• Eugene Weekly Loves You!
Share |

Eugene Weekly : 5.10.07

Flat Tax

Will county get rolled byproposed income tax?

BY ALAN PITTMAN

The $32.5 million Lane County income tax would tax a family struggling on food stamps at the same rate that it would charge the wealthiest millionaire in the county.

Measure 20-129 on the May 15 ballot imposes a flat 1.1 percent income tax regardless of income level.

"This is really going to hurt the working poor," Lane County Commissioner Peter Sorenson lamented, saying the tax was unfair because it wasn't based on ability to pay.

But unfairness isn't the only concern of opponents of the tax. Critics also question what the money will be spent on, whether the dire threats of cuts are exaggerated and whether the tax has much chance of passing.

FLAT TAX

The county's flat tax is different from the long tradition of progressive, graduated income taxes in the U.S. The federal income tax increases from 10 to 35 percent as income rises.

By not imposing a similarly graduated income tax, the county decided, in effect, to give a huge tax advantage to the wealthy (see chart). The wealthiest 1 percent of county residents, about 600 people with average incomes of about $776,000 a year, would pay an estimated average of about $5,700 a year less in taxes under the county's flat tax than under a graduated tax, a 73 percent tax break. The next wealthiest 4 percent would pay about $950 a year less with the flat tax. The next wealthiest 15 percent would pay about $192 less.

Under the flat tax the county has proposed, the poor and middle class would pay for a big tax advantage for the wealthy. The poorest 40 percent of taxpayers would pay an average of about $36 a year more in taxes compared to a graduated tax, a 51 percent tax increase. The middle-class 40 percent would pay $78 more on average.

County Commissioner Bill Dwyer said the county chose the flat tax to avoid well-funded opposition from the rich. With a graduated tax "we would have had a lot of people invest money in shooting it down," he said.

Commissioner Faye Stewart, a Republican timber heir, said he should be praised for his brave leadership in voting for the flat tax. "I have put myself out on the line to save the people."

Stewart said he originally thought a flat tax of $150 per person in the county would have been more fair, but he settled for the flat income tax. He said his accountant told him the rich would pay most of the total tax revenue. "I don't see the unfairness in this tax."

A flat tax has long been the holy grail of Republicans. Billionaire Steve Forbes has championed a flat tax that would cut millions off his taxes. But arguments about the fairness of the poor paying for a huge tax break for the rich have discouraged implementing a flat tax, except in Iraq, where the Bush administration's military occupation imposed it by fiat.

The Lane County flat tax does include some provisions to reduce its impact on the very poor. The tax would exempt single filers with income below $10,000 and joint filers with income below $20,000. Single filers would get a $7,500 deduction, and joint filers would get a $15,000 deduction.

But the exemptions and deductions would still leave many struggling families paying the tax. The federal poverty line for a family of four is $20,650. Families of four earning up to $27,000 qualify for food stamps. Other public assistance programs go to families of four earning up to $31,000 a year, about what many labor groups consider a minimum living wage.

In Lane County the average taxpayer would pay about $224 filing jointly or $306 filing single, assuming no deductions.

Progressive groups have called for tax reforms to limit the growing income inequality in Oregon, but the county flat tax would do the opposite. In the last three decades the income of the wealthiest 1 percent of Oregonians has doubled while the wage of the typical Oregon worker has dropped slightly after adjusting for inflation, according to the Oregon Center for Public Policy (OCPP).

Critics also complain that the county tax unfairly burdens individuals over businesses. The flat tax would receive an estimated 86 percent of its revenues from individuals, but only 14 percent would come from business income.

Business loopholes included in the flat tax may greatly limit the taxes corporations pay. For example, the county chose to charge corporations income taxes only on income from sales within the county. That tax break could be a huge windfall for corporations like Hynix, which has millions in local income but sells few of its chips in Lane County.

Sorenson notes that Multnomah County's income tax is paid entirely by businesses with no tax on individuals.

If, instead of 14 percent, Lane County businesses paid an equal 50 percent of the proposed county income tax, the average single taxpayer would save about $130 a year.

But Commissioner Dwyer opposes lowering individual taxes by increasing taxes that he said would "hurt" business. "Business is the engine that drives the economy," he said.

FOR WHAT?

What will the county spend the $32.5 million in flat tax revenue on?

There's considerable confusion on that question due to a mixed message from county officials. County officials describe the tax as "dedicated" to public safety services by the companion charter amendment, Measure 20-130. But at the same time, county officials argue that passage of the tax will fund social services for disabled children and adults and the poor and fund the animal pound, parks, veterans and 4-H programs.

How can this be? By funding public safety programs now paid for by property taxes, the income tax would free up revenue to pay for the other programs. So once in the county funding pot, the dedicated tax isn't, in effect, so dedicated.

Sorenson says the mixed message was intentional. The idea was that conservatives want a tax dedicated to law enforcement while liberals also want money to go to social programs, according to Sorenson. To appeal to both groups, tax supporters are delivering different, apparently contradictory messages to different audiences, he said.

