Governor I.L. Patterson's Administration
Governor's Special Message, 1927
Source: State of Oregon SPECIAL MESSAGE Of I.L. PATTERSON, Governor To the THIRTY-FOURTH LEGISLATIVE ASSEMBLY February 2, 1927
Gentlemen of the State Senate and House of Representatives:
You are convened in joint session today pursuant to my request directed to the President of the Senate and the Speaker of the House of Representatives that you be so assembled. My wish that I be accorded the courtesy of hearing by this body was prompted by a desire to place before you, in accordance with utterance made in my inaugural message, observations which I have assembled concerning tax measures which have been presented for you consideration, and convictions at which I have arrived after a thorough and conscientious scrutiny of every aspect of such proposed legislation.
I am informed by the ways and means committees that notwithstanding their careful consideration, and even relentless paring of appropriations proposed in the budget, expenditures for conducting the varied governmental activities of Oregon for the ensuing biennium will exceed the revenues at present anticipated from all sources by approximately three million dollars. This estimate, moreover, is reached by eliminating virtually all building enterprises, except those necessary to carry out the expressed desire of the people for a new normal school and a tuberculosis sanitarium in Eastern Oregon.
The condition thus outlined is one that you, as members of this legislature, have, no doubt, foreseen, and I believe it has given you the same deep concern that it has given me.
It is known to the members of your body that this unsatisfactory condition has been brought about by a combination of circumstances and policies, none of which was directly intended to produce such a dire result. We have witnessed the defeat by the people of measures devised to add to the revenue of the state at the same time that other measures increasing the expenditures of the state were approved by the people.
The people have also put certain limitations on the power of the legislature to increases and regulate taxation.
An amendment to the constitution adopted not many years ago forbids the legislature to attach an emergency clause to any bill regulating taxation.
Another amendment prohibits any tax-levying authority from increasing the revenues raised by taxation in any one year by more than 6 per cent over the revenues raised by taxation in the preceding year.
The effect of the first named amendment is that no matter how pressing the emergency may be for a new regulation of taxes, the law designed to meet the emergency must await a lapse of ninety days before it becomes effective.
It is not a criticism of our people to say that no element or group thereof rejoices over an increase in taxes applying to that particular group or element.
Because of the present high level of taxes levied for state and local purposes, there is plausible argument to be found why any new or special tax should not be imposed upon a particular class of property or upon the right of any profitable activity to do business. It is still fresh in our recollections that new tax revenue bills were adopted by the preceding legislature, were halted in their application by use of the referendum and were defeated by the people in the next ensuing general election.
As for the 6 per cent limitation amendment to the constitution, its inhibitions may apply to any revenues that may be provided by resort to new taxation. In other words, the prospective deficit of $3,000,000 for the ensuing biennium takes into account the maximum tax levy for state purposes possible under this provision of the constitution. I call your attention at this time to the further fact that under this provision of the state constitution the 6 per cent limitation on increase in tax revenues may be exceeded when such excess is approved by vote of the people, and does not apply to taxes levied to pay bonded indebtedness or interest thereon.
The state, it is true, has two major sources of revenue. One is taxation, safeguarded and limited as I have outlined. The other is a group of miscellaneous revenues, including fees, licenses, excises, and the like. It has been assumed—and I believe correctly—that measures regulating miscellaneous revenues are not restricted or limited by the two provisions of the constitution which I have cited.
But, in considering new possible sources of revenue, the question always arises as to whether they are in fact regulations of taxation, as meant by the constitutional restriction on the use of the emergency clause, and likewise whether their revenues would fall within the 6 per cent limitation. If defined as tax measures, they offer no relief from the prospective deficit, for tax revenues may not, as I have said, be increased beyond the amount already levied or anticipated for the ensuing two years. They would serve only to shift taxes in part from one source to another.
To retire the deficit by the process of increasing miscellaneous revenues means that not one but several new subjects must be tapped, or the revenues from present miscellaneous sources be increased. It is, I am convinced, not feasible to impose the entire burden of the deficit upon a single business, upon a single industrial or professional group, or upon any single activity. To meet our difficulty by this method requires that a group of companion measures be adopted. They must all withstand the scrutiny of the constitution as to whether they come within its restrictions on taxation; they must not be unduly depressive on business or industry; they must not be discriminatory as to person, firms or corporations engaged in the same line of business or manufacture; and they must not be oppressive in point of administration, either upon the state or upon the subject taxed.
It is possible, if we consider only the matter of revenue to be derived, to devise a set of companion laws which will, by careful estimate, provide the additional money of which the state is in need. But I know of now group of revenue measures which will provide the necessary money and still meet the other requirements which I have enumerated. And even if a series of revenue measures which met these requirements could be devised, I doubt that this legislature would have the moral right to force them into immediate effect by use of the emergency clause, or that, as a matter of practical legislation, an emergency could be declared in the face of the combined opposition that these bills would arouse among those who would be called upon to pay. And without the emergency clause, appeals to the referendum would certainly follow, with a result that can not be forseen.
