Business leaders emphasize cutting benefit costs to reach education funding goals
Oregon business leaders say they support revenue reform for education provided that any deal contains cost containment measures.
Recently elected Democratic supermajorities in both chambers, however, have weakened the business representatives’ bargaining position.
Oregon’s budget is built on relatively low property taxes, relatively high fees, a volatile personal income tax and shrinking corporate taxes. Oregon’s economy has been growing for nearly a decade, but when adjusted for inflation, Oregon school funding has been stagnant since ballot measures in the 1990s limited property taxes.
Oregon business leaders will meet Dec. 3 in Portland at the Oregon Business Plan Leadership Summit to make legislative plans and discuss options for revenue, cost controls and investment. The Oregon Business Plan, an economic development forum, is a joint venture of the Oregon Business Council, Oregon Business & Industry, and the Portland Business Alliance.
Oregon’s Nov. 14 Economic and Revenue Forecast predicted the state will have about $900 million more in net revenue for 2019-21 than the previous biennium, probably not enough to meet inflationary costs, according to Mark McMullen, Office of Economic Analysis state economist.
Advocates for revenue reform and cost containment, among them OSBA, say that a shift in thinking is necessary for achieving stable and adequate education funding. Oregon would need to increase the State School Fund by $2.5 billion to reach the $10.7 billion recommendation of the Quality Education Model, a nonpartisan assessment of the costs of a high-quality Oregon education system.
OSBA has been working with business representatives to explore options, said OSBA Executive Director Jim Green.
“They have been willing to come to the table and talk,” Green said.
Oregon business leaders are looking at consumption taxes that are not a sales tax or a gross-receipts tax, which Oregon voters have rejected. One approach would be a value-added tax, where items are taxed based on increases in value along the production or distribution stages.
Business leaders say any tax increases should be contingent on comparable cost cuts.
“In our view, fiscal reform must start with cost control,” Sandra McDonough, Oregon Business & Industry president and CEO, said in a statement.
Oregon has essentially flat education funding with relatively high public-employee benefit costs that are rising faster than the national average, taking more dollars away from classrooms.
When adjusted for inflation, Oregon education spending has fallen 4.2 percent from 2005 to 2014 while total benefit spending has risen 31.3 percent, according to Max Marchitello, Bellwether Education Partners senior policy analyst. Bellwether is a national nonprofit that focuses on education needs for at-risk students.
Oregon’s spending on K-12 benefits has risen from 19.2 percent of budgets in 2005 to 26.3 percent in 2014, according to Marchitello. Over the same period, the national average rose about 3 percentage points to 19.5 percent. Marchitello calculated that once benefit costs are removed, Oregon spent about $650 million less on education in 2014 than in 2005 adjusted for inflation.
Oregon’s average employer contribution for the state health plan per employee is roughly 40 percent more than the national average, according to the 2014 State Employee Health Plan Spending report from The Pew Charitable Trusts and the MacArthur Foundation.
The Public Employees Retirement System will cost school districts $1.3 billion in 2019-21, nearly 29 percent of payroll before side account offsets, according to the August PERS report. School PERS costs have more than doubled since 2015-17.
OSBA has joined business and government employer groups to ask the PERS board to analyze possible reforms, including capping salaries for benefits calculations, establishing an employee contribution and transitioning all active PERS members to the Oregon Public Service Retirement Plan, which offers more limited benefits.
The teachers union and Gov. Kate Brown have said limiting benefits would make it harder to attract and retain teachers. Business owners, particularly in rural parts of the state where the schools are major employers, have said that generous public-employee pay packages drive up business costs as they compete for workers.
Oregon Business Council Vice President Jeremy Rogers is project manager for the Oregon Business Plan.
If the Legislature doesn’t address PERS, business leaders will consider a ballot measure to make reforms, said Jeremy Rogers, Oregon Business Council vice president. State cost controls should not fall entirely on public employees, he said, but benefits are a large share of the cost drivers.
