The Trump administration has created uncertainty as state lawmakers crafted a budget this year. In the latest economic forecast, Oregon went from a nearly $500 million cushion over the next two years to a roughly projected $373 million deficit. Carl Riccadonna is the state’s economist. Democratic Senator Kate Lieber represents Beaverton and Southwest Portland and is a co-chair of the Legislature’s Joint Ways and Means Committee. They join us with more on Oregon’s economic future.
Note: The following transcript was transcribed digitally and validated for accuracy, readability and formatting by an OPB volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. We start today with a broad look at Oregon’s economy. Last week, the state economist released the latest revenue forecast, the first since the passage of the One Big Beautiful Bill Act. And it was a doozy, erasing close to a billion dollars in expected revenue and turning a nearly $500 million cushion over the next two years into a projected $373 million deficit. What’s more, according to the state economist, Oregon’s growth has consistently underperformed the national economy and the unemployment rate has risen by nearly a full percentage point.
In a few minutes, we’ll ask how one of the co-chairs of the budget writing committee plans to respond to this news. But we start with Carl Riccadonna – he is the state economist. Welcome back.
Carl Riccadonna: Hello.
Miller: For Oregonians who are just tuning into the news about the revenue forecast, the latest one, can you just give us a short version of what happened? What erased a modest cushion for the current two-year budget that just started and turned it into a relatively large shortfall?
Riccadonna: Well, our team does a forecast based on current law. So at the time of the last quarterly forecast, which was back in May, we knew that potentially there was tax law changing coming at the federal level. But of course it had not happened yet, so we have to assume that it doesn’t happen.
Miller: You have to assume that or can you say, well, Republicans are in charge and there’s a good chance something is going to happen?
Riccadonna: For the purposes of state law, we assume that we are connected to federal policy, so it is a current law forecast. That has been the way the office has operated for decades.
Miller: And the timing was just challenging here …
Riccadonna: And the timing was challenging.
Miller: Because the timing was challenging before taxes were going to change dramatically.
Riccadonna: The federal tax law changes – we’ll call it H.R. 1, it’s shorter and easier to say. H.R. 1 passed July 4 or 5, basically, after the gavel had come down on the last biennium. So we had some economic assumptions for tax law changes, but of course we didn’t know the details of that tax law at the time of our Q2 or our May forecast. That was the big change in the moving parts heading into the Q3 or the September forecast as we call it. So we had to adjust for these changes.
We update our economic models. Surprisingly, they were relatively resilient, so there wasn’t a big change on that front. But Oregon is one of about five states that connect to the federal definition of taxable income, which means if the folks in D.C. change that definition as they did in H.R. 1, then that automatically feeds through to the Oregon definition. We adjust accordingly both corporate taxes and personal income taxes, and that price tag was about $888 million for the current biennium.
Miller: There is a little bit of a weird detail here, which is even though there are a lot of worrisome signs in the state economy and the the national economy, even though we’re sort of sputtering along in some ways, you’re saying that that is actually not the reason that we’re expecting hundreds of millions of dollars less in revenue, that the economy so far has not had a hit to revenue. In fact, it’s gone up a little bit.
Riccadonna: A very little bit.
Miller: It’s a change in tax law that has led to this. So why is it that the economy, which is not great, has not actually made it so that we’re expecting less revenue?
Riccadonna: We have a trajectory expected for the economy over the course of the biennium. So while the economy has not been performing that well over the course of the summer months, if we look at something like jobs data, hiring data, whatnot, we see both in state and nationally, the unemployment rate is drifting higher and whatnot. We had a similar profile factored into our forecast. So I’ll describe it as maybe a hockey stick where we have a little bit of a down and then up. Now, down doesn’t necessarily mean recession. We think that we will be able to hopefully skirt past recession, but we are in a growth slowdown period over the course of the next couple of quarters.
I don’t think we can say the coast is clear until, really, we get to about the first quarter of next year. Of course, we have the tax cuts from H.R. 1, which should be economically stimulative, but they don’t kick in until 2026. In the meantime, we have a shadow tax increase from the tariffs which are hitting the economy. It’s impacting the employment numbers, it’s raising consumer prices. It’s squeezing corporate profit margins, all of these things. So you have sort of a tax hike before the real tax cut arrives. So, because of that, we have this slowdown over the next couple of quarters.
Miller: If lawmakers were to vote soon to decouple the state tax code from federal rules to say that the code would be the same as before H.R. 1, the One Big Beautiful Bill, how much of the projected budget deficit would be erased?
