Revenue forecast: Oregon tax collections will be up by $2 billion

By PETER WONG
Oregon Capital Bureau

Oregon lawmakers will have more money available for state spending, taxpayers are due record credits on their 2023 returns, and the state school fund will get a record amount from excess corporate income taxes.

State economists delivered that news Wednesday, May 17, to members of the House and Senate revenue committees in Salem. This quarterly economic and revenue forecast is the last before lawmakers make final decisions on the next two-year state budget, which starts July 1. The 2023 session is scheduled to adjourn by June 25.

The key figures:

• State tax collections: They will be up for the current two-year budget period by almost $2 billion from the most recent forecast on Feb. 22, and by $173 million for the next budget period.
• Personal income tax kicker: The projected record amount is now $5.5 billion, up from $3.93 billion in the Feb. 22 forecast. The exact amount will be determined in the next forecast Aug. 30, after the end of the current budget period. Because of a change in 2011, the final total will be rebated to taxpayers in the form of credits on 2023 tax returns that are filed in spring 2024. No checks are mailed. No estimates are available yet for how people are affected by the rebates, but State Economist Mark McMullen said the rebates will come close to a record 50% of state tax liability.
• Corporate income tax kicker: The projected record amount is now $1.8 billion, up from $1.55 billion in the Feb. 22 forecast. Voters decided in 2012 that excess corporate income taxes go into the state school fund, not back to businesses. The amount will be added to the $9.9 billion that Gov. Tina Kotek and legislative budget writers have proposed for the state school fund, but the $1.55 billion will not count against the base amount for future budgets.

 

McMullen and senior economist Josh Lehner also said state reserves will be at record levels at the close of the current budget period on June 30. The general reserve, known as the rainy-day fund, will be at $1.35 billion. The education stability fund, which comes mainly from Oregon Lottery proceeds, will be at $708 million. The budget’s ending balance will swell to $7 billion. Lawmakers can draw money from reserves only after economic triggers and 60% majority approval, but they can tap the ending balance by simple majorities.

McMullen and Lehner said that their latest forecast assumes no economic downturn — or if it happens, it will be well into 2024 — and that the state economic and revenue model has been updated to take inflation more fully into account. The current model was instituted about two decades ago, when inflation was relatively steady.

The forecast may resolve a dispute between Kotek, who proposes in her budget to suspend a required payment from the ending balance into reserves, and legislative budget writers who have substituted a 2.5% cut in general-fund and lottery contributions to state agency budgets. Kotek’s proposed spending from the tax-supported general fund and lottery proceeds — the two most flexible sources for the state budget — is $32.1 billion, the legislative budget-writers’ plan, $31.6 billion.

State government spends far more, but most of the rest is from federal grants and sources that are earmarked for specific purposes, such as fuel taxes, driver license and vehicle registration fees.

Governor and spending

Kotek said in a statement after the forecast release:

“Oregonians have clear expectations for legislators to address our housing crisis, ensure that our behavioral health system is accessible in every part of the state, and set up our youngest students for success. The revenue forecast lays the path for bold leadership. We cannot afford to squander this opportunity, and I look forward to a continued partnership with legislative leaders to deliver results for all regions of the state.”

Earlier this session, Kotek won bipartisan legislative approval of a $217 million plan to aid unhoused people and lay the groundwork for more housing, and a $210 million plan to boost Oregon’s bid for a share of billions in federal incentives for domestic semiconductor manufacturing.

In her statement, Kotek called for legislative approval of these other items:

• $316 million to continue and expand on the state’s response to homelessness prevention and unsheltered homelessness, and $1 billion in bonding to build and preserve more affordable housing. (The legislative budget-writers’ plan does not propose amounts for state bonds.)
• $280 million investment to support a more accessible, better staffed system of care for behavioral health.
• $120 million to improve early literacy of students by delivering reading skills across all 197 school districts in Oregon.

 

Kotek also proposes additional spending on these items not in her recommended budget, which she unveiled on Jan. 30:

• $64 million to deal with urgent water quality and infrastructure issues in communities.
• $207 million to continue advancements in the state’s wildfire protection system.
• $6.3 million to open more training slots so more officers can move through the academy at the Department of Public Safety Standards and Training.
• $6.7 million to reduce the backlog at the Oregon Board of Parole for updating the state’s sex-offender registry.

No downturn forecast

Unlike the Nov. 16 forecast on which Kotek had to base her recommended budget, the two most recent forecasts do not assume an immediate recession starting this fall.

A synopsis prepared by Lehner said:

“To be sure, recession risks remain very real, but given the current economic dynamics, those recession risks are likely a 2024 or beyond story.

“Even so, Oregon’s economy will slow noticeably in the upcoming 2023-25 biennium, however for good reasons. The recovery from the pandemic has been faster, and more inclusive than any in recent memory. With the economy operating at or near full employment, underlying gains in the labor market will be closely tied to demographics and population growth. To maintain even stronger economic growth in the years ahead Oregon will need to see faster population gains, and/or rely on business investment and capital to increase productivity.”