But Sorenson said the confusion only hurts the measure. "Both groups are saying, no, that's disingenuous," Sorenson said. "All that does is fuel the view that they're not being straight with people."

A backlash against a misleading measure last November to increase taxes with a measure titled to "limit" taxes contributed to its defeat, Sorenson said. The county should have learned that "people would like to have a little more straight talk," he said.

But Dwyer said if the tax wasn't dedicated, "people would have hollered, 'Well, you said it's all about public safety.'"

Sorenson also said the dedicated funds will further "shackle" county spending, potentially allowing waste in one area while needed services are cut.

Progressive critics of the many failed county public safety measures in the past have said that they devote money to law enforcement and jails while underfunding crime prevention and treatment programs that are cheaper, more humane and effective at reducing crime.

Despite a decade of county complaints that law enforcement is underfunded, the county violent crime rate fell 11 percent from 1996 while the property crime rate fell 15 percent, according to FBI data.

DIRE?

Tax supporters have issued dire threats of what will happen if the flat tax doesn't pass and the county loses about $20 million in federal funding.

Dwyer predicts mass layoffs. "We're talking 250, maybe 300 less people." With so much threatened, any opponents of the tax "don't care about the community," he said.

Commissioner Stewart said the county may release 1,100 criminals. "We're just going to let them loose."

The cuts cited by county officials include 160 jail beds, drug, alcohol and sex offender treatment programs, violent crimes detectives, the Women, Infants and Children (WIC) program, elderly and disabled and mentally ill programs and a long list of other services.

But Sorenson said he doesn't think this dire scenario will happen. Based on the "very positive feedback" he's heard from local congressional representatives, Sorenson said, at least an additional year of Secure Rural Schools (SRS) funding is more likely than not. Even if SRS doesn't pass, it will be "tragic," but the county will not have to follow the drastic cuts that flat tax supporters have threatened, Sorenson said.

"It's basically the tax or a catastrophe, and I don't see it that way," Sorenson said. "You can look at all kinds of things" for alternatives, he said. For example, the county could choose to close more jail beds to fund youth drug and alcohol treatment programs and the WIC program, he said.

It's unlikely that 250 to 300 actual people will be laid off, Sorenson said. The county staff estimate is 189 positions. But many of those positions may be already vacant.

The county could also ask employees to volunteer for temporary unpaid vacations or furloughs, Sorenson said. The county has no hiring or wage freeze now but could also ask unions for that, similar to the approach other agencies have used to avoid layoffs, according to Sorenson. Another idea would be increasing permit and other fees on developers such as other jurisdictions have done, he said. Although it could eventually make borrowing more costly, the county could also spend down its reserves, Sorenson said. "Obviously, there's some flexibility."

If the county is in a budget crisis, "we need to be going outside the box," Sorenson said. "It bothers me that we're not doing that."

Sorenson said he agrees that more money is eventually needed. But now, with voter distrust high, the county may have a better chance of passing a fairer, undedicated tax measure when and if the federal funding is canceled and people can see the actual effects for themselves.

SPENDING

The county may have also undermined its arguments that it faces a budget crisis by continuing controversial spending.

Last month the conservative majority on the County Commission voted to subsidize developers with a $6 million new parkway that will increase urban sprawl in Springfield. The "We Said No" group opposing the tax has cited the expenditure as a reason to vote against the tax measure.

The $6 million came from the county road fund and can't be used for general government. But the road fund is also facing the loss of $20 million in federal funding. The road fund money could also have been used to maintain roads and help Eugene and Springfield taxpayers with their large pothole repair backlogs.

We Said No also cited the roughly $50 million in tax breaks the county has pushed to give to Hynix as a reason to vote against the tax.

Opponents of the tax measure have also complained that the county is spending tax money to convince voters that it needs more tax money. For the failed but similar November measure, the county spent $250,000 pushing the tax. For this measure, the county spent about another $40,000. Critics have called the publicity campaigns propaganda in violation of state law, but county officials say the spending is on unbiased information. State officials are investigating a complaint and have requested the county make a make a few immediate changes to its website language.

One misleading part of the pro-tax campaign is repeated claims that the money is only to replace what might be lost to federal funding cuts.

"The tax is to strictly fund what we're losing," Stewart said.

In fact, the tax would raise at least an extra $6.3 million to pay for a 6 percent increase in county spending next year, according to county budget manager Dave Garnick. Garnick said the increase is needed to cover rising labor and health care costs.

But while the county has factored in an inflation increase for itself, there is no similar automatic inflation adjustment included in the tax for the deductions and exemptions to help the very poor afford the flat tax.

There's also a good chance that the flat tax revenue could far exceed expectations. The county includes several conservative estimates in its revenue calculations. In down years, the tax includes a 10 percent rainy-day reserve.

But during better years, it's not clear what would happen to any surpluses. Statewide, total taxable income has increased an average of about 8 percent a year over the last decade.

So with both many progressives and conservatives opposed to the flat tax, does it have a chance?

By trying to enact the tax in February, three months after voters defeated a similar tax, the county stirred up a "huge firestorm" of opposition, Sorenson said. "I think it will fail."