Riccadonna: Well, it would be a smaller number, but it would depend on the timing of when they disconnect. I think logistically for the 2025 tax year, that may be impossible at this late stage in the game, but there are policy options for them to disconnect at some point in the future. It could be ‘26, it could be ‘27 … all of that would have revenue implications for the current biennium.
So again, not disconnecting, we know the price tag is about $888 million. Now, there is a lot of uncertainty around that because we don’t know necessarily how economic entities will respond to some of these tax provisions, whether it’s SALT deductions, accelerated depreciation for corporations, no tax on tips, no tax on overtime. We have to see how these pan out, but the Legislative Revenue Office puts together this menu of all the moving parts of the bill and what it will mean for Oregon, and again, that price tag [is] $888 [million.]
Miller: One of the stats that really caught my attention was the revision of employment data from the last revenue forecast to this one. How do you go from saying that 25,000 jobs were created over the last year to saying that 25,000 jobs were lost? That’s a 50,000 job swing.
Riccadonna: That is a very big swing and it’s a big swing for a state like Oregon in particular. I’ll just caveat out by saying this does not come from my office, so this is not us revising projections or anything like that. This is the Employment Department doing their best effort to understand what the employment picture looks like. They ultimately reconcile this with tax payments. It’s kind of like counting the votes on election night, so you have your exit polls and then 20% of the vote is tabulated. Ultimately, you count every single ballot – that’s what happens through this reconciliation with tax records, which we call benchmarking.
Oregon does this faster than the federal statisticians do it and a lot of states don’t even do this benchmarking exercise on a normal cycle; they just accept whatever the federal statisticians feed down the food chain. Oregon does this faster, so what we saw was a much different labor landscape. In May, I was telling legislators that we had created 25,000. Now we’re 25,000 in the hole. That’s a big swing, but when we think about it from a tax perspective, it’s really the full body of employed people in Oregon, which is about 2 million people who are working. So 25,000 sounds big, but when you think of 2 million workers, it is just a small number in percentage terms.
That’s why we could see signs of stress and things like taxes based on wages and salaries. That was definitely on a cooling trend, but still in positive territory. But what we saw was with the stock market at all-time highs, as of August – it’s a little bit down today on the latest jobs report – things like capital gains taxes actually got revised higher in our model because markets were performing more strongly.
Miller: Right. So if I understand this piece of your analysis correctly, it’s that – forgive the shorthand here – rich people are doing well. Their investments are growing and taxes on those investments are helping to replenish state coffers that are lower because of tax cuts, and maybe in the future, lower because of a sputtering economy. Is that basically right, that right now capital gains …
Riccadonna: In broad brushstrokes, I think that’s a fair assessment. So we can see signs of labor market stress, absolutely, but upper income households have a higher income tax rate. And what we have seen over decades with our revenue forecasting is that capital gains tend to be one of the big swing factors, a big source of volatility. The overall level of employment doesn’t change all that much across the biennium, but in the meantime, you have market swings – you’re up 20% one year, down significantly the following year.
The fact that the stock market is at these record high levels is important to our revenue forecasting, but also a very important economic signal. Typically, if the economy is entering recession, we see the stock market down in negative territory, sometimes double digit into negative territory. We’re up about 18% to 20% in year on year terms. So that is a signal of economic resilience that we’re paying close attention to.
Miller: How do you explain that? I mean, because when it became clear some number of months ago that the president was serious about tariffs, the equity markets and then the bond market significantly, they freaked out and the president backed down. But since then, he has continued to move forward with tariffs and the markets have not just not freaked out, they’ve done well. What do markets … they’re not people. They’re collections of people doing things ...
Riccadonna: There’s collective wisdom embedded in markets …
Miller: Theoretically, sometimes.
Riccadonna: Sometimes it can be irrational.
Miller: What does this collective think they know right now that they thought differently about six months ago?
Riccadonna: The effective tariff rate is about 10 percentage points lower than what we thought it would be back in May, based on what was said at the time, not that we knew there would be some adjustments and whatnot. But the effective tariff rate is lower and now we have a Federal Reserve that is moving very seriously towards interest rate reductions. So based on that weak jobs report we saw nationally at 5:30 this morning, now the expectation is the Fed will cut either by a quarter or possibly a half point at their meeting in the middle of this month, followed by one or two more rate cuts through the end of the year.