The Oregon Business Council supports putting the personal income tax kicker toward some type of reserve fund to add stability to education funding during recession. When Oregon income exceeds forecasts by more than 2 percent, the excess is returned to taxpayers in a “kicker” payment. The corporate kicker is already dedicated to education funding.
The personal kicker from the 2017-19 budget is forecast at $724 million. That money, nearly a third of the State School Fund increase education advocates are seeking, comes off the top of state revenue for 2019-21.
“The kicker is kind of an insane policy,” Rogers said.
Jody Wiser, founder of Tax Fairness Oregon, said the need for revenue is clear and the state should look for where taxes are low now: sin taxes, tourist taxes and business taxes.
Oregon has one of the lowest business tax rates among states, according to the Council on State Taxation's 2017 report. Businesses benefit from Oregon’s low property taxes, and Oregon’s lack of a sales tax makes business-to-business transactions cheaper. Businesses pay about 42 percent of state sales taxes, according to the council.
Oregon statistics also show the corporate share of the tax burden has dropped from 18.5 percent in the 1970s to about 6.7 percent now. But that data doesn’t count taxes from the increasingly common S corporations and limited liability companies, which didn’t exist in the 1970s. These business structures pass corporate earnings onto shareholders, where they are taxed as personal income.
Personal tax rates are higher than corporate tax rates, but the shareholders avoid having the money taxed twice, first as business income and then as personal income.
Rep. Barbara Smith Warner discusses Oregon’s education needs in “A Time to Listen,” a short documentary examining Oregon’s education funding problem and the legislative drive for a solution. (Photo by Blue Chalk Media)
Democrats have expressed a willingness to look at taxes and cost controls for increasing money spent in classrooms.
Rep. Barbara Smith Warner, who is on the budget-making Ways and Means Committee, said everything is on the table and now is the time to make changes.
“It’s easier to have these conversations in a good economy than a bad economy,” she said.
Smith Warner, D-Portland, is co-chair of the Joint Interim Committee on Student Success, which traveled the state to examine Oregon’s education system. She said the committee would address cost drivers in its December report.
Smith Warner said the goal is to find a tax that is as broad and as low as possible so that it adds to fairness and stability in Oregon tax collections.
According to state economist McMullen, income taxes are among the most equitable taxes but are volatile while consumption taxes are more stable but tend to fall disproportionately on lower incomes. McMullen also cautioned that states such as Washington are seeing their sales tax income erode as the population ages and buys fewer big-ticket items.
A diversity of revenue streams helps stability, effectiveness and equity, McMullen said.
Sen. Mark Hass, chair of the Senate Interim Committee on Finance and Revenue, said Oregon needs to address the state’s revenue volatility.
“We take in too much in good times and not enough in bad times,” he said. “In those bad times, Oregon has a train wreck hitting hardest on K-12 schools.”
Hass, who is also a member of the Student Success Committee, said Oregon needed to address both its chronic revenue problem as well as provide money for Student Success Committee recommendations.
Hass, D-Beaverton, pointed to the successful joint transportation committee, the model for the Student Success Committee, as cause for optimism. He said the transportation committee’s public tour built a case for new taxes that had been considered taboo. Ultimately, the Legislature passed a $5.3 billion transportation package in 2017.
Hass expects the Legislature to form a subcommittee to explore cost issues, including PERS.
“There will be cost containment, with or without business groups’ support,” Hass said. “There will be revenue, with or without business groups’ support.”
Rogers, of the Oregon Business Council, said that it is important to provide taxpayers with assurances that new money will go to classrooms.
The business community recognizes that other issues, such as carbon pricing and a family leave plan, will be competing for a share of tax increases, Rogers said. Businesses will want to see how all the proposals stack up before they can support any specific tax proposals, he said.
“We don't see how you can get there with new taxes alone, given the size of the PERS and health care cost increases that are coming,” Rogers said.
- Jake Arnold, OSBA
jarnold@osba.org