A two-gear tax system.

Byline: The Register-Guard

Oregon's income tax is in high gear, generating an estimated $1.3 billion more than predicted at the start of the biennium. But eventually the economy will cool, and income tax revenues will slam into reverse. That's hard on an engine, and it's hard on the state. Yet no one competing to sit behind the steering wheel is proposing a serious remedy.

Oregon obtains the bulk of its general-fund revenue from the income tax, which is the most volatile of major taxes available to state and local governments. Oregon has compounded this volatility by adopting a two-year budget cycle, which requires that state revenues be estimated more than two years in advance. Then the state locked volatility into its tax system by mandating that whenever actual revenues exceed the estimates by more than 2 percent, the entire amount of the excess must be rebated to taxpayers.

The Legislature adopted this refund requirement, known as the kicker law, in 1979. In the 14 biennia since then, the kicker law has triggered personal income tax refunds eight times. It would have been nine of 14, but in 1989 refunds were suspended.

The Legislature made suspensions more difficult in 1995 when it voted to issue refunds as checks rather than as credits against future tax liabilities. Suspensions became even harder after 2000, when Oregon voters made the kicker law a part of the state Constitution. A candidate for state office who proposes suspending the kicker risks being accused of thwarting the voters' will and snatching checks from Oregonians' mailboxes at Christmastime.

In three of the other 14 biennia, revenues fell short of projected amounts. The most disastrous shortfall came in 2001-03, when Oregon's income-tax revenues declined faster than those of any other state. Of course, there's no reverse kicker that allows the state to collect more from taxpayers when its projections exceed actual revenues. Instead, the state must cut budgets. That's how Oregon found itself being lampooned in "Doonesbury" for having the shortest school year in the country.

The personal income tax shortfall in 2001-03 totaled $1.2 billion. That's close to the amount refunded to individuals in the four preceding biennia. Other states that rely on volatile income taxes would have banked the surpluses in the boom years, and then drawn on reserves when the economy soured. But Oregon has no meaningful rainy day fund.

The state economist reported recently that income tax revenues are surging again, and individual taxpayers can expect kicker refunds totaling more than $1 billion. Corporate income tax revenues have wildly exceeded estimates, triggering refunds of an estimated $238 million, or 61 percent. That adds up to about $1.3 billion - about enough to have smoothed the state's passage through the downturn of 2001-03.

Ominously, the state economist also reported signs of an end to the income-tax boom, with declines in housing sales and building permits. As always, the effects of the normal ups and downs of the economic cycle on income tax receipts will be amplified. In the next biennium, or the one after that, the income tax won't generate enough revenue to sustain state services. But this period's $1.3 billion will have been rebated, and another round of cutting will begin.

Given Oregon's near-total dependence on the income tax, a sensible tax policy would attempt to compensate for the volatility of revenues from this source. Revenue estimates have been within 2 percent of their targets in only two of the past 14 biennia - clearly, stable budgeting can occur only if the state builds up savings during the peaks of the cycle for use when it enters the troughs. Yet the kicker law prevents state programs ranging from education to law enforcement from being shielded from the effects of volatility.

Neither major candidate for governor has proposed banking the $1.3 billion in kicker rebates. Either, however, would be happy to have that amount in reserve if elected. They and candidates for legislative office could show leadership by proposing to suspend kicker rebates until a healthy rainy day reserve had accumulated. That's not radical tax reform, it's not even a repeal of the kicker. It's just good government mechanics: Oregon's two-gear tax system needs a clutch, so it can shift from forward to reverse and back again more smoothly.