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Since 1997, Oregon's per person income has fallen to 91% of the U.S. average. Lower incomes means fewer dollars in people's pockets and fewer tax dollars paying for services like public education. In 2008 this trend was compounded by the worst recession Oregon has experienced in decades. Economists predict that recovery from the recession will take years.
At the same time, an aging population, healthcare cost inflation, ballot measure mandated spending on prisons, the legacy costs of a poorly designed pension system, and other factors are sucking more of our limited tax dollars, leaving less for public education-a key ingredient for future prosperity.
This downward spiral, which we call " The Circle of Scarcity," threatens the quality of life that we cherish in Oregon.
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The Circle of Prosperity: How It's Supposed to Work
The Circle of Prosperity illustrates how a strong private sector economy and quality public services go hand in hand. In good times, a healthy economy drives higher incomes and lower poverty, generating tax revenue for public services while at the same time reducing the demand for them. This allows citizens to enjoy quality public services at reasonable tax rates.
Unfortunately, Oregon has fallen off of the "Circle of Prosperity" and into a "Circle of Scarcity."
A long-term slide in incomes relative to the nation, combined with the job losses of a devastating recession have left our public budgets structuraly out of balance for at least the next decade. Meanwhile, Oregon voters continue to pass ballot measures mandating increased spending on prisons, health care costs keep rising, our population is rapidly aging, and we are forced to deal with the legacy costs of a poorly designed pension system. All of these factors are eating away at the limited tax dollars that we have available to invest in public services like education. Since education is a key ingredient for growing jobs and incomes in the future, Oregon is trapped in a vicious cycle that Governor John Kitzhaber aptly named a "death spiral."
Getting out of the "Circle of Scarcity" and back to the "Circle of Prosperity" is the most pressing challenge facing Oregon's business, elected and community leaders. Click on the graph to enlarge the image.
Issue #1: Oregonians' Personal Income Has Fallen Off of the U.S. Pace
After peaking at 102% of the national average in 1976 during the height of Oregon’s timber economy, Oregon's personal income levels tumbled compared to the rest of the nation during the 1980s. The 1980's were a particularly hard time for Oregon as a national housing recession, foreign competition, automation and eventually the spotted owl crisis took a major toll on employment in Oregon's forest products industry.
During the 1990s, incomes soared in the Portland Metro area, driven by rapid growth in the "Silicon Forest." Rural incomes never recovered from the devastating loss of timber harvests, but growth in the Metro area was enough to give the state an impressive run up until 1997.
Since 1997, Oregon personal income levels have tumbled to 91% of the U.S. average, far below the State of Washington at 106%. Our rural economies are still stuck in the same rut they've been in since the 1980s. The new phenomenon is that the Portland region is performing very poorly compared to other metropolitan areas around the nation. In fact, Portland Metro area incomes lag significantly behind Denver, Minneapolis, Seattle, Austin and just about every other metropolitan area that Portland considers its "peers." The decline of metro area incomes compared to the rest of the nation has been well documented in a recent report by Oregon's leading business associations. The report can be found at www.valueofjobs.com.
Click on the graph to enlarge the image
Issue #2: Declining Personal Income Means Fewer Services for Oregonians
Because personal income has declined to ninety-one percent of the national average, Oregon state and local governments have fewer tax dollars to invest in public services.
The adjacent graph compares state and local revenue per capita in Oregon with Washington and the national average.
Click on the graph to enlarge the image.
Issue # 3: Oregonians Have Selected a "Price of Government"
A simple response to this problem might be to raise taxes in order to make up for our low personal income levels. Unfortunately that won't work for two reasons. The first is that raising taxes to the degree that we would need to in order to bring our public spending in line with other states would have devastating effects on economic growth. The second is more practical: Oregonians have decided that they don't want to pay more in taxes and fees. For the past thirty years, Oregonians have devoted a constant share of their personal income to the government for public services. When taxes or fees go up in one area, they come down in another. In essence, Oregonians-consciously or not-have selected a "price of government" and they don't veer from it.
In the chart on above, the top line shows that total state and local government revenue has been consistent at about 16% of total personal income. The bottom line shows the state general fund revenue has been consistent at 5% of personal income.
The Price of Government phenomenon, and its implications for public budgeting and the provision of public services, has been well-documented not just in Oregon but around the country by David Osborne in his book: The Price of Government. Getting the Results We Need in an Age of Permanent Fiscal Crisis.
This series of charts makes the point that Oregon has less ability than other places to pay for public services like quality education because our personal income levels are lower. Responding to the problem with tax and fee increases is innefective over time because Oregonians, conscously or not, will only pay a fixed share of their personal income for government services. Therefore, the best way to support public services is with more robust job and income growth.
Click on the graph to enlarge the image.
Issue #4: If Some Costs Rise Faster than Personal Income, Others Must Decline
Over ninety percent of the state General Fund goes to three areas: education, public safety and health/human services. To put it bluntly, Oregon income taxes pay to educate, medicate and incarcerate Oregonians.
We already know that Oregon has fewer dollars than other states to pay for these public services. But the cost of some services is rising much more rapidly than others. In Oregon, we are spending more and more of our public dollars on health/human services (specifically: Medicaid -healthcare for children, the poor, and the disabled) and public safety (specifically: prisons), while shrinking our investments in education.
As this other chart shows, over the last decade the growth in spending on human services averaged 5.9% annually, public safety 4.8% annually, K-12 education 2.9% annually, and higher education/community colleges about 1% annually, despite significant growth in higher education enrollment. Because educational attainment is closely tied to income levels, this squeezing out of education will likely lead to further erosion of personal incomes in Oregon.
