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Sunday, January 10, 2010

Heartbreak Warfare (long)

It is a rare occurrence when I find myself agreeing with The Oregonian in an editorial. Last Sunday they came out *against* Ballot Measures 66 and 67. As someone who has supported nearly every tax increase ballot measure and opposed every tax limitation measure, my view of M66 and M67 will surprise many.

I am categorically opposed to the measures introduced by the Legislature and which we will vote on anytime between now and January 26, 2010. My opposition is not to the principle of tax increases, but as an objection to the methods and ways the Legislature sneaked in all sorts of nasty things into these "reforms" and increases. They did not even consider alternatives and any legislator who tries to convince me otherwise is dissembling.

I don't doubt that the schools need more money, that higher education, and human services need more money. But, the Legislature chose two groups to single out for PERMANENT tax increases and did so in the most perverse of ways.

First, let's discuss M66. This is advertised as a simple increase of 1.8% in the marginal tax rate of personal income taxes on singles who earn more than $125,000 per year and joint filers who earn more than $250,000 per year. What isn't made clear is that this is only part of the story. Not stated is the fact that (1) the tax increase is permanent; (2) the tax increase is retroactive to January 1, 2009; (3) the marginal rate rises to 11% on incomes over $500,000; (4) M66 phases out the deduction of federal income taxes paid from $5600 to $4000 on incomes up to $290,000, and then to $0 on incomes above that. All tolled, instead of raising the marginal rate from 9% to 10.8% or 11%, the effective marginal rate rises to close to 12.5% or 13% in most cases. This is an outrage. This is enough to drive many individuals who contribute large sums of money to the Oregon Treasury to consider moving out of Oregon. Who will pay the 54% of taxes individuals or couples in those income brackets currently pay when many decide to pick up and move across the river to Washington and base their employment out of WA. Most people in those income brackets are pretty mobile. We certainly are.

To me, it is outrageous to expect that those 1% of taxpayers pick up an additional 5% of the state's revenue, while the rest of the taxpayers get by scott free (or so they think).

Measure 67 is a slightly different story. I am not opposed to raising the minimum tax for business from $10 to $150. While it is significant in percentage terms, it is not significant in dollar terms. But the Legislature wasn't content to leave the tax alone. Instead, they changed the basis of the tax as well. It used to be that the $10 was the minimum tax a business paid regardless of its profits or losses. However, the new minimum tax is now based on gross receipts before expenses are deducted. So a small business whose sales are, say, $60,000 will pay taxes on that amount rather than paying taxes on the NET sales after expenses. A business with $60,000 gross receipts and a net profit of $2000 will be paying about 30x as much in taxes as before. I can't think of a more regressive form of taxation. Instead of encouraging small business to work harder to up their gross receipts, this measure punishes them for succeeding regardless of the expenses needed to up gross receipts.

Since I have made it a practice to try, whenever possible, to patronize small business (my dry cleaners, my local independent service station, my local hardware store, my barber, etc), this will result in them having to pass on the tax increase in the form of raising prices. This, in turn, may drive me back to the big box stores I try to avoid. And the big box stores won't even be fazed by this change in the tax structure.

So, while the Legislature had dozens of different opportunities to come to grips with Oregon's terrible tax structure, its moronic "kicker" law, and the prospect of a "temporary" tax increase, they managed to choose the most offensive forms of tax increases imaginable. Instead of providing measures to increase tax fairness, to spread the burden equally (or semi-equally) across the various tax brackets, they chose a path designed to antagonize the two groups of people who contribute more in raw dollars to Oregon's treasury than anyone else, and to do it in a blatantly dishonest and disingenuous way. Read the ballot titles and then read the tax measures themselves. Ask yourself just how much information isn't being shared in the ballot title.

Don't let the cries of "woe is me" and "the sky will fall" fool you. The Oregon Legislature's special session will not convene until AFTER the results of this election are in. They will have time to come up with a set of alternatives to these tax measures in ample time to prevent the sky from falling. They're telling you that this will leave a $700 million hole in the budget, but they fail to tell you how big the 2010 "kicker" will be. It isn't that there isn't enough money; it's that the Legislature doesn't want to try to spend it. I call BS and urge people to think very carefully before voting on these measures.