In the category of miscellaneous revenue measures suggested for meeting the emergency are the following:
An impost on the fees and licenses collected by certain state boards and commissions.
A corporation franchise tax measured by a levy upon what is termed corporate excess.
A tax on moving pictures.
A tax on so-called luxuries.
A withdrawal of intangibles from the scope of the general property tax and the application of a special levy thereon.
The use of the market road tax for general fund purposes, and diversion of an equivalent amount from the highway fund to market road projects.
I commend to your attention the justice of a requirement that the state boards and commissions which are supported by fees and licenses imposed under authority of the state shall pay to the state the overhead costs created by the existence and functioning of these boards and commissions. I recommend the adoption of this measure, not essentially as a revenue device, but as a fair recognition of the principle that these boards and commissions should, in truth, be “self-sustaining.” In that regard, I suggest payment to the general fund as a permanent practice of only such percentage of fees and commissions as shall reimburse the state for the expenses cause by the exercise of its duties as a sponsor for and guardian of the affairs of these bodies, except that I shall hereafter in this message qualify the foregoing recommendation as a temporary expedient.
The corporate excess tax, the tax on moving pictures and the tax on luxuries, do not fit into a well ordered, permanent system of taxation, such as we should try to achieve in Oregon.
The corporate excess tax is, in the final analysis, an income tax imposed upon one class, to the exclusion of all other classes. If strictly administered, its cost of application would be very large, and its annoyance and cost to the subjects taxed would be similar to the annoyance and costs occasioned them by the federal excess profits tax, now repealed.
Taxes on amusements and luxuries have been imposed by the federal authority only as emergency means of raising war revenues. They are not adapted, as I have said, to a well ordered system of taxation, and have, under the federal system, justly acquired the opprobrious name of “nuisance” taxes.
As regards these three measures, I wish to be understood as not condemning them outright as temporary devices for raising public revenues for which there is a dire an immediate need. In the absence of more permanent methods and more equitable methods of providing emergency funds, it may be necessary to adopt one or more of them. My hope is that we can agree upon a more permanent and equitable method of alleviating the state’s financial condition.
The intangibles tax is an indirect method of applying an income tax to that class of property. It has been successful as a revenue produced in states which do not impose the income tax, but in its operation the tendency is for revenues derived from that source to fall off for the first few years from the sums that were raise by applying the general property tax to intangibles, but thereafter to show a yearly increase under intelligent administration, until the proceeds greatly exceed the proceeds derived by the older method. The intangibles tax, therefore, does not meet the need for immediate increased revenues, whatever may be its other merits, and moreover would fall within the 6 per cent limitation.
The proposal that the market road tax be diverted to the general fund and market roads be built out of general highway funds is a circuitous method of avoiding the 6 per cent limitation. If such a plan were to have favor, I see no reason why it should not be approached directly. A flat division of highway funds for general fund purposes would produce the same results. But at best it would be a temporary way out of the present difficulty. If we provide by temporary expedient for the present deficit, there is the same problem to meet two years hence. This is apart from the restrictive effect the measure would have upon the general road program.
There is, in fact, another circuitous method of avoiding the 6 per cent limitation, by the exercise of which the burden of the deficit would fall upon general property. The 6 per cent limitation does not apply to tax revenues raised for the payment of principal of or interest on state bonds.
The principal and interest of the major part of the highway bonds outstanding are paid out of moneys derived from automobile licenses and gasoline tax. I believe there would be no legal obstacle to a requirement that the state highway fund transfer to the general fund $1,500,000 a year, and for the state tax commission at its next meeting to increase the general property tax by an equivalent sum to be used in retirement of state highway bond principal and payment of interest thereon.
I look upon this device as undesirable because of the increased tax obligation thereby imposed upon some classes of general property, and particularly upon agricultural lands which are now almost, if not quite, at the limit of their ability to pay. I suggest to you, however, that a drastic situation sometimes calls for drastic remedies. It may be a sound policy for a commonwealth to go into debt for permanent improvements, but it is unsound and disastrous for a state to run largely into debt for current running expenses. I believe you will all agree that the general property tax must not be increased except as a last resort. But the general property tax is now a major source of state revenue. If, through pride of opinion, or refusal to accept sacrifices, we divide into factions and through that division produce no form of relief, the necessity that government shall continue makes unavoidable the addition of greater loads upon the revenue sources that have once been established and which we have failed to assist in their plight.
