In an article published in Tax Notes State, Nikki Dobay and I explore the practical, legal, and political challenges facing the Portland metro area’s tax regime. In recent years, localities and advocacy groups have advanced new and expanded taxes targeting classes of taxpayers deemed politically undesirable—often businesses (particularly larger businesses) and the wealthy. The targeted nature of these taxes is discriminatory and raises constitutional concerns. Additionally, these taxes tend to result in a revenue structure that undermines the regional economic and business climate, and, thus, the taxes ultimately collected.
Conventional wisdom suggests voters will object to raising their own taxes but, if presented the opportunity, might be more inclined to support a tax if they do not find themselves in the crosshairs. This wisdom runs contrary to principles of sound tax policy informing us that low-rate, broad-based taxes are the most effective and efficient method to raise government revenues. Although tax policy advocates may differ as to which specific low-rate, broad-based tax is best, most would agree that focusing new or expanded taxes on narrow subsets of individuals or businesses fails to adhere to this principle.
Over the last decade, Portland-area governments and advocacy groups have applied this conventional wisdom to make onerous taxes more appealing to voters. In practice, however, these discriminatory taxes may increase a locality’s exposure to costly and disruptive litigation. These targeted taxes are particularly vulnerable to U.S. and state constitutional challenges if the discriminatory feature of the tax, such as a threshold, creates an arbitrary tax classification or narrowly applies to taxpayers outside the jurisdiction. Because the legal system tends to favor remedial action over rescinding a law so long as an equitable remedy is available, the courts may prescribe changes to eliminate the unlawful discrimination. In some cases, these actions may result in the courts lifting a threshold and applying a tax broadly. Although such an outcome may not reflect the goals and understanding of elected leaders, advocates, and voters, it would reflect the foundation of our legal system—fairness. In Portland’s case, it is perhaps only a matter of time before the localities imposing these taxes find themselves in a courtroom.