Issue #5: The Trends Worsen Over the Next Decade
The costs for Medicaid will continue to rise rapidly over the next decade.
Recent declines in the stock market present another challenge for the coming years: a significant burden on taxpayers to cover commitments to public employee retirement accounts.
Together, these two expenses will
eat up an additional 1.1% of total personal income in Oregon by 2018 (for a total of 2.3%). Remember, for the past 30 years the entire state general fund has equalled 5% of total personal income. These escalating costs have to be paid for by something. In Oregon, if we follow recent trends, we will pay for these growing costs by investing less in education, and particularly higher education. This could have the devastating effect of further driving down personal income levels, because education, employment and income levels are closely tied.
On reason for the growth of Medicaid costs is the aging population. Over the coming years, there will be far fewer working-age adults to help pay for the services that the elderly population requires. To make matters worse, the baby boomer population leaving the workforce is significantly better educated than the incoming 25-34 year workforce.
We also face significant demographic challenges with our population of kids entering school. One out of every five kids under the age of five lives in poverty, and one out of four have no English speaking parent.
Issue #6: Job Losses Are Severe and Economists Predict a Slow Recovery
The impact of the current recession is the deepest Oregon has seen since the Great Depression, exacerbating the trends described above.
Economists predict a long and slow recovery. This downturn will require action and leadership from across the private and public sector.
The adjacent graph depicts the changes in Oregon's employment trends for the last 4 recessions. Click to enlarge the image.
Issue #7: Oregon's Tax System Remains Unstable and Unbalanced
While Oregon's overall tax burden is below the national average when expressed as a share of personal income, Oregon relies more on income taxes than any other state.
Income and capital gains taxes are the most volatile of all taxes and they discourage high wage earners from locating and investing in Oregon.
Oregon has an inadequate rainy day fund to balance against the volatility of our tax system, and the passage of Measure 66 is exacerbating the problem. To improve stability of revenues and incentives for economic growth, Oregon needs to reduce its high income/capital gains taxes and introduce more consumption taxes. It also must expand the size of its rainy day fund and commit to a permanent mechanism for filling it, such as the kicker.
A Decade of Deficits
All of these challenges add up to a decade of budget deficits if we continue to do business as usual. Note: This chart is outdated. The latest projections show a deficit of roughly $3-3.5 billion per biennium for the next decade.
Two Possible Possible Paths Moving Forward
Moving Oregon out of the "Circle of Scarcity" and in to the "Circle of Prosperity" will require a new attitude and a new approach from Oregon's leaders, both in the public and private sectors. If we get stuck in our old way of thinking, Oregon is destined for continued struggles.
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- Focus on high wage job creation as the best source of revenue for families and public services.
- Redesign the way we budget for and deliver state services to get better value for the limited dollars we have.
- Revamp the tax system to provide more stable revenues and better incentives for economic growth.
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Action #1: Grow Jobs and Income
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If Oregon returned to the level of per capita income relative to the U.S. that it had in 1997, the budget deficit would be nearly erased.
How do we create jobs and income?
Action #2: Redesign The Way We Budget For and Deliver State Services
Without a new way of budgeting and a process to identify and implement measures to achieve better value in state government, Oregon is doomed for the fiscal path described above. Absent major policy changes, poor economic performance combined with ballooning costs for Medicaid and prisons will continue to eat away at our investments in education.
Identifying those policy changes that have the most impact will require a "continuous improvement" budgeting process where Oregon changes how it develops, deliberates, and determines its budgets. The budgeting process must be long-term, transparent, and dynamic (incorporating demographic projections, economic performance, etc.). It must be geared toward outcomes for recipients of state services, rather than simply funding agencies at particular levels. Essentially, the question the budget should ask is: Given the limited dollars we have, what outcomes do we want and what is the best allocation of resources to achieve them? This is different than the current question, which is essentially "how much did this agency have last year, and how would we tweak at the margins if there is more or less revenue next year?"
A new budget model will allow Oregon policymakers to continously improve the delivery of state services and set the priorities of government. This will require tough choices and innovative solutions, including opening up existing funding formulas and mandates to address perverse incentives.
Some of these solutions have already been identified through the Governor's "reset" committee and report. We encourage you to review those materials, and the Governor's speech on this issue, here.
Action #3: Adjust the Tax System Fro
m Tweaks to Overhauls
The most significant way to improve the quality of life of Oregon families is to get better at creating high wage jobs. Redesign our budgeting process and service delivery is critical to get through the "decade of deficits" with key services in tact. A third element remains critical to both economic growth and quality public services: Tax reform.
We should work toward consensus on broad tax overhaul including the introduction of consumption taxes to offset needed reductions in income taxes. In the meantime, there are things we can do right away to make the system better for high wage job growth, such as:
- Building a robust rainy day fund, looking at all possible sources including ending balances and the kicker.
- Selectively reducing capital gains taxes to disrupt the economic distortions caused by Oregon's nation-leading capital gains tax rate. Given its proximity to Washington, a state which has no capital gains or income taxes, the "wealth effect" keeps people out of Oregon to begin with and draws them across the river when they make major investment decisions.
- Modifying Oregon's new gross receipts tax to make it more fair for high sales, low margin companies.
- Reviewing tax incentives and extending those that incent high wage job growth (i.e. the R&D tax credit).
Review and Comment on Our Initiatives
For more detailed information about our ideas to create jobs and revamp Oregon's system of public finance and budgeting, review and comment on our Initiatives. While we have identified major areas of opportunity, we are seeking input on what actions Oregon can and should take in the near term to make progress.