I am coming to this legislature in the hope that it will, in its able counsel and assistance, help me to avoid the application of a drastic remedy—one which could virtually all be applied by exercise of administrative power.
I have sought diligently for some plan of taxation which will spread the needs of the present emergency equitable among all classes who have ability ot pay. I am convinced that such a plan is the only plan that ought to merit to be considered. I have explained to you the obstacles in the way of adopting any fair system of increasing miscellaneous revenues; and I have explained to you my opposition, which I believe is yours, to the singling out of general property for increased taxation. Every avenue I have approached has finally, by devious courses, led back to one plan or scheme which meets the situation. I present it with reluctance, for the people of Oregon have several times expressed their views on this form of taxation and on only one occasion, and then by a majority of less than one thousand, approved it, only to reverse their will at the first opportunity offered.
I would remind you that in the election last November there was presented to the people an amendment to the constitution declaring it to be the policy of Oregon that no income tax should be adopted by this state for fifteen years. That amendment was overwhelmingly defeated. I believe it was defeated because the people of Oregon feared that an emergency might arise within fifteen years which would involve the state in unpleasant consequences if this form of taxation were precluded from consideration.
I come to you with the conviction that the emergency which the people of this state foresaw might arise, has now arisen. I believe an income tax law can be drafted which will be free from discriminatory aspects, and free from those appeals to prejudice of class against class which have attended some other efforts to apply this form of tax. It is my conviction that an income tax properly drawn will produce revenues sufficient to meet the present emergency, and yet be so light in its application that capital or industry will not be reluctant to come to this state. It is my observation that the antipathy of new capital and industry to the income tax is not to the payment of a moderate income tax, but to an apprehension lest venturesome and extravagant policies, based on the false assumption that income tax money is easy money, will gradually encroach upon and increase the income tax until it becomes unbearable.
In this connection it may be pointed out that in one of the constitutional provisions to which I have hereinbefore referred, there is a strong safeguard against improvident increase in an income tax or any tax. It is that provision which requires in effect that measures regulating taxation shall not go into force until ninety days have elapsed. There is here offered opportunity for invoking the referendum, if future legislatures shall unwisely promote extravagance. The people who vote today on matters of taxation are to be considered no wiser, and no more careful of their own interests, than will be the people who vote tomorrow. Without the restraints of initiative and referendum, without the provision in the constitution which I have cited, the fear that an income tax would row to oppressive proportions would perhaps have some foundation. In Oregon there need be no such fear.
The income tax I recommend would be graduated and have a low maximum rate—not more than 3 per cent. It would be framed with no intent or expectation that its revenues would be immediately sufficient to put the state on a cash basis, but it would provide sufficient revenues to meet the necessary obligations of the state under present laws and when these obligations shall have been met the income tax will operate to reduce the burden of state tax on the property of the taxpayer.
As is known to you, the income tax would fall within the 6 per cent limitation. It must take its course with other non-emergency measures and under ordinary circumstances await the possible application of the referendum. I assume that the referendum would be applied to it.
Inasmuch as the people will vote on this measure in any event, I recommend that a bill drawn along the lines I have broadly outlined be submitted at a special election, and that it contain a provision lifting its proceeds out of the scope of the 6 per cent limitation of the constitution in such measure as will place the state on a case basis until such time as an agreed-upon base of tax revenues shall have been reached; that thereafter the proceeds of the income tax shall be used as a means of reducing the general property tax.
Inasmuch as the proceeds of an income tax would not be available until 1928 and inasmuch as the need for immediate additional funds is pressing, I also recommend that for 1927 a 5 per cent tax on the fee and license revenues of state boards and commissions be imposed in order not only to provide new revenues at once but also to hasten the time when the income tax can be used as an equalizer of taxes, and that after 1927 the tax on fees and commissions be reduced to 2.5 percent.
If the legislature shall be pleased to grant certain other measures which I recommend, I am confident that this system will pull the state out of its financial dilemma within a reasonable time and that this will be done without undue hardship to any class of the people or any class of property.
The plan assumes a careful supervision of state expenditures which will be attained by the creation of a state budget official with direct responsibility placed upon the governor. Another measure providing for expert state supervision of local assessments should facilitate the reform of assessments until a much more equitable distribution of the tax load than at present prevails has been accomplished.
I assure the legislature again that I have given my best thought to this problem and that I have incited and received the disinterested counsel of many persons of sound judgment. I repeat that the principal recommendation I have made has been decided upon with considerable reluctance in view of the oft expressed contrary opinion of the people. But I am confident that the people themselves will as readily sense the serious nature of the emergency which confronts us as you and I, and will be found as ready as you and I to sacrifice previously conceived opinion and surrender proportionately of their means that the good financial name of Oregon and the progress of our public institutions shall be preserved.