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The 1995 Budget Accountability Act (the Act) requires that the Governor, with the assistance of the Department of Revenue and the Department of Administrative Services, produce a tax expenditure report every biennium, along with the Governor's Recommended Budget. The report was first prepared in 1996 for the 1997–99 biennium. This report covers expenditures for the 1999–01 biennium.
Tax Expenditure Defined
The Act defines a tax expenditure as
any law of the Federal Government or of this state that exempts, in whole or in part, certain persons, income, goods, services, or property from the impact of established taxes, including, but not limited to tax deductions, tax exclusions, tax subtractions, tax exemptions, tax deferrals, preferential tax rates, and tax credits.
The term "tax expenditure" derives from the parallel between these tax provisions and direct government expenditures. For example, a program to encourage businesses to purchase pollution abatement equipment could be structured with an incentive in the form of a tax credit or a direct payment by the state to businesses. Tax expenditures can be viewed as: (1) providing financial assistance to certain groups of taxpayers, (2) providing economic incentives that encourage specific taxpayer behavior, or (3) simplifying or reducing the costs of tax administration. While the third of these policy objectives eliminates inefficiencies within the tax code, the first two could be implemented with direct expenditures rather than tax expenditures.
This report describes 293 tax expenditures contained within fifteen Oregon tax programs. Since tax expenditures impart special treatment to groups of taxpayers, it is necessary to begin with a clear definition of the 'normal' tax base from which that special treatment departs. Descriptions of the tax bases for each of the fifteen tax programs begin each chapter. There may be differences of opinion about what this 'normal' tax base ought to be. Where there was uncertainty about whether a particular provision should be considered a tax expenditure, it was included in an effort to be as comprehensive as possible.
In some tax programs, an alternative tax is imposed for recipients of a tax expenditure. In the interest of being comprehensive, this report includes all provisions involving tax relief from a specific tax, even if those taxpayers are subject to an alternative tax. The alternative taxes paid are reported as "In Lieu" payments in the descriptive information about each tax expenditure.
Purpose of the Tax Expenditure Report
The Act declares the necessity of
a review of the fairness and efficiency of all tax deductions, tax exclusions, tax subtractions, tax exemptions, tax deferrals, preferential tax rates, and tax credits. These types of tax expenditures are similar to direct government expenditures because they provide special benefits to favored individuals or businesses, and thus result in higher tax rates for all individuals.....It is in the best interest of this state to have prepared a biennial report of tax expenditures that will allow the public and policy makers to identify and analyze tax expenditures and to periodically make criteria-based decisions on whether the expenditures should be continued. The tax expenditure report will allow tax expenditures to be debated in conjunction with on-line budgets and will result in the elimination of inefficient and inappropriate tax expenditures, resulting in greater accountability by state government and a lowering of the tax burden on all taxpayers.
The Act specifies that the report include the following information: a list of the expenditures; the statutory authority for each; the purpose for which each was enacted; estimates of the revenue loss for the coming biennium; the revenue loss for the preceding biennium; a determination of whether each tax expenditure is the most fiscally effective means of achieving its purpose; and a determination of whether each tax expenditure has achieved its purpose, including an analysis of the persons that benefit from the expenditure. Each tax expenditure is to be categorized according to the programs or functions that it supports. Finally, for those expenditures that will sunset next biennium, the report is to include the Governor's opinion on whether the sunset should be allowed to take effect as scheduled or be revised to a different date.
In preparing this report, as well as the previous one, it was not always possible to obtain data on the expenditures. Information about the recipients of certain tax expenditures is quite limited and a comprehensive analysis of all 293 tax expenditures is not possible given limited resources. A significant number of tax expenditures were presented in the 1997–99 report with complete information, and this 1999–01 report builds on that base. The primary objective of future reports will be to improve upon the work done so far and to increase the number of expenditures for which complete information and analysis is presented.
How to Use This Report
This report has been designed to allow a quick overview of Oregon's current tax expenditures as well as a perusal of more extensive details. There are five main sections: the summary; the Governor's recommendations on tax expenditures scheduled to sunset in the 1999–01 biennium; an index of all tax expenditures by tax program (Table 1); an index of all tax expenditures by program/function (Table 2); and detailed descriptions of each tax expenditure (Chapters 1–15).
