Big tax hike in Oregon results in substantially less revenue

Last year, voters in Oregon voted to raise taxes on the highest income earners in the state, giving Oregon the highest tax rates of any state in the nation. It hasn't worked out too well for Oregonians, according to the Wall Street Journal:

In 2009 the state legislature raised the tax rate to 10.8% on joint-filer income of between $250,000 and $500,000, and to 11% on income above $500,000. Only New York City’s rate is higher. Oregon’s liberal voters ratified the tax increase on individuals and another on businesses in January of this year, no doubt feeling good about their “shared sacrifice.”

Congratulations. Instead of $180 million collected last year from the new tax, the state received $130 million. The Eugene Register-Guard newspaper reports that after the tax was raised “income tax and other revenue collections began plunging so steeply that any gains from the two measures seemed trivial.”

One reason revenues are so low is that about one-quarter of the rich tax filers seem to have gone missing. The state expected 38,000 Oregonians to pay the higher tax, but only 28,000 did.

What's more, the decline in revenues might actually end up being much worse than the $50 million drop would suggest:

The tax wasn't enacted into law until June 2009 but was retroactively applied to January 1, 2009. So for the first half of the year wealthy Oregon residents weren't able to take steps to avoid the tax ambush because they didn't see it coming. This suggests that a bigger revenue loss from tax mitigation strategies will show up on tax return data in 2010 and 2011. The Revenue Office has already downwardly revised tax collection projections for the first three years by one-third.

Funny how people like to pay taxes with their feet. The state has long had a fairly hostile business climate, but Oregon's relatively cheap cost of living (no sales tax) and status as a magnet for ski bums and other outdoor enthusiasts means that state has attracted a lot of new residents in the last few decades without a good way to earn a living. (I am from Oregon and my father owns a decent-sized company in Bend, where the unemployment rate topped 15 percent last year.) And then the recession hit the state hard. So a tax increase on the rich campaigned for by unions and fueled by class warfare seemed like a good idea politically, and indeed, Oregon is one of the few places recently where voters actually approved a large tax increase.

Liberals are often quick to point out that claims by supply-siders that tax cuts increase revenue aren't always sound. However, it should also be noted that tax increases don't always increase revenue either. The Journal also notes that this should be no surprise. When Maryland recently enacted a big millionaire tax about a third of the states highest income earners moved away.

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