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The state Office of Economic Analysis could not have conjured a better illustration of the perversity of Oregon's kicker law: In 2020, the office's forecasters predict, Oregon will return $686 million to individual income tax payers — just as the state tips into a recession. It's the fiscal-policy equivalent of spending your savings on a vacation the week before you need to pay for a kidney transplant.

To taxpayers, it looks a little different — at first. The median Oregon household, with an income of $36,000, will receive a state income tax credit of $162 in 2020, a relatively small but welcome infusion of cash that will arrive when Oregon's long economic expansion comes to an end. It could even have a modest stimulative effect on the state's economy.

But the credit will be tilted steeply toward those who need it least, with the top 1 percent of households — those with incomes higher than $400,000 — receiving credits of $6,787. Households in the bottom 20 percent will get $13, and those in the second quintile, with incomes between $11,200 and $26,300, will get $75. These lowest-income households are most likely to be affected by recession-induced cuts in state services, cuts that could have been ameliorated with the $686 million in refunds triggered by the kicker law.

The kicker law was passed by the Legislature in 1979 in an effort to head off a California-style property tax revolt. The revolt came anyway when voters passed of Measure 5 in 1990, which capped property tax rates and shifted responsibility for financing local schools to the state. In 2000, voters approved a legislatively referred ballot measure to add the kicker law to the state Constitution.

The kicker law is unique to Oregon. It requires that when state revenue exceeds official forecasts by 2 percent, the entire amount above the projected figure must be returned to taxpayers. Before the start of the 2017-19 biennium, the state's economists projected $18.4 billion in revenue from sources other than the corporate income tax, mostly the personal income tax. The latest projection, released last week, revises that figure upward to $19.2 billion — a 3.7 percent increase, well beyond the kicker law's 2 percent threshold.

A separate kicker applies to corporate income taxes, which are also flowing into state coffers at a higher-than-expected rate because of a strong economy and changes in federal tax law. In 2012, voters amended the state Constitution's kicker provision to divert the corporate kicker funds to school funding.

After nearly 40 years, the personal-income-tax kicker appears to have become a permanent fixture of Oregon's fiscal policy. An outright repeal would be a tough sell politically — particularly with the prospect of another refund on the horizon. But Oregonians might be willing to modify the kicker law in a way that makes public services, particularly education, less vulnerable during economic downturns.

The vulnerability stems from Oregon's heavy reliance on personal income taxes — the state has no sales tax, and property taxes are reserved for local governments. To a greater degree than sales or property taxes, income tax revenue flows freely during periods of economic growth, and slows dramatically during recessions. One way to dampen this volatility is to build up a rainy day fund during boom times, and use these savings to cushion the effects of a downturn. The kicker is an obstacle to such a countercyclical practice.

Oregon has two rainy-day reserves — the Oregon Rainy Day Fund and the Education Stability Fund — that are fed by corporate taxes, lottery revenues and other sources. These reserves will contain $1.2 billion at the end of the 2017-19 biennium, according to the latest projection. That would not be enough to carry Oregon government through a recession that is deep, long or both.

The kicker law could be amended to require that all or a portion of refunds be deposited in the rainy day reserves until they contain savings equal to, say, 15 percent of the general fund, which would amount to about $3 billion. After that threshold of adequacy was reached, kicker refunds to taxpayers would resume. Such an adjustment to the kicker law would ensure that larger-than-expected income tax receipts aren't immediately spent, and provide refunds to taxpayers once a degree of fiscal stability is achieved.

Such a system would entail some deferred gratification for Oregon taxpayers. But it would be more sensible than providing big tax refunds on the eve of a recession.

The (Eugene) Register-Guard

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