Measures would curb state spending.

Byline: David Steves The Register-Guard

ELECTION 2006

CORRECTION (ran 10/27/2006): Associated Oregon Industries does not support Measure 41, a statewide ballot measure that would increase the deductions that taxpayers can claim on their state income tax returns. An article on Page A1 on Saturday did not accurately describe AOI's position.

SALEM - Measure 41 is a double-edged sword. It would cut the state income tax bills of four out of five Oregon filers. It also would take a big slice out of the state government revenue meant to provide services to 100 percent of the state.

So Measure 41 could prove a difficult choice for voters, who this weekend are receiving their ballots for the Nov. 7 election. Voters will have to decide if a modest tax cut - the average would be $226 - for themselves and most of their neighbors is worth the effects of a $400 million a year hit to the Oregon general fund, which pays for education, health care and public safety.

Unlike past tax-cutting measures, this one doesn't easily lend itself to charges that it's a radical departure from Oregon's traditional tax system, that it's unfair to poor or working-class people or that it's a huge giveaway to corporations or the rich.

Measure 41 would restore to Oregon's income tax code a method of accounting for dependents that was on the books for a half-century until the Legislature did away with it in an attempt to raise tax revenue in 1983.

The measure would bring the state's approach in line with the federal income-tax code. About 78 percent of income-tax filers would see their taxes drop. And since filers could still opt to fill out their tax returns under the current system if it's advantageous to them, no one would see their taxes increase as a result of the measure.

Advocates tout Measure 41 as the "family tax cut."

The cut would be "spread widely, and a higher percentage of the cut would go to lower and middle income families," said Bill Sizemore, who authored Measure 41 but leaves it to Washington, D.C.-based FreedomWorks to run the campaign in Oregon. Most of the money spent on signature gathering came from Nevada millionaire and Oregon business owner Loren Parks.

Public-policy analyst Chuck Sheketoff, whose think-tank has criticized Measure 41, acknowledged that the measure won't strike most voters at first glance as a giveaway for the rich - a charge used in campaigns to defeat earlier tax-cutting initiatives.

"It's not regressive, like past Sizemore measures have been," said Sheketoff, executive director of the Silverton-based Oregon Center for Public Policy. But Sheketoff likened the initiative to fool's gold.

"At first glance, it may look good. But once you really look at it in the light of day, it's not worth much," he said.

Further, the measure would not cut taxes for everyone, leaving some groups such as seniors largely without a benefit, Sheketoff said.

In the current two-year budget cycle, the Measure 41 tax cut would all come from the revenue that the state could not spend anyway because they'd otherwise be rebated through the "kicker" system that returns to voters tax dollars that exceeded the official revenue forecast by 2 percent or more.

The measure would start to be felt in 2007-09 biennium, when it would drive revenue down by a projected $800 million, or 6 percent, out of the projected $13.8 billion general fund.

"To continue all the current services we have, we wouldn't be able to do that with the revenue loss from Measure 41," said Ken Rocco, director of the nonpartisan Legislative Fiscal Office. "Without any additional revenue, we'd have to reduce programs."

Ninety percent of the state general fund budget goes to health care, education and public safety. The Legislature would have to make any cuts.

Savings vs. services

Rep. Phil Barnhart, D-Eugene, said voters will have to ask themselves if a tax break is worth the price in public services.

"In theory, a particular tax cut might be a great thing, but the actual effect of it is that it would impair the state's ability to pay for basic services," he said.

Critics have said the state can't afford to give up that much revenue, especially as it continues to restore services to their levels before the economic recession earlier this decade that drained about a quarter of the state's revenue.

Russ Walker, a chief petitioner of Measure 41 and the Oregon director of FreedomWorks, scoffed at this criticism.

His measure's backers include state and national anti-tax organizations and individuals. Representatives of Taxpayers Association of Oregon, FreedomWorks, and Parks combined to submit six arguments to the state voters pamphlet on behalf of the measure. Other supporters include GOP gubernatorial candidate Ron Saxton and the political action committee of Associated Oregon Industries, the state's biggest business trade group.

Opposition arguments in the voters pamphlet came from more than three dozen groups and individuals, including the public university presidents, public-employee and private trade unions, law enforcement, Intel, Hewlett-Packard, the Oregon PTA, a pair of business groups, and Gov. Ted Kulongoski and U.S. Sen. Ron Wyden, both Democrats.

How tax code would change

Here's how the Oregon tax code works: Filers don't get a deduction based on the number of people in the household. Instead, they take an inflation-adjusted exemption credit against their taxes owed - currently it's $159 per person - for themselves, spouses and dependent children. A family of four gets a credit totaling $636.

Under Measure 41, filers could choose between the credit method or the same exemption deduction as offered on the federal tax form. In the 2005 tax year, that was a $3,200 deduction per exemption. A family of two adults and two dependent children would receive deductions totaling $12,800, which they would use to reduce their taxable income. For most Oregon filers, the new deductions would be worth more than the existing credits.

The state Legislative Revenue Office estimates that the measure would give a family of four with an income of $65,000 a tax cut of $564.

According to the nonpartisan Legislative Revenue Office, filers with an income of less than $20,000 would experience an average reduction in tax of 24 percent under Measure 41, while those with income of at least $70,000 would get a tax cut of 4 percent, on average.

The Legislature in 1983 did away with deductions and replaced them with tax credits in order to increase tax revenue for the state, Legislative Revenue Officer Paul Warner said. At that time, the Legislature was grappling with a severe budget-wrecking recession.

Measure 41 would cut the state's income-tax revenue by 7 percent, with nearly four out of every five filers benefiting from a lower tax bill.

Who are the one out of five filers who wouldn't get a tax cut under Measure 41? According to the Legislative Revenue Office, they are:

Children who work and file taxes but are claimed as dependents by their parents.

People with so little money that they have no taxable income - and therefore can't take advantage of the deduction.

High-income filers who can't benefit from the deduction because it is phased out as income rises. For joint filers with income around $235,000 or more, the deduction is cut until it is eventually eliminated around $357,000.

In addition, single filers would get less benefit than joint filers, since the average single filer has only 0.9 personal exemptions, compared with three for the typical joint filer.

That's one reason AARP of Oregon opposes Measure 41. It argues in the voter's pamphlet that 98 percent of seniors will get no tax relief.

"Instead, they may lose prescription drug coverage and access to valuable programs like Oregon Project Independence that keep seniors in their home," AARP Oregon director Jerry Cohen argued.

Walker, the measure advocate, acknowledged the tax benefit isn't great for seniors. But he said their cost of living is lower than for families, since they're not paying for child-rearing expenses.

"Families need help. That's one of the reasons we call it the Family Tax Cut," he said.

MEASURE 41 Ballot title: Allows state income tax deduction equal to federal exemptions deduction and to substitute for state exemption credit Summary: Allows four out of five filers to take a bigger state tax deduction than currently available for themselves, spouses and dependents. Average annual tax reduction per filer: $226 Fiscal impact: State revenue would be reduced $151 million for 2006-07 and $385 million in the 2007-08 fiscal year. Measure 41 would reduce the 2007 personal income tax `kicker' by $151 million. The measure would reduce state revenue $407 million for the 2008-09 fiscal year and $430 million for 2009-10. Supporters: FreedomWorks; www.cse.org/oregon; [phone] Opponents: Defend Oregon; www.defendoregon.org; [phone]

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