I hate the kicker. Hatred is an emotion that goes beyond logic. But this is why hatred is the right emotion for the kicker — it also goes beyond logic. I’m getting ahead of myself.
| By Tom Potiowsky |
Do us all a favor. Kill the kicker. I hate the kicker. Hatred is an emotion that goes beyond logic. But this is why hatred is the right emotion for the kicker — it also goes beyond logic. I’m getting ahead of myself. This is a column devoted to economics, which is full of logic. So let me build the story of how an economist, steeped in the science of cause and effect, ends up with an emotional conclusion.
From September 1999 to September 2006, I was the state economist for Oregon. The state economist is responsible for, among other things, the quarterly economic and tax-revenue forecasts for Oregon. I was blessed with a wonderful staff that had the training and expertise to develop and implement the various forecasts produced by the Office of Economic Analysis.
What purpose do forecasts serve? Forecasts are our best educated guess of what will happen. Will the economy slow down and place further pressures on social services? What amount of tax revenues will the economy generate to fund government programs? The forecast is foremost a planning tool for government.
This is as it should be. But the forecast in Oregon takes on an importance far greater than similar forecasts for other state governments. Oregon’s unique factor is the “kicker.” Back in 1979, a number of people were trying to figure out a way to curtail state government spending. The idea that won the day is as follows: If tax revenues are 2% or higher compared to the forecast, then all the tax revenue above the forecast is returned, or “kicked” back, to households and corporations. There are more details about the personal and corporate kickers (personal is a cash refund and corporate is a tax credit), but this is the main gist of how it works.
The intended goal of limited government spending has unintended consequences. The kicker makes it extremely hard for government to recover after a recession. When government services are cut during economic downturns, school years are shortened and health programs cover fewer people. Economic recovery usually brings about increased tax revenues to restore services. Funds that could have been used are sent back to taxpayers. Once again, you may feel this is just fine, but your elected legislative officials have no ability to debate the issue.
Some claim that the kicker is an economic development tool. Corporations are attracted to Oregon and existing firms stay because of the chance that they may receive tax credits every other year. Large multi-state corporations, the recipients of large kicker tax credits, are more worried about energy costs, labor availability, transportation issues and federal taxes than they are about Oregon’s corporate kicker. Advisory groups have told us that the corporate kicker isn’t even on their radar screen.
Small businesses also get a tax break from the corporate kicker. But if you operated your businesses on the margin to the extent that the possibility of a corporate kicker was the sole reason you could stay in business, you might want to change your business plan and start over with new management. On the personal kicker side, people really do enjoy getting checks in the mail. But if the sole reason you live in Oregon is the gamble that you might get some tax money back, move to Nevada. You’ll be much happier.
Finally, the kicker has prevented Oregon from building a rainy-day fund. Given our highly volatile tax source (income tax), any surges in taxes during boom times are not put aside for the inevitable business cycle downturn. And the same tax system that makes taxes surge during the good times causes them to tank during the bad times.
From 1985 to 2000, the combined personal and corporate kicker returned funds totaled close to $2 billion, enough to have covered the shortfalls during the 2001-03 biennium. Finally, the corporate tax kicker is being put aside, approximately $309 million as of the May 2007 forecast. But this will be a little more than 2.0% of the likely budget for the 2007-09 budget, an amount that is much smaller than the fluctuations of tax revenues around the forecast for the past 25 years. Oregon needs a sizable rainy-day fund. The best way to lock money up for use during the bad times is to save during the good times, but the kicker prevents this.
Forecasts are our best educated guesses, and figuring out the exact strength, let alone the timing, of economic recovery is still an inexact science. Possibly the solution is a better forecast. If that darn forecast could only be within 2% each biennium, then these problems would not exist. What would it take to have forecasts always within 2%? For starters: accurate forecasts of the stock market, the 9/11 attacks, the income and business decisions of the top 100 firms in Oregon, and one of the largest housing booms in the past 45 years. Forecasters that are this accurate are either extremely lucky or have a contract with the devil. Both are short-run phenomena.
The kicker defies logic. It reminds me of the prescription ads that run on TV: “Take NO CLOG and your cholesterol will drop by half. Side effects have included nausea, blindness and brain tumors.” You are relieved that you won’t die from a heart attack but you can’t shake this feeling that you wish you were dead. The kicker has outlived its usefulness, if it ever had one.
Get rid of the kicker, build reasonable rainy-day funds, and find other ways to ensure and measure accountability of government taxation and spending.
Tom Potiowsky is an economics professor at Portland State University and the former state economist for Oregon.
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