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No wayto run a state

Oregon editors say

The kicker is terrible public policy, and Oregon's bond rating shows it

The Oregonian

When Moody's Investor Services stunned Oregon by downgrading its credit rating earlier this year, its analysts didn't seize on the state's over-reliance on an income tax, or insist that it needed a spending limit.

Instead, they noted that unlike nearly every other state, Oregon's tax kicker and its spending decisions had left it with no savings ' none ' from the economic run-up of the 1990s.

By now, it's painfully obvious that the kicker is terrible public policy. If the kicker really still is wildly popular, it's also proven to be a wildly irresponsible way to run a state.

The kicker, which is unique to Oregon, is widely misunderstood. It's not about surplus taxes. It's based entirely on how accurately the state economist can forecast business activity, income, inflation and other economic factors 30 months in advance.

— Any time state revenues exceed 2 percent of forecasts, the kicker refunds the entire excess to taxpayers.

The budget the Legislature is now writing perfectly illustrates the folly of the kicker: Lawmakers are struggling to keep courts and schools open, but if the economy rebounds in two years and tax revenues grow more than 2 percent above the cautious forecast made by the state economist, the state will be required to send every dime of this excess to taxpayers, even as schools shut their doors early for lack of money.

It's a crazy, destructive law, and it's hurting this state. That's clear to Moody's and Fitch's Rating, which also dropped Oregon's bond status, costing the state's taxpayers millions in higher interest rates.

As Moody's noted, while other states built up reserve balances in the 1990s, Oregon refunded &

36;2 billion to taxpayers. When the economy slumped, Oregon alone had no reserves. The rest is history: Doonesbury, front-page stories about Oregon's crisis in The New York Times and kids in Hillsboro already well into their summer vacations.

Oregon voters put the kicker in the Constitution in 2000. Now lawmakers of both parties have offered plans to ask voters to change the kicker, and turn it either completely or partially into the rainy-day fund.

A few lawmakers seem determined to tie any change in the kicker to an overall state spending limit. A carefully drawn spending limit may be a good idea in Oregon, but it should be done in conjunction with an overall tax-reform plan, not with the kicker.

A plan authored by Sen. Frank Morse, R-Albany, reduces the kicker threshold from 2 percent to — percent, but at least sends the extra revenue into a reserve fund. The fund would be capped at some level, and once that cap is reached, additional tax collections would go back to taxpayers.

That would be an improvement over the existing law, but it still ties state fiscal policy too tightly to the uncertainties of revenue forecasts. Lawmakers ought to know better: In two years, they've seen eight consecutive revenue forecasts miss by an economic mile.

Oregon doesn't need to reinvent the wheel. It needs what other states have: A system that puts unanticipated revenues in a rainy-day fund that can be tapped only with stringent conditions, and with a supermajority vote of the Legislature or a vote of the people.