The indexes in Tables 1 and 2 are good starting points to identify those expenditures for which more information is desired. Table 1 provides a list of all tax expenditures sorted by tax and numbered sequentially from 1.001 to 15.003. This numbering system can be used as an index to locate the full description of each tax expenditure in Chapters 1–15. Similarly, Table 2 lists all the tax expenditures, but groups them by program/function rather than tax. This categorization has been done so that all tax expenditures related to a particular program area can be viewed together.
The main body of this report, Chapters 1–15, is organized by tax program. Each chapter begins with a description of that chapter's tax, and contains detailed descriptions of the tax expenditures associated with that tax program.
Appendices A to C include the full text of the Budget Accountability Act, a list of agencies that evaluated the tax expenditures, and a list of Oregon tax programs that do not contain tax expenditures. Appendix D lists the tax expenditures that are new, modified, or have expired since this report was last published. Because Tables 1 and 2 combine the estimates for both personal and corporation income tax expenditures, Appendix E provides a table of corporation income tax expenditures and a table of personal income tax expenditures.
Program/Function Categories
Each tax expenditure has been assigned to one of ten program/function categories. Wherever possible, an expenditure was categorized as one of the budget program areas used in the Governor's Recommended Budget: Education, Human Resources, Economic and Community Development, Natural Resources, and Transportation. Those that did not fit one of these program areas were assigned to one of five function categories: Insurance and Financial, Tax Administration, Government, Social Policy, and Federal Law. Since some tax expenditures can fit neatly into more than one category, those who wish to sum the revenue impacts by program or function should be careful that they agree with these assignments or change them accordingly. The tax expenditures are listed by program/function in Table 2.
The evaluations of whether these tax expenditures achieve their purpose were conducted by personnel in over thirty state agencies (see Appendix B). Agencies were asked to evaluate tax expenditures if the expenditure directly related to their program responsibility or if they had appropriate knowledge of the subject matter.
Revenue Impacts
The revenue impact of a tax expenditure is intended to measure what is being "spent" through the tax system with respect to that one provision, or alternatively the amount of relief or subsidy being provided through that provision. The dollar impact is NOT the amount of revenue that could be gained by repealing the tax expenditure. There are three main reasons for this:
  • The estimates do not incorporate behavioral changes that may occur if a tax expenditure were eliminated.
  • Each provision is estimated independently. A tax expenditure beneficiary may qualify for a tax reduction under more than one law.
  • Government may not be able to collect the full liability for some tax expenditures for administrative reasons.
For these reasons, and because tax expenditures interact with each other and the rest of the tax system, summing the revenue impacts may result in misleading totals that should be interpreted with caution.
The tax expenditures reported here represent revenue loss to the state and local governments, and higher tax rates for taxpayers. For example, income tax expenditures reduce state General Fund revenue while property tax expenditures reduce revenue to local governments and may increase property tax rates. The property tax is unique in that property that is exempt from property taxation may result in both a revenue loss to districts and a shift of taxes to other taxpayers. A complete explanation of revenue loss and shift can be found at the beginning of Chapter 2. The introduction to Chapter 2 also contains a description of the changes to the property tax system brought about by Measure 50 in 1997. For all property tax expenditures, the detailed descriptions report the revenue loss and shift separately. Tables 1 and 2 report the total of the loss and shift.
The revenue impact estimates are generally rounded to the nearest $100,000. For tax expenditures below $50,000 the revenue impact is indicated as "Less than $50,000." Where more precise estimates are available, they are provided in the tax expenditure description.
Several data sources and methods were used to estimate the revenue impacts. For the income tax expenditures, the primary and secondary data sources were Oregon and federal tax returns, respectively. Estimates of federal tax expenditures made by the Joint Committee on Taxation of the U.S. Congress were used to develop estimates of those income tax provisions incorporated in Oregon law through connection to the Internal Revenue Code. For property tax expenditures, the primary data source was information gathered by county assessors. For all tax programs, data from various federal and state agencies were used where available.
Although the Department of Revenue coordinated the construction of this report, numerous Oregon state agencies provided important information and analysis regarding the objectives and effectiveness of individual tax expenditures. These agencies are listed in Appendix B. The original report prepared in 1996 relied heavily on the tax expenditure report prepared by the Legislative Revenue Office in 1994 for the House and Senate Committees on Revenue and School Finance. The 1996 Congressional Research Service publication, Tax Expenditures: Compendium of Background Material on Individual Provisions, is used extensively throughout this report to describe and evaluate the tax expenditures that result from Oregon's connection to the federal income tax.