Tax cut plus new tax equals little gain
What the federal government giveth in tax cuts, Multnomah County taketh away. And for the vast majority of Oregonians, it turns out, the federal government hasn't given very much at all.
Several analyses of the tax law enacted late last month by Congress indicate that the benefits of the federal legislation may be ephemeral for most Oregon residents.
The lion's share of the tax cuts will go to the wealthiest 1 percent in the state and virtually eclipse the benefits for those at the bottom of the income pyramid who have little (if any) income from stock dividends or capital gains.
Furthermore, the new Multnomah County tax intended to shore up the struggling public school system, a worthy goal, will erase most of the new federal cuts for many living in the Portland area. The tax is 1.25 percent of Oregon taxable income (after an exemption of $5,000 for married couples filing jointly and $2,500 for single filers). It is retroactive to Jan. 1 and will be due April 15 of next year.
An analysis of two hypothetical households prepared for the Tribune by Holmes Royer, a Portland CPA firm, found that the new Multnomah County levy wipes out about two-thirds of the benefits of the new federal tax cuts.
'The Multnomah County tax will take away the majority of the federal tax savings for most people,' said William Holmes, managing partner of the firm.
In one case, a married couple with two children, $75,000 in wages and $500 in dividends would see their 2003 federal tax fall by $1,083 to $4,871 and their Oregon tax drop by $37. But these savings would be mostly erased by a new $721 bill from Multnomah County, reducing their overall tax savings this year to $399, according to the Holmes Royer analysis.
In another case, a married couple with two children, $150,000 in wages, $5,000 in dividends and $50,000 in capital gains would see their federal taxes drop by $3,050 to $29,960 and their Oregon taxes shrink by $37. But this saving would be mostly offset by the new Multnomah County tax bill of $2,080, resulting in a total decline of $1,007, the firm's data indicates.
But most Oregonians won't even get tax savings of this magnitude, according to the Oregon Center for Public Policy, a social and economic research group in Silverton. The richest 1 percent of Oregon households Ñ those with average gross income of $710,000 in 2003 Ñ will get more than 25 percent of the federal tax cut, while the less affluent 60 percent of Oregonians Ñ those with incomes of $34,000 or less Ñ will get less than 10 percent of the federal tax cut.
'It's peanuts compared to the capital gains cuts for the rich that result in campaign contributions,' said Charles Sheketoff, executive director of the public policy center, referring to the minimal tax cuts for financially pressed Oregonians.
According to the Public Policy Center, in the next four years the wealthiest 1 percent of Oregonians will see their federal taxes reduced by $57,438 on average, while the bottom 60 percent of Oregon households will average tax savings of only $368.
In 2006, the final year of the federal tax cut, the poorest 20 percent of Oregonians, those with incomes of $9,600 or less, will see their taxes decline by only a dollar, compared with a cut of $7,387 for the richest 1 percent.
A major reason for this disparity is that the new federal tax law has radically slashed the taxes on investment income, income that is common among the affluent but almost nonexistent among those of modest means. But among the bottom 60 percent of all households in Oregon, 89 percent have no capital gains income and 83 percent have no dividend income, according to the public policy center.
The well-off but not superrich Ñ those making $177,000 Ñ will get almost 20 percent of the tax cut and save an average of $11,054 from 2002 through 2006. And the upper middle class Ñ those with average incomes of $91,000 Ñ will get almost 30 percent of the tax cut, saving $4,479 over that same period.
How will middle-income Oregonians fare under the new federal law? Spread over four years, the tax cut for the middle 20 percent of state residents with average incomes of $34,000 is certainly not much to celebrate. According to the public policy center, they will get tax cuts totaling $760, or an average of $190 per year.
And the next most affluent group of Oregonians, with average annual income of $55,600, will get reductions totaling $1,804, or an average of $451 a year.
Meanwhile, the new Multnomah County tax could prove to be a big shock to middle-income Portland area residents who do not take steps now to set aside money for it. They could face a major cash flow crunch next April when they must pay the new tax for the first time.
'There are going to be a lot of surprised people who will need to write that check next year,' Holmes said.
New federal withholding tables due out by July 1 will take all of the federal changes, including rate reductions, the higher child care credit and the lower rate on stock dividends and capital gains, into account.
But so far, there are no similar withholding provisions for the county tax to allow people to pay as they go, Holmes said. Furthermore, the fact that the new county levy is retroactive to the beginning of 2003 will pack an added wallop.
'The new county tax will be a hammer,' he said. 'So it's very important to plan now for payments that will be due when you file your 2003 tax return next April.'
One possibility, Holmes said, is not to spend most of the higher take-home pay you will get as a result of the new federal withholding tables, and to put aside the extra money to pay for the new county tax instead.