess including the 2% must be refunded to the taxpayer. The corporate excise tax kicker requires that if corporate excise tax collected, exceeds the state economist’s estimate by more than 2% , the entire excess including the 2% must be credited to the next year’s corporate excise tax. This constitutional amendment was passed by the people to limit government spending. They believed that when taxpayers are allowed to keep more of the money that they earn they will stimulate the economy by both increased investment in business and by increased retail spending. The kicker law can only be repealed by a constitutional amendment; however, the legislature is allowed to suspend the kicker for a budget cycle by a super majority vote of both chambers. For this tax year such a vote would serve to increase combined personal income tax and corporate excise tax by and estimated $660 million dollars.

“SYSTEM DEVELOPMENT CHARGES”

System Development Charges (SDC) as a means to build community infrastructure have become a hot topic of discussion.  SDC’s are taxes levied on new construction intended to help pay for the cost of sewers, water systems, utilities, streets, sidewalks, and even bike paths. Not surprisingly, government entities have continued to expand the scope of System Development Charges to develop an ever larger stream of revenue for government spending. Some Central Oregon Communities have expanded their SDC’s to more than $20,000 for a typical single home construction. Recent attempts have even been made to change the state law to allow communities to extend these charges to help pay for schools and other infrastructure development.

    System Development Charges are front loaded property tax surcharges. These taxes are an additional cost of doing business for developers and construction companies. The SCD costs are uniformly passed on to the new home or business owner just like any other construction cost. When that increased cost is added to a standard fixed interest rate 30 year mortgage the effect of the SCD is multiplied several times. For instance when a $5,000 System Development Charge is added on to a $200,000 mortgage the total principle and interest payments are increased by more than $16,000. A $20,000 SCD adds more than $60,000 to the mortgage principle and interest payments required to service a typical $200,000 thirty year loan.

    System Development Charges are regressive taxes because the cost of repaying an SCD is substantially the same over the term of a 30 year fixed interest mortgage regardless of the size of the home and the amount of the loan.

“TAX EXPENDITURES”

Tax expenditures are “tax breaks” in the form of tax credits, deduction, exemptions, and subtractions created by legislation. The total dollar amount of Oregon tax expenditures is about nine billion dollars. They actually exceed the combined amount of personal income tax, corporate excise tax, and property taxes collected by the State. These “tax breaks” were all created by a legislature that believed at the time the tax expenditure was in the best interest of the people of Oregon. Personal income tax expenditures make up 96.6% of these “tax breaks”. Some familiar tax expenditures are the personal income tax exemption, the home mortgage interest deduction, the capitol gains exemption on home sales, the property tax deduction, pension contribution subtractions, the Medicare benefits exemption, and the social security income deduction. Of the $296 million in Oregon corporate excise tax expenditures all but $64 million flow from Oregon’s connection to federal income tax law. Most of those remaining

$64 million are directed at pollution control, economic development, renewable energy, and energy conservation. While we should review all the tax expenditures periodically to determine that they continue to serve their defined purpose, most tax expenditures result from federal law, most expenditures create advantages for individual Oregon taxpayers, and most expenditures continue to serve their original purpose.

“COUNTY PAYMENT PROGRAM’

The proposed elimination or phasing out of the federal “county payment program” would severely impact our rural communities. The federal government owns more than 58% of our Senate District 28. The federal government pays no property tax. This leaves our county property tax base represented by only about 40% of our land area, putting our counties at a significant disadvantage.

For decades this inequity was made up by the federal timber harvest tax which provided the counties with significant income to make up for this loss of property tax base.  The income was derived from the timber harvested off federal land located in the counties. It was essentially timber harvest payments in lieu of property taxes. The spotted owl debacle changed all that. As a direct result of that timber harvest reduction, timber harvest taxes were reduced by about 90%. Also, more than 80% of sawmills and related businesses were forced to close further reducing the property tax base.

The Northwest Forest Plan crafted by former President Clinton to address this problem has resulted in total failure. Congress passed the “Secure Rural Schools and Community Self Determination Act of 2000” in response to that failure. This program has sent about $280 million in federal funds to Oregon annually for roads, schools and other uses. For instance, Klamath County receives about $13 million of those funds each year. This county payments program is up for reauthorization this year and it is in trouble. President Bush has included the program in his budget, but has asked for about a 50% reduction with plans to phase out the entire program within 5 years.

          This is unfair because the federal government continues to own most of our district, continues to be exempt from [property taxes, and continues to restrict timber harvest on federal land. This property tax shortfall was caused, and continues to be caused by the actions of our federal government. Until our government changes that policy they should continue to make up the shortfall.

Best regards,

Doug