Oregon News

State revenue forecast: Record kicker, more available for budget

By PETER WONG
Oregon Capital Bureau

Lawmakers will have more to spend in the next two years, and taxpayers can anticipate record credits against their tax bills next year, under the latest forecast released by state economists.

The report presented to lawmakers on Wednesday is preliminary to the next forecast (May 15), which lawmakers will rely on for their decisions about the two-year budget that starts July 1. The exact amount that will be rebated to individual taxpayers, known as the “kicker,” will come in a forecast due in late August.

State Economist Mark McMullen said his office has drawn back slightly from a projected “mild” recession, starting this fall, that would cut into state tax collections and Oregon Lottery proceeds – the two most flexible sources of state spending. The projected gap was about $3 billion, though the budget recommended by new Gov. Tina Kotek came in about $1 billion less – and she proposes to suspend an automatic allocation to a state reserve fund as total current reserves hover around $2 billion.

“Although we are expecting more resources, it still makes a lot of sense to be prudent until we are exactly sure what those budget thresholds will turn out to be in the end,” he said at a joint meeting of House and Senate revenue committees.

“We have seen the economic outlook improve and person and corporate income taxes outstrip expectations. But there is still a tremendous amount of uncertainty here in this outlook.”

The upshot of the latest report by the Oregon Office of Economic Analysis:

  • Lawmakers will have almost $700 million more available than previously projected in tax collections in planning state budgets — $489 million in the current cycle and $207 million in the 2023-25 cycle.
  • A record $3.93 billion, up from $3.7 billion in the most recent forecast Nov. 16, is projected to be returned to individual taxpayers. The rebate will be in the form of credits subtracted from their 2023 tax returns that will be filed next spring. (The 2011 Legislature reinstated credits, instead of checks that were mailed the previous fall.) The previous record for a kicker was $1.9 billion, which amounted to 17.34% of tax liability; the estimate is now for 31.5%.
  • A record $1.55 billion, up from $1.3 billion in the Nov. 16 forecast, is projected from excess corporate income taxes. The previous record was $851 million. Oregon voters in 2012 directed these amounts to go into the state school fund, not rebated to businesses.

 

The corporate income tax is separate from the state’s corporate activity tax, which lawmakers approved in 2019 based on business receipts to raise money for specific school improvement programs.

Under a law that dates back to 1979 – and which voters wrote into the Oregon Constitution in 2000 – taxpayers get a rebate when actual tax collections exceed budget projections by 2%. The rebate can be suspended, but it requires specific economic triggers and supermajority votes in the Legislature – and lawmakers have not done it since voters put the kicker into the Constitution.

Improved outlook

McMullen said the new forecast takes into account some signs of a slower growing economy and easing inflation nationally. (In Oregon, the statewide unemployment rate has gone up a full percentage point in the past few months, from a near record-low 3.5% to a still-low 4.5%. But the private sector has continued to add jobs.)

“We have seen encouraging inflation reports, but not entirely encouraging,” he said. “There is still quite a lot of risk,” especially if the Federal Reserve continues to increase interest rates in its efforts to tamp down consumer demand and wage growth.

In response to a question by Rep. Daniel Nguyen, D-Lake Oswego, McMullen said that despite announcements of layoffs in technology and other job sectors, “it’s only a drop in the bucket in terms of jobs.”

Gov. Kotek offered her reaction in a statement:

“As inflation continues to slow, this revenue forecast shows that we can anticipate having more predictability and stability for the coming budget cycle. While this is encouraging news, the Legislature still has some tough choices to make. We will have to keep focused and stay the course in order to make much-needed investments in Oregonians’ most urgent shared priorities: housing and homelessness, behavioral health, and education.”

Simple majorities would be required to change a 2007 law that created a rainy-day fund and required 1% of the ending balance in the two-year budget to go into that fund.

It takes supermajorities to withdraw money from either that fund or another lottery-based reserve fund for education – but Kotek is proposing to leave untouched the estimated $2 billion in reserves.

Other trends

McMullen and senior economist Josh Lehner discussed a couple of demographic and economic trends that could affect future state economic and revenue forecasts.

According to preliminary U.S. Census estimates for 2022, Oregon recorded its first actual loss in population in decades, though relatively small. Lehner said that while it could be a one-year event, Oregon has depended on in-migration from elsewhere for growth in its labor force and consumer demand.

“If 20- and 30-somethings are not moving here like they used to, that means our labor market will be structurally tighter than expected and our finances will grow at a slower pace than we anticipate,” Lehner said.

“That is why we care about population numbers.”

He said similar trends affected high-cost cities elsewhere, and not just on the coasts.

As for state household income levels, McMullen said there’s good news and bad news.

He said the good news is that for the first time since the end of the 1970s, Oregon’s median income – half above and half below that figure – is now at or ahead of the national average. (Iy came close at the end of the 1990s.)

“We have more than caught up,” McMullen said.

The bad news? Oregon per-capita income in 2021 matched or exceeded the national average until the 70% mark (about $106,000), but McMullen said that higher-income levels are lagging in comparison.

Lehner said that while Oregon’s smaller population centers have generally recovered faster than larger cities as a result of the downturn prompted by the coronavirus pandemic, the income gap between Oregon’s rural and urban households is now as much as 25%, compared with 10% in 1980.

But while income disparities in Oregon remain by race and ethnicity – Blacks, Hispanics and Native Americans – Lehner said they ranged from 10% to 20% in 2021, compared with 20% to 40% in the past.

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