Guest Post: The High-Risk Game of Raising Taxes in Oregon

Posted on March 31, 2012 by

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[5440 note: We ran across this blog post by a research fellow at the Wyoming Liberty Group. It’s ironic that even other states are looking at Oregon as a poor model for public funding. Reposted by permission from The Liberty Bullhorn.]

The High-Risk Game of Raising Taxes in Oregon

The push for higher state and local taxes continues. One of the more contested battles is unfolding in Oregon, where government unions are actively behind a campaign to increase taxes. Oregon is not exactly in a good shape to cope with a higher burden on entrepreneurship and hard work: as I explained in last week’s article,

It is worth noticing that between 2007 and 2011, Oregon lost 150 population-adjusted private-sector jobs for every 100 private-sector jobs that Washington lost. Its loss rate was, in other words, 1.5 times that of Washington.

These numbers are bad as they are, but there are more macroeconomic reasons why Oregon cannot afford higher taxes. For one, Oregon is losing residents to its neighbor to the north: according to Census Bureau interstate migration data for 2007-2009, migration across the Columbia river left Oregon with a net loss of more than 3,000 residents. The more dramatic loss of private jobs in Oregon partly explains this; another explanation is the difference in income taxation, where Washington has wisely chosen not to tax people’s hard work.

One of the counter arguments to show that Oregon can indeed afford to raise its taxes is that the state GDP has shown strong growth over the past decade. From 2000 to 2010 the Oregon economy grew at 3.8 percent per year, on average, adjusted for inflation. This is more than Idaho (3.4 percent), California (2.2), Washington state (1.6) and the national economy (1.8). Surely an economy with such a strong growth record can afford higher taxes, right?

Before we jump to any such conclusions we should take a closer look at where this growth comes from. If the growth is spread evenly across the economy, then we know we are dealing with a state that is in relatively good shape economically. Unfortunately, this is not the case: according to data from the Bureau of Economic Analysis one sector is responsible for virtually all growth in the Oregon economy.

That sector is manufacturing. Or, more specifically, manufacturing of computers and electronic products.  The production value of this industry in Oregon grew by 35 percent per year from 2000 to 2009 (the latest year available), again adjusted for inflation. Only four states, Hawaii, Idaho, North Dakota and Tennessee, have seen their computer and electronics manufacturing grow faster.

In terms of share of the economy, the computer/electronics industry has gone from a meager $3.30 of every $100 of GDP in Oregon in 2000 to $21 of every $100 of GDP in 2009.

In effect, the computer/electronics industry has transformed Oregon from an industrially diversified economy into something that can best be characterized as a mono-industrial economy. While it is good for the successful industry and its employees, this dramatic change in the structure of the Oregon economy has far-reaching consequences. Most immediately, it means that $21 of every $100 of economic activity that the state government can put a tax on, now comes from a single industry. Unlike natural resources or traditional, large-scale manufacturing such as the auto industry, computer/electronics manufacturing is a relatively mobile type of industry. Small changes in taxes or other parts of the business climate can easily motivate a company to migrate out  of state.

Another consequence of a mono-industrial economy is its vulnerability to the business cycle of that particular industry. In a diversified economy, the regular ebb-and-flow movements of individual industries are normally countered by each other: if one industry is in a recession, the jobs and investments lost in that industry are compensated for by hirings and investments in other, upbound industries. On occasion, of course, these cycles harmonize whereupon we fall into recessions. But mono-industrial economies tend to be much more vulnerable to violent swings in the business cycle.

If Oregon raises its corporate income tax, as has been proposed, the state government will make itself highly vulnerable to business cycle swings in one industry. In addition to dealing with a regular recession (when the next one comes) Oregon will have to deal with tax revenue losses that are much higher than for a diversified economy.

Are the legislators in Salem ready for that? Will they be prepared to drastically lower spending when the computer/electronics industry goes into a recession or moves abroad because of an unfavorable tax climate in The Beaver State? Or will they set their targets on the next group of citizens, whose job it will then be to shoulder an even more unbearable tax burden?

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