Taxes and Revenue, the Chris Dudley Proposal, by Oregon Economics Blog



Chris Dudley, Republican candidate for Governor, presented his 20-point plan for promoting employment and the Oregon economy. [Funny how these things always miraculously come out to nice round numbers – why not a 19 or 23 point plan?]  Anyway, the key points appear to be decreasing taxes and in particular capital gains taxes, (many of the other points are bromides rather then specific proposals).  This makes sense politically, after the passage of Measures 66 & 67 taxes are an obvious focal point for Republicans.  But do they make sense economically?  Perhaps.

When I first heard the news reports on the plan the sound bite they chose to play was of Dudley trying to make the point that the tax cuts would likely pay for themselves in terms of extra revenue.  To me this sounded like the tired Laffer curve argument that has been discredited for marginal income tax rates as low as we have in the US. 

As an aside, if you are wondering about income tax rates and the disincentive to work, most economic studies put the tax rate at the peak of the revenue curve (i.e. after which revenues actually decline when you increase the rate) at over 70%.  Here is perhaps the foremost expert on the matter, Emmanuel Saez of UC Berkeley, quoted in the Washington Post:

The tax rate t maximizing revenue is: t=1/(1+a*e) where a is the Pareto parameter of the income distribution (= 1.5 in the U.S. and easy to measure), and e the elasticity of reported income with respect to 1-t which captures supply side effects. The most reasonable estimates for e vary from 0.12 to 0.40 (see conclusion page 47) so e=.25 seems like a reasonable estimate. Then t=1/(1+1.5*0.25)=73% which means a top federal income tax rate of 69% (when taking into account the extra tax rates created by Medicare payroll taxes, state income tax rates, and sales taxes) much higher than the current 35% or 39.6% currently discussed

And here is a passage from Greg Mankiw’s textbook:

Laffer’s argument may be more compelling when considering countries with much higher tax rates than the United States. In Sweden in the early 1980s, for instance, the typical worker faced a marginal tax rate of about 80 percent. Such a high tax rate provides a substantial disincentive to work.

But you should note that Saez’s analysis is a static one, not considering the long-term growth effects of tax cuts.  Perhaps by promoting growth in the long-run, over time cutting taxes will promote growth.

Capital gains taxes are more nuanced than the tax rate on labor income since capital gains taxes are on often associated with the very investments that we think are good for economic growth, especially in productive capacity.   We want to encourage investments in new businesses and in revenue enhancing productive capacity, and one way to do so is to increase the reward on such investments – by lowering the tax rates.  There are also many other types of investments that fall into this category that are not so obviously growth enhancing like buying and selling stock.  If the share price goes up, the investor makes a capital gain, but this gain does not necessarily represent an investment in productive capacity. 

So what is the answer, will this pay for itself?  The first part is pretty clear: in the short-run we should expect tax revenues to decrease.  The second part, the question of whether the cuts will this enhance growth in the state enough over time so as to raise tax revenues to a level higher than they would have been without them, is not clear.  And no good answer exists to this question.

Here is the conclusion form a CBO report on capital gains taxes and growth:

Revenue estimators are often faulted for the way they project tax receipts and prepare legislative cost estimates related to capital gains taxes. But the relationship of realizations and receipts to gains tax rates is neither predictable nor obvious. And while reductions in the overall taxation of capital income can measurably increase economic growth, a cut in capital gains taxes alone is likely to produce much smaller macroeconomic effects. Inaccuracies in projecting revenue and disagreements about the effects of tax changes stem not from a failure to incorporate the behavioral responses of asset holders but from the complexities inherent in the nature of gains and gains realizations.

So in the end, we don’t really know, especially in the case of a state as opposed to a country. I think one could target specific investments in new business, new capital, etc. and exclude things like earnings from stock sales and have a smaller short-term revenue impact while getting the growth boost you are hoping for. 

And this is getting too long, but my first impression is that the tax credit for businesses who hire unemployed workers is a very good proposal as a temporary measure.


NB: I was trying to decide what kind of picture to use of Dudley and it made me wonder if the Dudley campaign likes the use of Dudley-as-Blazer pics as they create the positive association with the Blazers (in most Oregonians minds, I would think this is positive), or do they want to get away from the basketball player identity and try and make him seem wonkish by showing him in button up shirts and a serious expression. To me, the picture I showed rocks, baby: get that rebound big man!

After outcry, Springfield lowering development permit fees, by Susan Palmer The Register Guard

SPRINGFIELD, OREGON – The cost of doing development business in Springfield just got cheaper, thanks to a fee change passed by the City Council.

Beginning this month, the “impervious surface fee” associated with commercial, industrial or multifamily projects will drop by 80 percent.

The change comes in response to an outcry by developers, who have complained that the city’s fees are significantly higher than those of other Oregon communities and belie Springfield’s unofficial “open for business” slogan.

The city charges developers to recoup its staffing costs to make sure projects comply with local, state and federal regulations.

In overseeing what’s known as site plan reviews, the city scales costs so that small developments pay less and large developments pay more.

Under the old fee structure, a project with an overall footprint of more than 100,000 square feet (including both the building and parking areas) would have paid $108,341.

By far the largest part of the total was driven by the impervious surface fee: $93,198.

But after a couple of informal meetings with developers, the city staff recommended not only that the fee be reduced, but that the staff take a closer look at other fees as well as its overall development review process, which some argue is cumbersome and burdened with last-minute surprises.

The council voted in July to change the fee, and expects to hear recommendations for more changes in the fall, after additional meetings between city employees and local developers.

Since the new lower fee went into effect, just one project has come down the city’s development pipeline, urban planning supervisor Jim Donovan said.

The Eastside Baptist Church plans a 44,000-square-foot remodel. The difference between the old and new fee for this project: $14,300 vs. $1,700, Donovan said.

While the change is welcome, the city needs to do more, said Terry McDonald, executive director of St. Vincent de Paul of Lane County. The nonprofit agency has built several low-income housing projects in Eugene and Springfield.

“It’s not just in one fee area, it’s multiple and it’s surprise driven,” McDonald said. “You never find out what your fees are going to be until you’re committed, and that is a disaster for developers.”

McDonald said he has been hit with additional fees well after receiving a certificate of occupancy on new construction or signing a lease on a remodel project.

“The city staff in many ways have always been very supportive of the development community, nonprofit and for-profit. I believe they want to make it better, but at this point, the system is broken,” he said.

That’s about what other developers are telling Springfield Mayor Sid Leiken.

“Overall, the response has been positive, but clearly the development community wants more,” Leiken said. “I think of it (the reduced fee) as a confidence builder between the city and developers.”

The city’s development services budget will take a hit from the reduction.

A city report on the issue calculated that the $41,888 it received in impervious surface fees for three development projects in the 2008-2009 fiscal year, would be just $7,700 under the new calculation.

But while the 80 percent reduction seems large on its face, its just one of approximately 100 different fees that get assessed during development and permitting, and represents just 8 percent of the total fees the city charges, Donavan said.

While the reduced revenue might hurt in the short term, Leiken thinks it will benefit the city over the long haul.

“I’m trying to look at this from the 30,000 foot level,” he said. “To make adjustments now to encourage developers to want to do business here, we’re going to reap those benefits in the future.”