The "rich" and "business" are two convenient "whipping people" for those who like to engage in "class warfare". However, the "rich" won't all be paying these taxes. The ordinary citizen of Oregon will end up paying these taxes in the form of higher prices and diminished services. In addition, both businesses and individuals/couples that are mobile will simply pick up and cross the river as soon as possible. I know that we will.

Oregon no longer owns the patent on "psychic income". I don't feel richer because I live in Oregon. It used to be that Oregon sold itself as the land of milk and honey. Now, I'm afraid, Oregon's reputation is simply the land of a cowardly government that uses emotional blackmail to try to get citizens to do the dirty work that the Legislature and Governor refuse to do. It is always easy to vote for taxes that affect someone else. But believe me, these taxes will come back to haunt everyone if they pass.

I know this entry will piss off many of my friends and colleagues still working in the public sector. I'm sorry that you feel that way. But just remember that there is no such thing as a free lunch.

Note: added 1/12/10. For those of you who may want to take advantage of the special deal to convert traditional IRAs to a Roth IRA, expect the conversion to come under the M66 effects. Just another bite from retirement savings. Major bummer.


21 comments:

TruthSeeker said...

Does your position on these measures have anything to do with the tax bracket you and your wife are in? Just wondering.

mrfearless47 said...

To answer your question, I will be affected by both M66 and M67 as a taxpayer and as a small business. I will lay off one of my student employees if my taxes go up nearly $12,000 as my accountant has calculated under the joint effects of M66 and M67. If the measures were temporary instead of permanent and not retroactive, I wouldn't have any trouble supporting them. I guarantee that if they pass, my wife and I will move out of Oregon as soon as she is eligible to retire.

Jackie said...

Wow, you're retired and still your income is over 250k?

Good for you.

TruthSeeker said...

My wife and I moved from Oregon because we saw the tax burden being carried by individuals while the businesses and corporations were making out like bandits.I do agree the the "kicker" is the most mindless and arcane tax policy I have ever dealt with. Again, it was the businesses and Corporations who reaped the the king sized benefit from the kicker. IMHO

mrfearless47 said...

I am retired and OUR income is over the magic threshhold. My wife is still working until the end of 2011. My income is high, but not that high, and I still do a lot of consulting.

mrfearless47 said...

For an even better analysis of these measures, see tax lawyer Jack Bogdanski's analysis on M67 (today)
http://bojack.org/2010/01/who_ya_taxin.html, and his take on M66 here (http://bojack.org/2009/10/get_your_kicks_on_measure_66.html )

tessydave said...

If the tax measures don't pass, how will PERS meet their pension commitments? I understand that PERS already has huge shortfalls and needs these tax dollars.

mrfearless47 said...

PERS doesn't get a dime of the tax increases. The need for money is for agency budgets. The money for existing retirees is already in the OPERF. None of this money is for existing retirees. The shortfall for PERS is a paper shortfall, not a real dollar shortfall. The unfunded actuarial liability, which is what has increased, is the liability that exists IF EVERYONE CURRENTLY WORKING WERE SUDDENLY TO RETIRE AND SEEK THEIR BENEFITS. Since that is both theoretically as well as practically impossible, the "shortfall" is simply what would happen if everything in the universe remained the same. Since the markets ebb and flow and employer rates rise and fall, there isn't much to be concerned about with PERS.

TruthSeeker said...

Tessydave's post really shines the spotlight on a widespread myth in Oregon...that PERS retirees are being funded through taxes paid by working stiffs. Much of the (misplaced) public resentment re: PERS Retirees is fueled by this misconception. Thanks again, Marc, for clarifying.

mrfearless47 said...

Let me clarify something for those confused about my complaints. I could care less about the $150 increase to the Oregon minimum corporate tax. It should be increase IF it were based on profits, not gross receipts. I won't be subject to the effects of M67 directly, but the effects of M66 will sabotage our family in noxious ways. Between my PERS pension, my wife's income, and my consulting business, the way M66 is structured, we will see tax increases of near $9000. You can do the math yourself and decide whether you feel sorry for me or not. That isn't my point either. My point is that these taxes are permanent increases, they are retroactive to 2009, and they make it likely that the person I employ to help me with my consulting will be unemployed because the additional $9000 in taxes doesn't make it worth it to me to have someone helping me. So explain again how this will help the Oregon economy. I give with one hand and take away with the other. And, we will give serious thought to making our residence in southwest WA when my wife retires in 2011. The state loses all the way around.

cantseepast2004 said...

