The Pew Charitable Trusts

A week after Massachusetts voters delivered a stunning blow to Democrats' legislative agenda in Washington, D.C., Oregonians on Tuesday (Jan. 26) will decide the fate of Democratic-led efforts to raise taxes on corporations and the wealthy in the state by $727 million.

In a special election, voters will choose whether to allow the new taxes — which Democrats pushed through the state Legislature last year to balance the state's current two-year budget over the objections of Republicans — or block them, which likely would result in cuts to education and other fundamental services provided by the cash-strapped state. About two-thirds of the operating budget for Oregon's schools comes directly from the state treasury, and some districts already have been forced by state budget cuts to shift to four-day weeks to cut costs.

One of the two proposals, known as Measure 66, would generate $472 million for the state treasury by raising income taxes on individuals who earn more than $125,000 a year and households that earn more than $250,000 a year. The other, Measure 67, would raise $255 million and replace the state's 79-year-old, $10-minimum corporate income tax with a graduated system in which large companies would pay much more.

Coming on the heels of Republican Scott Brown's surprise victory in last week's special U.S. Senate election in Massachusetts, the vote in Oregon — while attracting far less national attention — represents a fresh test in this busy election cycle of Democrats' standing in another traditionally blue state.

Democrats hold the Oregon governor's office and have supermajorities in both houses of the Legislature, and they have promoted the tax hikes as a necessary step to avoid crippling cuts, such as teacher layoffs. Republicans claim the tax hikes would place an undue burden on businesses and the wealthy and increase Oregon's 11-percent unemployment rate, already one of the highest in the nation.

If the Democrats' tax proposals are upheld, "it will provide an ideological counterweight to what happened in Massachusetts. It will muddy the waters a bit in terms of the perception of what's going on out there," said Bill Lunch, a political science professor at Oregon State University and a prominent commentator on the state's politics. "On the other hand, if they fail, then it would underscore the apparent movement away from the Democrats."

It is possible, Lunch said, that voters will issue a split decision and accept one tax hike but not the other. Recent polling has shown that the "Yes" campaign supporting both measures — heavily underwritten by labor unions — is slightly ahead.

Beyond its partisan implications, Tuesday's election also will help answer a broader question about the mood of the electorate heading into a major election year: whether tax hikes, particularly those aimed at a relatively small segment of the population, are acceptable to voters in tough times. Thirty-seven governors' seats and 46 state legislatures are at stake in November, and a major campaign theme will be how policymakers respond to the sputtering economy.

Governors in at least five states — Arizona, Illinois, Kansas, New Mexico and Washington — already have said that higher taxes may be necessary this year. Two of those governors, Arizona's Jan Brewer (R) and Illinois' Pat Quinn (D), are pushing tax hikes even as they face stiff primary challenges, an indication of the gravity of their states' fiscal crises.

But other governors, such as those in Alabama and Virginia, have said they will not raise taxes and argue that states should not force struggling residents to pay more during an economic downturn. Vermont Gov. Jim Douglas (R) has advocated for tax cuts as a way to spur business and hiring in the state. In Maine, voters in June will have the chance to weigh in on a tax overhaul that lawmakers approved last year and which lowered income taxes for most residents.

Tuesday's election in Oregon also marks the first time that voters in any state will have the chance to vote on so-called "millionaire's taxes," or income tax hikes levied specifically at the wealthy, said Kail Padgitt, a staff economist with the Tax Foundation, a Washington, D.C., tax research organization that opposes Measures 66 and 67. Lawmakers in a record eight states, including Oregon, last year raised income taxes on the wealthy, and Padgitt predicted that more states will do so this year, particularly if Oregon voters agree to it.

Measure 66, if approved, would create two new temporary tax brackets for higher-income residents: 10.8 percent on income of more than $125,000, and 11 percent on income of more than $250,000. The 11 percent rate would tie Hawaii for highest in the nation. The tax hikes would switch to a permanent, 9.9-percent rate on income of more than $125,000 starting in 2012.

The changes would affect less than 3 percent of the state's residents, and Democrats say that wealthier residents should be called upon to "pay their fair share," particularly because deep state budget cuts would disproportionately affect the poor and elderly.

But Republicans have assailed the personal income tax hikes on top earners as "class warfare" and say they would affect more than 3 percent of residents because small business owners, who would be hit by the increases, may be forced to shed jobs. That is a particularly resonant argument in Oregon, where the loss of jobs in the timber industry and in other sectors has driven unemployment in some counties past 15 percent.

Historically, tax increases have fared poorly at the ballot box in Oregon. The state is one of only five without a statewide sales tax, largely because voters have rejected a sales tax nine times. Voters rejected higher income taxes in 2003 and 2004, and in 2007, they surprised many observers by nixing a proposed hike in the cigarette tax to pay for children's health insurance. Moreover, Oregon's personal income tax rates already are among the highest in the nation, which Republicans and the business community have pointed out tirelessly ahead of Tuesday's vote.

"We feel it's a major mistake to make Oregon the highest income tax state in the country," said state Rep. Dennis Richardson (R). "That sends the wrong message to investors and to high tax-paying capitalists. We need people who will expand businesses that will create jobs."