Oregon’s budget picture continued its impressive comeback Wednesday, with a new revenue forecast suggesting the state will take in hundreds of millions of dollars more in the current budget cycle than expected months ago.
The revenue the state now anticipates is so robust, in fact, that economists are planning for the possibility of a $570.5 million “kicker,” the unique payment under Oregon law that returns some personal income tax collections back to residents if the state’s revenue comes in more than 2% above initial projections. If triggered, the state would issue those refunds in 2022, halfway through the upcoming two year budget.
“Revenue is up and it’s up sharply,” state economist Mark McMullen told lawmakers Wednesday. “We’re now going to be a little bit above where we were prior to the pandemic.”
The improved budget outlook — unthinkable at the time the COVID-19 pandemic set in nearly a year ago — is the last revenue forecast lawmakers will see before they offer a first-draft framework for the state’s next two-year budget in early March. The financial update comes as many Oregonians are still suffering from lost income and some businesses are struggling to survive. Economists in recent months have said those difficulties are more than offset by large businesses’ profits and affluent people doing better during the pandemic, along with stability brought by federal aid.
But the improved forecast isn’t a guarantee against budget cuts. While the state now anticipates having more money than expected left over from the current budget, that may not be enough to avoid some cuts as demands for public services increase and costs rise.
“Although the additional revenue called for in the March 2021 outlook is a welcome sight, budget writers still face a challenging environment this session,” the state’s Office of Economic Analysis wrote. “Although personal income taxes have continued to grow this biennium, many other revenue sources such as Lottery sales have not.”
An increasingly likely federal aid package featuring as much as $350 billion for state and local governments could further improve Oregon’s standing, potentially resulting in billions of dollars for state coffers.
The new forecast predicts Oregon’s combined general fund and lottery revenues will come in $642.7 million higher than anticipated in November. That increase is largely driven by higher than expected personal income taxes, along with corporate taxes.
The revenue outlook suggests taxes will largely offset roughly $800 million that lawmakers sent to the state’s emergency fund in December, during a special session to address the ongoing crises from COVID-19 and historic wildfires.
Oregon’s future budgets look more positive for personal income taxes, too. The Office of Economic Analysis now expects general fund revenue for the 2021-23 budget will be $22.3 billion, about $21 million more than expected in February. Taken together with the expected kicker and other factors, however, the state may actually have less to spend for that budget than previously anticipated, according to the Legislative Revenue Office.
Combined with additional money the state now expects to have left over from the current budget, the more bullish future forecast cuts meaningfully into a roughly $1.6 billion budget hole that lawmakers have been anticipating.
In preparation for that hole, state Rep. Dan Rayfield, D-Corvallis, one of the Legislature’s top budget writers, told reporters earlier this month that lawmakers were thinking through a combination of budget cuts, one-time spending and potential federal aid to address budget holes. Budget subcommittees have been told to prepare cut packages of 5% to 7%, he said.
“We’ll be prepared to move forward on that front,” Rayfield said. He and other lawmakers have repeatedly cautioned against building ongoing programs into the next budget using one-time money from federal aid or emergency funds because revenues might not grow enough to pay for them in the future.
Oregon lawmakers wasted little time shaping the forecast to their political and policy stances.
“Given the state’s fragile economy, we must exercise fiscal discipline, not increase taxes or grow government programs and bureaucracy,” House Republican Leader Christine Drazan, of Canby, said in a statement. “Many of these scars run deep and will take time to fully reveal themselves. For the time being, the bipartisan federal pandemic relief has proven effective in supporting families and the state’s finances.”
Republicans and business interests this session have lined up against a proposal that would disconnect Oregon’s tax code from tax relief offered to some businesses via the federal CARES Act, a move opponents say is tantamount to raising taxes.
Democrats were more inclined Wednesday to highlight the potential need for additional public spending to combat the impacts of the coronavirus.
“Today’s revenue forecast brings some welcome news, as we see that state revenues are on the rise, making it clearer that the impact of the latest recession on income tax revenue is significantly smaller than we had estimated it to be last spring,” Gov. Kate Brown said in a statement. “Even with this good news, it is important to move forward cautiously, as the road ahead remains unpredictable. We also know that many Oregonians are still struggling with job losses, underemployment, and making ends meet.”
Meanwhile, House Speaker Tina Kotek, D-Portland, said Oregon’s economic position “demands bolder actions in the areas of housing, wildfire recovery and financial assistance to the hardest-hit households. I look forward to working with my colleagues to reinvest some available dollars in the coming weeks to help Oregonians who need us to step up and help them.”
If Oregon’s surging taxes do trigger a “kicker” it’s likely to generate debate in Salem. Lawmakers have the power to suspend refund payments with a two-thirds vote of both chambers, but such a move would likely be politically contentious.
Groups like the Oregon Center for Public Policy, which has long argued against the kicker, are likely to urge a suspension nevertheless, pointing out kicker refunds flow largely to wealthier Oregonians.
“The kicker is such an excellent example of terrible tax policy,” said Daniel Hauser, a lobbyist with the Oregon Center for Public Policy. “When the state needs to invest in our communities the most, we turn around and send a disproportionate amount of our dollars to the people who need it the least.”