The Pew Center on the States examined nine states, in addition to California, that are particularly affected by the recession (pdf). Pew notes that all of California’s neighbors—Arizona, Nevada and Oregon—were severely hit by the bursting housing bubble, landing them on Pew’s list of states facing fiscal difficulties similar to California’s. Pew blames Oregon’s problems on the state’s lack of sales tax, its Kicker law, and its relatively undiversified economy.
The following provides an economist’s view of selected portions of the Pew report. While most of the study is more reportage than analysis, some of the facts and analysis would have benefited from a more rigorous review.
[The recession has] prompted lawmakers to respond with $2 billion in spending cuts, aggressive use of federal stimulus dollars and more than $1 billion in new taxes, including $733 million in proposed income tax hikes that will be challenged at the polls in January 2010.
Oregon’s Legislative Fiscal Office reports (pdf) that the state budget has increased by 9.3 percent (enlarge figure). The Legislature increased spending by $4.8 billion.
Between the second quarter of 2008 and the second quarter of 2009, Oregon’s unemployment rate more than doubled, outpacing California’s job loss increases and surging faster than that of any other state. … To understand Oregon’s soaring unemployment rate and its corresponding decline in tax revenue, look no further than the goods the state produces—many of which are going unsold. Oregon’s once-mighty wood products industry, whose workforce has been shrinking due to automation and technology advances, is projected to lose a jarring 21 percent of its jobs in 2009. Driving the collapse is the nation’s housing bust: When new homes are not being built, timber sales slump.
Oregon almost always has some of the highest unemployment in the U.S., whether or not the country is in boom or recession. While the decline in the timber industry and the housing bust may explain Oregon’s chronic high employment, eventually a time comes to ask whether the state’s policies are contributing to the unemployment.
Some policy makers, including the governor, believe that one sector of Oregon’s economy, clean energy, offers hope. Oregon had a bigger share of its jobs in clean energy than any other state as of 2007, according to a Pew report. Kulongoski has worked hard to build a green legacy—insisting on generous tax credits for renewable-energy firms even as other Democrats sought to reduce them, for example, and publicly test-driving electric cars in an effort to lure their manufacturers to Oregon. … But some experts question whether the sector can lead Oregon out of its economic doldrums. “There are worries that we’re getting in a little late, especially with all the investment that China is doing,” said Jessica Nelson, an economist with the Oregon Employment Division.
It is becoming more and more clear that the “generous tax credit” could more accurately be described as a money grab bordering on scandalous.
Confronted with a staggering loss of jobs and tax revenue that accompanied the state’s economic nosedive, Oregon Democrats seized upon the supermajorities they won in last year’s legislative elections. On February 5, less than a month after the session began and about two weeks before President Obama signed the federal stimulus package into law, Kulongoski signed Oregon’s own, state-level stimulus initiative, a $175 million borrowing plan that promised to create jobs while making improvements to the state’s roads and schools. At the same time, lawmakers made about $2 billion in cuts ….
Again, these “cuts” were actually an increase of $4.8 billion.
But the more than $1 billion in tax increases that Democrats pushed through to balance the budget and pay for major new initiatives in transportation and health care have proven most controversial. To help fund a massive road-improvement plan they said would create thousands of jobs, lawmakers raised the gas tax from 24 to 30 cents per gallon and hiked the cost of vehicle registration from $54 to $86. To expand health care for to up to 115,000 uninsured children, they created a new 1 percent tax on health insurance premiums and raised hospital taxes. … The vast majority of new tax revenue, $733 million, came in the form of new personal and corporate income tax rates that have drawn national attention and will go before the voters in a crucial special election in 2010.
As noted on this blog, over the next four years, increased taxes on hospitals and health insurance will be as large as the increased personal and corporate income taxes. All of these new taxes amount to $2.6 billion in new taxes.
Oregon’s minimum wage is another line of demarcation. The $8.40 hourly rate is the second- highest in the nation, and while liberals see it as helpful to the poor, fiscal conservatives claim that it hurts businesses and even some low-wage workers who might not get jobs because of it.
Actually, this has nothing to do with “liberals” and “conservatives.” Empirical research demonstrates that Oregon’s minimum wage is associated with an unemployment among young workers that is 5 to 10 percentage points higher than it would be if the state’s minimum wage was the same as the federal minimum wage.
The state-level stimulus has provided its own controversy, similar to the national debate over the federal stimulus. The Oregon Legislative Fiscal Office credits the program with having “created or retained a total of 3,236 jobs” in its first three months.201 But an Associated Press investigation questioned the way the state counted those jobs and found that each job lasted a total of 35 hours, or less than a week of full-time employment.
Oregon is quickly reaching the point where employment impacts published by state agencies cannot be trusted [1, 2, 3].
PERS: Oregon’s 800-pound gorilla that the Pew report missed
It is well known that Oregon’s Public Employee Retirement System (PERS) has been a major driver of Oregon’s high state and local government spending. It is a system of generous promises that shifts to taxpayers nearly all of the risks of investing in asset markets. The PERS crisis earlier this decade pushed the state to the edge of insolvency. There is still a risk of another crisis in the future.
At the end of 2007, Pew published a report that said Oregon had THE BEST funded pension system in the U.S. (pdf). Even though the PERS Board knew of the flaws in Pew’s study, it promoted the report as proof of the system’s soundness (pdf).
Pew seemed unaware that the state and many local governments issued pension obligation bonds to plug the huge deficits in their accounts. This practice shifted money out of the pension system and onto the books of the individual government entities. It did not solve the problem, it simply made a pension problem into a bond problem. Pew missed this crucial fact of Oregon’s pension system, which means that Pew’s conclusions are meaningless. The PERS Board should have known this and flagged it for Pew. Instead, the PERS Board trumpeted the flawed findings.
California—and Oregon’s—fiscal problems are spending problems not revenue problems
The Pew report focuses almost exclusively on states’ challenges to find new or additional revenues. Much of the fiscal problem facing states are spending problems: Misdirected tax credits, ambitious programs, and skyrocketing public employee expenditures.
The Pew report does not describe how much is spent on Oregon’s Business Energy Tax Credits. The Pew report only briefly mentions the massive expansion of state-run and state-subsidized health care in the state. These new programs will cost as much or more than the amount returned to taxpayers with the last Kicker payment.