McMullen and Lehner said the big surges in state tax collections during the onset of the coronavirus pandemic and afterward — buoyed by $4 billion in federal aid to state government over the past few years — are unlikely to recur again. They did say that they have made some adjustments in the state’s economic forecasting model, which was developed about two decades ago, to take inflation more fully into account. (While the national inflation rate has shown signs of moderating, it is still higher than the 2% annual target of the Federal Reserve, which has raised interest rates in an attempt to slow demand.)

Their statement:

“Qualitatively, there is not much difference between the updated revenue outlook and what was predicted in March. After unsustainably high revenue collections over the past two years, tax revenues are expected to come back to earth over the next biennium, before returning to healthy growth thereafter.

“Quantitatively, small differences in trajectory matter a lot, and compound over time. Taken together, the outlook for personal and corporate income taxes has risen by $1.5 to $2 billion over the forecast horizon due to the updated model methodology.”

Reactions:

Reactions from Gov. Tina Kotek and legislative leaders to the latest state quarterly economic and revenue forecast, which was released Wednesday, May 17:

Gov. Tina Kotek

“Oregonians have clear expectations for legislators to address our housing crisis, ensure that our behavioral health system is accessible in every part of the state, and set up our youngest students for success. The revenue forecast lays the path for bold leadership. We cannot afford to squander this opportunity, and I look forward to a continued partnership with legislative leaders to deliver results for all regions of the state.”

House Speaker Dan Rayfield, D-Corvallis

“We were elected to address the top Oregonians care about most: homelessness, behavioral health, education, community safety, and access to health care. Today’s revenue forecast affirms our plan to move a responsive, sustainable budget that prioritizes these key issues.

“Despite today’s forecast, we know that working families are still struggling with the lingering effects of inflation. It’s more critical than ever that we use state dollars wisely and in a way that leads to real outcomes.

“We have to stay focused on a budget that maintains existing services, and invests in housing, health care, good-paying jobs, and education — while at the same time, setting ourselves up well for future needs. I look forward to continuing our work to finalize a budget that responds to the priorities Oregonians sent us here to deliver on.”

House Majority Leader Julie Fahey, D-Eugene

“Today’s forecast is promising. It shows our economy remains healthy and the investments we’ve made in working Oregonians have been successful.

“While this is great news for our economy, the reality is that too many Oregonians continue to struggle to make ends meet and not all wages are keeping up with inflation.

“This means now more than ever, it’s critical we invest state revenues and deliver on the most pressing issues Oregonians face — from education and behavioral health to safer communities, homelessness and stable, affordable housing for Oregonians.

“In January, we committed to rebuilding a stronger, better future for Oregonians. With five weeks left, we’re ready to complete the work we were sent here to do.”

House Republican Leader Vikki Breese-Iverson of Prineville

“This morning’s revenue forecast revealed a few things — Oregon’s funding is secure for the time being, our workforce is slowly returning to pre-pandemic levels, and we expect the kicker to be rightfully returned into the hands of hardworking Oregonians. But while the State of Oregon is doing well, I want to ask my fellow Oregonians — are you?”

“It should be no surprise that the revenue derived from Oregon’s corporate activity tax (CAT) is up, which also means Oregonians are paying more for everything as a result. Oregon is effectively incentivizing businesses not to come here, while family businesses are shutting down because the cost of doing business is simply too great.”

“Despite the detrimental impact of the CAT Tax on businesses, Democrats have shut down any potential conversation around tax cuts to reduce the size of government. House Republicans will continue to advocate for fiscal responsibility, a lower cost of living, and the viability of our business community.”

Senate President Rob Wagner, D-Lake Oswego

“We have an incredible opportunity this session to fund access to health care, stronger public schools, job training and behavioral health treatment that will improve the lives of people all across Oregon. It is critical all 30 state senators are here to have a say and vote on how we invest this money to the maximum benefit of Oregonians. Senate Republicans must return so we can seize this momentous opportunity.”

Senate Majority Leader Kate Lieber, D-Beaverton

“Our economy and state revenue are growing because Oregonians are working hard, but too many families are still feeling the squeeze.

“Oregonians are clear: they want their legislature to be hard at work, making smart investments to solve our most urgent challenges. We must prioritize ending the homelessness crisis, reducing barriers to health care, improving our schools, and making our streets safer in every corner of the state.

“This is an incredible opportunity, but if we’re going to take advantage of it, be responsible stewards of our tax dollars, and deliver the solutions Oregonians are counting on, every lawmaker needs to be doing their job.”

Senate Republican Leader Tim Knopp of Bend

“Oregon families are on track to receive the largest kicker return they have ever received. Republicans trust Oregonians with their tax refund, their children, and their families. Meanwhile, Democrats want government to spend your money and parent your children.

“Senate Democrats must come to the table in good faith, abandon their uncompromising, unlawful, unconstitutional agenda, and allow us to participate in floor sessions. Senate Republicans have been clear that we are willing to pass substantially bipartisan budgets and bills that comply with the law.”