Mr. Fearless,

I can't tell you how much I appreciate the work and advice you have provided to PERS members over the years. Thank you very much.

That said, I have a hard time understanding how you can get so worked up over Measure 66 (moving out of state, for goodness sake!) and at the same time maintain such a critical view of those who see some equity issues in the distribution of PERS benefits over the years. Both Measures 66 and 67 have impacts that might seem a bit unfair and awkward at the margins, but they also reflect the political (and legislative) realities of the moment. The question at hand isn't whether a better package might have been presented. It's whether to oppose the measures because of those inequities and, in effect, balance the budget on the backs of public services users. Easy for me, I suppose: I don't run a business and, much as I'd love to, I don't find myself in a tax bracket that would be affected.

Still, it seems inconsistent to get so riled about the tax measures for fairness reasons and then to turn around take such a hard line with those who see inequities in the way PERS has functioned over the last couple of decades. I certainly don't have a beef with PERS (I plan to be a PERS retiree myself in the next few years), but the variability in PERS benefits over the last two decades, all things being equal, has been striking. Those of us lucky enough to have the "90's sweet spot" in our thirty-year careers come out well by any comparison. That's not to say we consider it unfair to us as individuals: We work and plan based on certain assumptions and promises. We feel we have earned our retirements. But what about the variability over time? I know PERS will treat me better in real dollars than it did my mother, a teacher who retired under PERS in 1979, and I'm fairly certain that I'll be better treated than most of my younger co-workers who joined the system under less favorable conditions. It just seems to me that any perceived inequities in Measure 66 and 67 pale by comparison to the differences we've seen between the current generation's retirement benefits and those of the past and, probably, future retirees.

They don't say anything to me, but I can see how my mother and my co-workers might perceive some inequities in my fortunes vs. theirs. I think they're realistic enough to understand that inequity and unfairness are not that unusual in the world, and that while we should work to get rid of them, we should also do our best to do what's right in spite of the problems.

Again, thanks for all you do with this blog and keeping us informed on PERS matters.

mrfearless47 said...

CantSee:

Two comments: I don't believe for a minute that these two measures represent "legislative realities". They represent nothing more than what was convenient for the legislature without having to stay in Salem longer. The "kicker" is the first place I would have looked.

Second, you accuse me, in effect, of overreacting to M66 and M67. Call it what you will, but I hardly think it is overreacting to call a spade a spade. This is the FIRST time my wife and I have "turned traitor" as you imply. We have been willing to reach deep into our pocketbooks every time one of these elections come along. We've paid at the office dozens of times for measures that kept both of us employed. But when a tax measure comes along that is so bad, so filled with potholes and will have such negative affects on us and everyone we know, all the businesses we try to trade with, etc, it is time to say "no". I never said my view would be popular, but I don't believe for a minute that the Legislature won't come up with something in its special session. If not, then they have chosen to let the people see the dark side of the abyss, which may be the necessary prelude to real tax reform in this state.

I appreciate your willingness to challenge my point of view. I expected more negative posts than I got, but I can live with what people have said.

mrf

sellinmystuffinpdx said...

All that you say - about emotional blackmail, a cowardly government, and a counterproductive way to try and pay for all the things that we must pay for - is true. However, as someone working in human services, I'm STILL gonna have to vote for the damn bills, because I wouldn't put it past those fuckers in Salem to go ahead and cut services to vulnerable people if the bills fail. They won't take the political risk involved in proposing, for example, that we stop getting the kicker. It would be better for their careers to simply let the system fail and then say "See, told you so, vote yes on tax increases next time".
And if the services are cut, we'll end up paying more anyway, because the people who are currently in group homes are going to get care from SOMEWHERE - and if group homes can no longer do the job, it'll be emergency rooms and prisons, which are far more expensive to taxpayers. I'm sure you're right, I'm sure the legislators COULD come up with a better solution. But I can't afford to gamble on the assumption that they WILL.
God, I hate politicians. Oh, how I hate them. I hate that between the pro- and anti- lobbies, they've spent over $8 million on trying to convince us how to vote - $8 million which could have just been put towards fixing the budget shortfall. I hate that instead of having the balls to make the hard choice themselves, they put it on the ballot. I hate that they didn't even try to come up with a real solution. And I hate most of all how they pretend to be on my side. But I'm still gonna have to play along with them, the bastards, because they're holding people I care about for ransom every time they threaten to cut services. I can't afford to call their bluff - what if this time they pull the trigger?

mrfearless47 said...

