Governor proposes large tax boost.

Byline: DAVID STEVES The Register-Guard

CORRECTION (ran 5/30/02): A front page story about Gov. John Kitzhaber's proposal to increase state income taxes temporarily contained an error. A 1 percentage point increase for all tax brackets and corporate taxpayers would generate close to $700 million a year; a half-percentage point increase would raise about $350 million, according to the Legislative Revenue Office.

Gov. John Kitzhaber responded swiftly to Tuesday's forecast that the state budget was about $900 million in the red.

Speaking in Eugene, he called for a September ballot measure to temporarily boost income taxes, a legislative increase in cigarette taxes, and other steps to rebalance the budget without any program cuts.

The governor also said he wanted a measure on the November ballot similar to last week's Measure 13, the rainy-day fund proposal he helped defeat. Kitzhaber's plan calls for the conversion of the lottery-funded Education Endowment into a rainy-day fund, but voter approval would not automatically tap the fund, as Measure 13 would have.

In his noon speech to the Eugene Rotary Club, Kitzhaber said the glum news in Tuesday's economic forecast prompted him to take up the question of a broad boost in income taxes, rather than repeat his earlier failed proposals to raise money through higher "sin taxes" for smokers and drinkers.

"The magnitude of our budget problem has outrun the kind of solutions we have debated in the first two special sessions. It is time for us to move beyond partisanship and ideology to do what is right for Oregon," the Democratic governor said.

In its two special sessions in February and March, the Republican-controlled Legislature rejected Kitzhaber's call for a "pay-as-you-go" approach of permanent revenue sources and spending cuts, instead filling an $845 million budget hole with roughly equal amounts of program cuts and one-time revenues from trust funds and reserve accounts.

Kitzhaber said he would probably call lawmakers back to Salem some time after June 10. He said he'd intentionally left out a specific rate increase in his centerpiece income-tax plan because that would depend on how much money was needed after the Legislature took up his other proposals and its own initiatives to close the budget gap.

A 1 percent increase in all three brackets and for corporate taxpayers would generate close to $700 million a year; a half-percent boost would produce about $335 million, according to the Legislative Revenue Office.

Kitzhaber said the increase should cover the 2002, 2003 and 2004 tax years, after which rates would return to 5 percent, 7 percent and 9 percent, depending on income levels.

Combined with his other revenue proposals and the Legislature's earlier $452 million in cuts that he approved, the tax increase would wipe out any budget shortfall for the 2003 Legislature and the next governor, who will take office in January. Such a move would give them a chance to make long-term decisions about spending priorities and the state's income tax-dependent tax structure.

The debate over a temporary income-tax increase could shape up as a question of what's best for education, or what's best for Oregon's economic recovery.

With education taking up $6 out of every $10 from the state general fund, Kitzhaber said he saw a voter referral on higher income taxes as an opportunity to gauge public support for schools.

"This will be a referendum on education," he told reporters. "And if Oregonians don't want to pay for their schools, there's nothing anyone can do about it. But I believe they do."

A member of his Eugene Rotary Club audience, Todd Taylor, said he couldn't support a tax increase at a time when businesses such as his are struggling to rebound from a recession that's been holding back Oregon's economy for more than a year.

"When he says I'm going to have to hit you up for an income-tax increase, that means less money is going into my businesses and out into the local economy," said Taylor, who owns his own insurance business.

Matt Evans, executive director of Oregon Tax Research, said the lesson of the early 1980s, when Republican Gov. Vic Atiyeh and a Democratic-controlled Legislature temporarily increased income taxes, is that such a move will hurt Oregon's economy.

"The governor's plan seems specifically designed to lengthen and deepen Oregon's recession," said Evans, whose pro-business group typically supports cutting spending and taxes.

State Rep. Lane Shetterly, R-Dallas, said he was willing to consider just about any of the governor's proposals, even an income-tax increase. But he said it would be a tough sell for Kitzhaber unless he could first demonstrate the public's willingness to go along with such a boost. "I'd guess that there's not a high degree of receptivity to an income-tax increase right now," Shetterly said, "and I'm doubtful that a case for one can be made in a three-month campaign."

Shetterly said that lawmakers were likely to once again consider one-time money to close a large portion of the shortfall, despite the governor's criticism of "borrow-and-spend" solutions that postpone, rather than resolve the state's fiscal problems.

"The bottom line is, in case anybody hasn't noticed, we are in dire straits and this is not a time to be pristine in selecting our options," he said.

Democratic lawmakers appeared more willing to go along with Kitzhaber's proposal. Reps. Phil Barnhart and Bob Ackerman, both Eugene Democrats, said they would work for passage of Kitzhaber's package as a way to protect education and other state-funded services from further cuts.

"You have to pay for what you really want. Now, if what we want are kids who are educated and a work force that is trained so it can get the economy moving, then we have to be willing to pay the tab," Barnhart said.

Overall, general fund revenue has dropped from $11.4 billion to $10.1 billion since the 2001 Legislature adopted the budget last July. Counting lottery income, the budget totals about $10.8 billion.

In his budget forecast issued Tuesday morning, State Economist Tom Potiowsky did sound some brighter notes, saying the recession ``is bottoming out right now'' in Oregon and that the state economy should be turning around over the next six months.

The Oregon economy is expected to grow somewhat faster than the national rate in 2003 and 2004, Potiowsky said in his quarterly economic report.

He said the state's lagging industry leader, high technology, is expected to rebound. ``We think there's definitely going to be a revival in that sector,'' he said.

The Associated Press contributed to this report.

GOVERNOR'S PLAN

Gov. John Kitzhaber's plan would:

Ask voters in September to approve a temporary increase in the income tax for three years.

Use $80 million of one-time money from Oregon's share of the national tobacco settlement.

Revise Oregon tax code to delay or eliminate the $124 million revenue loss from the federal economic stimulus package.

Raise the cigarette tax by 50 cents a pack to generate $80 million to $90 million.

Refer to the November ballot the creation of a rainy-day fund for education. It would leave the money in the fund for future use.

BUDGET SHORTFALL

Here are the numbers behind state officials' estimate that the state's $11.2 billion general fund for 2001-03 is out of balance by about $880 million.

Revenue shortfall: $551 million

Voter rejection of Measure 13: $220 million

Replenishing depleted ending balance: $76 million

Growing social-service caseloads: $33 million

CAPTION(S):

THOMAS BOYD / The Register-Guard Gov. Kitzhaber addresses the budget shortfall at a luncheon in Eugene.