Around Oregon, Business & economy

Oregon economists predict more revenue, big kicker but urge caution in budgeting

Fears of a recession are fading as Oregon’s tax revenue continues to outpace expectations, state economists told lawmakers Wednesday. 

The state’s latest quarterly economic forecast estimates that lawmakers will have nearly $700 million more to spend than originally anticipated, with nearly $31.5 billion available for the next two-year budget period that begins in July. 

And nearly $4 billion will go back to taxpayers because of the state’s “kicker” rebate, which gives Oregonians a rebate on their taxes every two years when revenues collected exceed official projections. Higher-income Oregonians who pay more in taxes receive more money back. 

Despite the promising economic news, state economist Mark McMullen urged lawmakers on the House and Senate revenue committees to remain cautious. Forecasts have changed wildly over the past few years, as the pandemic, influxes of federal money and the ongoing war in Ukraine have changed the state and national economy. 

“A lot of the things that we fundamentally thought were true have changed, and there have been some paradigm shifts in economic activity and what we’re (going to) see in the future, particularly on a regional basis,” McMullen told lawmakers. “We’ll cross our fingers going forward. Hopefully we’ll get into a more stable budgeting situation where the forecasts can be more accurate like they are once every 10 years.”

More tax money

Economists expect both personal and corporate income taxes to bring in hundreds of millions of dollars more than previously anticipated – not because lawmakers raised taxes, but because people and companies are making more or changed their behavior. Some of that growth earlier in the pandemic included people cashing in assets in 2020 and 2021, anticipating that the Biden administration would eliminate some of the Trump administration’s tax cuts. 

Higher-income people are more likely to have assets to sell and take advantage of those federal tax breaks, and they’ll pay more in state taxes. About 6% of Oregon taxpayers earn more than $125,000 annually and are subject to the state’s top tax rate. 

Because Oregon’s budget depends so heavily on income taxes, the state’s budget is more volatile than most. Lawmakers in recent years have added more consumption-based taxes, including the corporate activity tax on gross business receipts that functions as a hidden sales tax, as well as taxes on marijuana sales and vehicles. 

“Over the business cycle consumer spending tends to be more stable,” economist Josh Lehner said. “Not that it doesn’t ever decline, but it’s more stable than taxable income and corporate profits.” 

Economists expect marijuana tax collections to fall to $36 million in the upcoming budget cycle, 11% below current collections. That follows a six-month decrease in marijuana tax collections because more cannabis has been produced than is being sold and prices are lower – good news for consumers, but bad for tax collections. 

Population trending down

Oregon could be in long-term economic danger if the population continues trending down, Lehner warned. More people are dying than being born in Oregon, and the state’s economy relies on young working people moving here in search of jobs. 

People tend to move to Oregon in good economic times and away in bad ones, and economists expected a population decrease in 2020 and 2021 and a rebound in 2022. But so far, that rebound hasn’t happened, Lehner said. 

“If 20- and 30-somethings aren’t moving here like they used to, that means our labor market will be structurally tighter than expected,” Lehner said. “It means our firms expand and grow at a slower pace than we anticipated.” 

Political leaders respond

Gov. Tina Kotek and legislative leaders welcomed the forecast, while calling for cautious budgeting. 

“As inflation continues to slow, this revenue forecast shows that we can anticipate having more predictability and stability for the coming budget cycle,” Kotek said. “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.”

House Speaker Dan Rayfield, D-Corvallis, echoed Kotek’s calls for legislative spending to address the housing, homelessness and behavioral health crises.  

“While the state remains in a shortfall environment, today’s forecast better positions the Legislature to address those critical needs and make meaningful investments in education,” Rayfield said. “We must remain prudent in our budgeting.”

Meanwhile, Republican leaders Rep. Vikki Breese-Iverson of Prineville and Sen. Tim Knopp of Bend focused their comments on preserving the kicker and the continued struggles Oregonians face buying staples like food and gas because of inflation.

“We must return Oregon’s ‘kicker’ back into the hands of hardworking Oregonians. While my Pendleton friends would say ‘let er’ buck,’ I say ‘let er’ kick,’” Breese-Iverson said. 

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