I agree. I totally wish I didn't have to take a stand on this issue. The legislature didn't actually put these on the ballot. Freedom Works and Oregon Taxpayers United challenged the measures and sought a referendum. So they too should share the blame for all the campaigning on this. That said, had the legislature gone for temporary tax increases with a real sunset clause, a promise to look at alternative measures, put the kicker up for grabs, we would have voted for this and sucked up the cost as part of citizenship. But when the Oregon Legislature ALWAYS takes the easy way out because they are too worried about losing an (unpaid) legislative position. If they had the courage to make the hard choices like eliminating the "kicker" and making the individual tax increases temporary, and the business taxes on net profits, not gross receipts, they still would have been challenged. BUT - and this is important - they would have had strong support for their willingness to do the courageous thing and I suspect any measures they voted out of the legislature would have prevailed at the ballot boxes. Nobody (least of all me) wants to service cuts, but I simply cannot afford to succumb to this kind of emotional blackmail any more. If if takes a year or two of staring into the abyss and a few more Doonesbury jokes, then perhaps the Legislature will get the message and the people will understand that tax reform is absolutely necessary, no longer option, no longer avoidable. I can look at myself in the mirror even after saying "NO" to both measures, although I have to confess that it was an uncomfortable feeling.

But, I think that the Legislature has cried "wolf" one too many times when it wasn't necessary. Ask how much is in the kicker fund for distribution at the end of 2010? Think about $1 billion. How would that shore up the budget? Are cuts really needed? No, but it requires a legislature with a spine of steel and brass cojones, neither of which they seem to have. Perhaps a strong defeat this time will send a resounding message. I certainly am hoping so.

But if M66 and M67 pass, we will suck it up for the next two years until my wife retires. Then we'll be looking at Camas, WA for our next residence.

ezistreet said...

You wouldn't have to go through this lengthy defense if you would only change your name, you know to something like McRepublican. Just saying.

mrfearless47 said...

ezistreet: that's the problem. I ain't no Republican. Nowhere near close. But the Dems don't seem to represent me either. Indy is probably the closest I come. And I think if these measures pass, Oregon will be a bigtime loser in the long run. Short term, they will probably be OK, but in the long term, they will be eating their seed corn.

Marilyn said...

There's always Camas

sellinmystuffinpdx said...

Well, they passed. I kinda wish they hadn't, even though I voted for 'em. Ideal scenario would have been, as you said, for the measures to fail and the legislature to be forced to come up with something better... but I had no faith that they'd actually try if the measures failed.
My side won, and I'm sorry.

dcpcreations said...

If I did my math right, you and your wife will make around $750,000/year to be hit with $9000 in additional taxes from Measure 66. I don't feel bad about raising your taxes one bit. The only reason you'd need to lay off one of your student workers is because you don't have work for them to do, or you can't survive on $741,000/year (well, take taxes out of that, of course). Does it not sound absurd when you take into account how much you really make and, how poor those struggling to get by really are?

mrfearless47 said...

dpcreations: Your math is way wrong. We don't make near that much. You are failing to account for elements of M66 that are like ticking time bombs. We made a one-time conversion of several regular IRAs during 2009 even before M66 was before the Legislature. We will be getting brutally hit because we expected to be paying 9% instead of 11% on that conversion. Likewise, we lose all of our federal tax payment deduction, which raises our taxes significantly. Similarly, my consulting income will not be sufficient to afford continuing an employee in the slow economy with the added burden of these taxes.

Just by way of correction, I'd say your estimate of our income is off by at least 50%

dcpcreations said...

Thanks for the corrections. I'm sure you know this, but might as well keep this comment string going...

Your IRA --> Roth conversions can be allocated across multiple years, if that's what's bumping you up over the magic $250K. Reduce the hit a bit. Or you can recharacterize the conversion back to a traditional IRA. A pain if you comingled the funds with an existing Roth, but still possible.

I still consider those making more than $250K to have plenty of disposable income. As do I at far less than that.