Oregon's crazy income-tax brackets: Editorial

kicker.JPG

Members of the Oregon House and Senate revenue committees hear an update on the state economy -- including the kicker -- Aug. 26, 2015, at a briefing in Salem. Josh Lehner (left), an economist in the state Office of Economic Analysis, and State Economist Mark McMullen address the lawmakers.

(Ian K. Kullgren/Staff)

Is Oregon so flush that it can afford to refund some $400 million to taxpayers?

The answer, as any teacher facing an overcrowded classroom can tell you, is a resounding no. But the state announced this week that it will apply an average credit of $244 to Oregonians' 2015 tax bills because actual income-tax receipts for the biennium came in 3 percent higher than what state economists forecasted back in 2013. That, according to state law, is unacceptably high, triggering the so-called kicker to be refunded to taxpayers.

Oregonomics

The squeeze on middle-class jobs and threat to retirement security have everyone's concern -- all the more so in a time of the rebounding economy. But what can be done to restore hope for Oregonians? The editorial board of The Oregonian/ OregonLive is exploring questions that need to be answered in order to devise solutions that will put the state on a path to prosperity.

Today:

Oregon's crazy tax brackets

The kicker is, of course, based on the unrealistic assumption that the state can project income-tax revenue two years into the future with near-scientific precision. But the really surprising part of all this? The kicker isn't even the most ridiculous aspect of Oregon's tax system. Take, for instance, Oregon's personal income-tax brackets.

The personal income tax is Oregon's largest source of revenue, providing about 87 percent of the 2013-2015 general fund, according to the state revenue department's tax year 2013 report, the most recent summary available. Oregonians owed a total of $5.9 billion to the state that year.

Not surprisingly, a person's top tax rate will depend on the amount of his or her taxable income -- a person's federal adjusted gross income modified for Oregon-specific additions, subtractions and deductions. For the 2013 tax year, a single filer's first $3,250 of income is taxed at a 5 percent rate; income between $3,251 and $8,150 is taxed at a 7 percent rate; and anything between $8,150 and $125,000 is taxed at a 9 percent rate. (The ranges are doubled for joint filers).

Nearly 70 percent of Oregon tax returns fall into that 9 percent bracket.

The absurdity of such a wide range in the 9 percent bracket is pretty obvious: Families in poverty who just clear the income threshold are paying the same tax rate as high-income families at the upper end of the range. While various tax credits will help bring down the actual tax bill, low-income Oregonians still face a rate that is one of the highest in the country.

So how did Oregon, a state that prides itself on its progressiveness, enact a tax bracket that, for much of the population, operates almost like a flat tax?

Certainly not out of design. Since 1987, the state has had 5 percent, 7 percent and 9 percent brackets. Even after nearly 30 years under this bracket system, the threshold for hitting the 9 percent bracket has increased from $5,000 in taxable income to 2014's $8,250 for a single filer.

A breakdown of the number of personal income-tax returns per tax bracket for the 2013 tax year.

Two tax brackets were added temporarily for Oregon's top earners, as a result of Measure 66, which imposed a 10.8 percent rate and 11 percent rate for a three-year period. As of tax year 2012, those above the $125,000/$250,000 level are now subject to a 9.9 percent rate.

While some may hail the progressivity of Measure 66, let's be clear: It was a temporary vehicle to capture more money from the wealthiest Oregonians rather than a genuine effort to reform Oregon's badly structured tax system.

There's no easy fix. Widening the tax brackets at the lower rates to include more low-income filers would result in a loss of several hundred million in revenue, depending on how it's structured, said Chris Allanach, senior economist with the Legislative Revenue Office. That's because, as noted above, more of the income paid by wealthier taxpayers would be taxed at the lower rates as well. The state would need to make up that lost revenue in some other way. How? A sales tax? A higher tax rate on top earners?

"It's an easy thing for people to agree that there needs to be reform," Allanach said. The problem, he said, is "what does that mean?"

While the kicker and the sweeping 9 percent tax bracket are clear examples of flaws in Oregon's tax system, they're not the only ones. Most other states have a sales tax, which helps smooth out the volatility of a personal income tax. The topic, verboten in Oregon, must be part of the conversation. And the property tax system carries its own host of problems and inequities. Fixing the 9 percent bracket without tackling the bigger issues is like "replacing the radiator on a heap of junk," said Sen. Mark Hass, D-Beaverton, who has pushed for comprehensive tax reform. He helped secure legislative approval of a study to examine property tax restructuring, among other things, which he hopes will help move the debate.

These will not be comfortable conversations, but it's long past time for others to jump in.

-- The Oregonian/OregonLive editorial board

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