Preschool for All Tax Coffers Overflow as Wealthy Payers Reap Capital Gains

Multnomah County’s preschool program is awash in cash.

The county raised $187 million from the universal preschool tax in the year ended June 30, 2022, up from a projected $119 million, county economist Jeff Renfro told commissioners this week.

The windfall probably came from capital gains, because state data shows that they rose last year, Renfro said. About 20% of the revenue raised by Multnomah County’s new Preschool for All tax comes from around 100 returns filed by wealthy residents, and those taxpayers were flush in fiscal year 2022.

What likely happened, Renfro said, is that wealthy taxpayers saw the economy was about to weaken in late 2021 and sold stocks and other assets before they declined in value, reaping big gains.

“The vast majority of capital gains-related tax comes not even from the top 1% of earners but from the top half of 1% of income earners,” Renfro said.

And that’s who pays the Preschool for All tax. The program is funded by a personal income tax of 1.5% on taxable income over $125,000 for individuals and $200,000 for joint filers, and an additional 1.5% on taxable income over $250,000 for individuals and $400,000 for joint filers. The rate will increase 0.8% in 2026.

Preschool for All is the second special levy to raise more than expected from local sources. The Portland Clean Energy Community Benefits Fund, or PCEF, has raised far more than expected from a surcharge on sales at large retailers.

City officials expected PCEF to have annual revenue of $44 million to $61 million. Actual revenue hit $63 million in the year ended June 30, 2020, and soared to $116 million the following year.

The Preschool for All tax is among the reasons that Portland has the second-highest tax burden in the U.S., at 14.69%, exceeded only by New York City at 14.78%, according to a report from Ernst & Young commissioned by lobbying group Oregon Business & Industry.

Revenue from the preschool tax exceeded expectations even though some tax software products didn’t have the forms that users need to pay the tax. Eric Arellano, chief financial officer for Multnomah County, told commissioners that tax programs from H&R Block and Intuit, maker of Turbo Tax, didn’t contain the forms, which are unique to Multnomah County.

“There is always a transition period with a new tax,” Arellano said at the meeting. “Of the filings that we have received so far, over 90% were received without additional compliance efforts. Most taxpayers did pay and paid on time.”

Arellano said the county was waiving penalties for late payment. The county plans to charge interest on the overdue tax for now, though that is under discussion, he said.

Several taxpayers contacted WW to complain about penalties and interest on the tax. The Oregonian reported on the problem earlier this month, and on similar issues with Metro’s homeless services levy.

“Media coverage of the new taxes was light to nonexistent during the several months prior to the April 15, 2022, deadline, so these ‘tax delinquents’ could perhaps be forgiven for not paying through ignorance,” Doug Holmgren wrote in an email to WW. “However, the Revenue Division is not so forgiving, as it is tacking on a stiff 25%-plus-interest penalty fine to the tax amount owed.”

Multnomah County Commissioner Sharon Meieran raised concerns about the mechanics of the new tax last April, according an email obtained by WW.

“People who reached out to me were confused and frustrated by the quarterly payment, which they felt was very cumbersome,” Meieran wrote to Arellano last April. “They shared many conflicting interpretations (even by accountants) of what needed to be paid by April 18. People also questioned the requirement for making 2022 quarterly payments, which theoretically should not be due until the next tax collection date, saying that it was a very unusual practice.”

The Oregon Department of Revenue and Internal Revenue Service require quarterly estimated tax payments for individuals, if they expect to owe tax of $1,000 or more when their return is filed. Tax authorities waived penalties for not making quarterly preschool tax payments in 2021, the first year of the tax, but they planned to enforce them for 2022.

“We completely understand the frustration and difficulties with the transition to new local taxes,” Arellano said in a reply to Meieran.

At this week’s meeting, Meieran said interest should be waived along with penalties for any late payment. “I feel very strongly that we should waive penalties and interest,” she said.

County Chair Jessica Vega Pederson, the architect of Preschool for All, said such glitches can occur with any new program.

“We knew back in 2018 that the road to universal preschool would not always be smooth,” Pederson said at the meeting. “I am committed to addressing these issues and others as they arrive. We certainly aren’t at a place where we need this program any less than we did in 2020. In fact, there is a compelling case to be made that we need this program much more than we did just two years ago.”