OREGON STATE UNIVERSITY

Property tax cuts benefit rich more than poor

02/24/1997

CORVALLIS - A new study of the effects of property tax cuts in Oregon suggests that the economic growth stimulated by cuts benefits the rich more than the poor.

The study, conducted by economists Edward Waters and Bruce Weber at Oregon State University and David Holland at Washington State University, focused on the near-term impact on the Oregon economy of Measure 5, the property tax limitation initiative passed by Oregon voters in 1990.

"The study reaches some interesting conclusions about the effects of large property tax reductions," said Weber. "First, in the short run, household income increases as growth is induced by the property tax cut. High income households benefit the most - and low income households the least - so that income inequality increases under a property tax limitation.

"Furthermore, even as income grows and state income taxes increase, total state and local government tax revenues and spending shrink," Weber said. "The induced income growth does not generate nearly enough new tax revenue to offset the property tax cut."

Weber said the researchers' analysis was done with a 1990 model of the state economy in which Oregon was a relatively high-tax, high-service state. "In 1990, Oregon's state and local taxes represented 12.1 percent of personal income, and Oregon ranked 12th in the nation in state-local taxes as a percent of total personal income," he said.

By 1997-98, Weber said, Oregon will be a low-tax, low-service state, relative to the nation, placing around 40th in this ranking, with state and local taxes representing 10.7 percent of personal income.

"With the recent passage of Measure 47, Oregon in 1998-99 is expected to rank about 44th among the 50 states and the District of Columbia, with state-local taxes representing 10.1 percent of personal income," Weber said.

The researchers estimated income, consumption and taxes for the 1990 Oregon economy, and for high-, medium- and low-income households under the pre-1990 property tax system. They then compared these projections with estimates from a scenario that simulated the Oregon economy under a fully phased-in Measure 5 property tax system.

"The report examines how firms and households respond to the price changes induced by the tax cut, but it does not attempt to value the public services that will be partially replaced with substitute private services," said Holland. "It suggests that consumption expenditures of higher income households would be substantially increased, while those of low income households would increase only modestly."

Low income households may be less able than high income households to replace lost public services (particularly education and human services) with their post-Measure 5 increases in income," Holland said.