INCOME TAX UNSTABLE STATE REVENUE SOURCE

July 28, 2003 12:00 am

The battle cry this year for both Democrats and Republicans in the Legislature is "sales tax." As Oregon's economy has sagged and unemployment numbers remain high, income tax revenues have fallen sharply.

During recent hearings at the Capitol, former Governor Victor Atiyeh told legislators they needed to revamp the state tax system and a sales tax can be part of that answer.

We have listened to pundits for at least two decades tell us that Oregon needs the third leg of the proverbial tax stool: income tax, property tax and a sales tax. But maybe they are all wrong and we failed to recognize that sales and income taxes are more volatile than anyone has admitted.

Writing in the Sacramento Bee, Daniel Weintraub stated that California's tax system has become too reliant on sales and income taxes, which can both fluctuate radically depending on the economic climate.

Weintraub cited a recent study by Stephen Levy, the head of the Institute for Regional and Urban Studies in Palo Alto, Calif. Income and sales taxes are the most volatile of the three major sources of government income, while property tax is the most stable, Levy noted. He found that personal income growth fluctuated between 6 percent and 14 percent in the 1980s, while since 1990, the growth rate has swung between 2 percent and 11 percent.

Levy suggests that local governments would be better off relying a little more on the property tax and less on the sales tax. He adds that budget writers need to find a way to impound those windfall revenues into a rainy day reserve rather than building them into the ongoing budget. The state should be able to grow government on pace with the economy while preparing itself to weather future downturns which include the kinds of massive disruptions now under way.

Our neighbors to the south have something good to export to Oregon, and that includes the hard work of researchers and the idea that a sales tax won't be the panacea that so many Oregonians believe it is. Tying a sales tax to educational funding will only create more misery when revenues decline. This would mean cutting teaching positions and other staff during one cycle and then trying to add them back in another. We have experienced too much of that recently.

If Oregonians are really after stable funding of all government programs, then we need to adjust our income tax lower and increase the property tax rate. We should be able to find a workable way to not tax homeowners or renters out of their property, while bringing stabilization to our tax system.

As Levy suggested, when the economy gets stronger, we don't need to increase government costs by spending more. We need to create a permanent rainy day fund for the next down cycle.