Interest rate cuts help corporations and help to support the economy. So the stock market is responding to that expectation of a Fed that will now be taking its foot off of the brake pedal and possibly reaching for the accelerator. And of course, tax cuts are helpful to corporations.
Miller: The market doesn’t seem to be concerned that the president is trying to exert unprecedented control over the Federal Reserve. Is that because investors like what he’s pushing for, that they want to see the Fed cut rates, or that they’re just not concerned about what a lot of us see as the loss of independence of the world’s most important central bank?
Riccadonna: I think markets are concerned about what is potentially happening at the Federal Reserve. In an independent central bank – and we can look across decades, we can look across different economies, different regions or whatnot – independent central banks fare better over the longer run, hands down, across economies. So there is a real concern in investment circles about what will potentially be happening at the Federal Reserve.
Governor Cook, of course, there’s an issue there. There will be a newly appointed governor and possibly the recertification of the regional Fed presidents, that all have to happen next year. And if it looks like that there is a loss of independence that is happening – right now, it’s a risk, it’s not a reality – if that really does look to be coming to pass, you will see a change in investor psychology towards U.S. debt instruments in particular and there will be financial consequences. I would be fairly certain of that coming to pass and that’s not my own individual opinion. That is a kind of a broad based view in the investment community.
Miller: Carl, thanks very much.
Riccadonna: My pleasure.
Miller: Carl Riccadonna is Oregon’s state economist.
We are talking right now about the more than $350 million budget shortfall that state economists are now expecting, following their latest revenue forecast. Kate Lieber joins us now to talk about this. She is a Democratic state senator from Beaverton and Southwest Portland, and one of the co-chairs of the Joint Committee Committee on Ways and Means – that is the legislature’s budget writing committee.
Kate Lieber, welcome back to the show.
Kate Lieber: Thanks for having me, Dave.
Miller: What went through your mind when you saw the latest revenue forecast?
Lieber: Well, we knew that there was this chance during session that H.R. 1 was going to get passed and signed. And if that would have happened, we knew that we were going to have some budget deficits. I think that the top line for me is that H.R. 1 really was put forward because Trump and sort of congressional Republicans really wanted to give tax breaks to the millionaires and corporations. And they are financing these tax breaks by taking away this food assistance and kicking people off of Medicaid. That is what states are going to be left to sort out.
So we do have a revenue hit – I think that certainly Carl Riccadonna did a really nice job of outlining that for us – but we’re in a different position as well. Not only do we have to find additional revenue, which means cutting, we’re going to definitely need to figure out how to deal with the Medicaid and food assistant cuts. The one thing that I was really focused on is that, for decades, there’s been this promise that we pay federal taxes, and Oregon and other states will sort of receive that money back in forms of assistance for basically our most vulnerable people. And the federal government is really fundamentally changing that safety net and breaking that promise.
Miller: Senate Minority Leader Daniel Bonham, a Republican from The Dalles, said this in a statement when the latest revenue forecast came out. “Instead of focusing on Oregon’s problems, today’s forecast spent more time on tariffs and Washington politics. But the truth is, our challenges are not D.C. grown, they are Oregon grown.”
He wrote, “We are losing ground because of decisions made right here at home. Failed housing policy, hostile business regulations, struggling schools and rising crime have all driven families and employers away. Tina Kotek and the Democratic supermajority have done this one policy decision at a time.”
What’s your response?
Lieber: Well, I think that Mr. Riccadonna was pretty clear that the economy right now in Oregon, while softening, isn’t the biggest blow regarding the revenue impact. The revenue impact this time is really based on less revenue coming because of the tax implications that are contained in H.R. 1.
I think the Oregon economy is very tied to tariffs. That is a piece of the economy that is very true. I think the whole sort of Pacific Rim is tied to that. And I think that the Democrats, what we have done since we’ve quite frankly been in charge, we have built up strong, healthy reserves – which we have. The reserves really can help us weather through these difficult times. They’re not going to be able to backfill those federal losses over the next several biennia, but they are something that is incredibly helpful.
However, I do agree that we need to pay attention to our economy. We need to continue to have conversations around, how do you attract and retain companies that will come to the state of Oregon, that will stay in the state of Oregon? And make sure that we have a strong economy, because our tax base is so tied to income taxes. So we need people to be here working and that is what’s going to help us get out of this.
Miller: What options are you considering right now to close this hole?
Lieber: We have got to look and figure out how to maintain our core government services. So during the session, my co-chair and I, Representative Sanchez, were really clear. The state budget is designed to draw down federal dollars, not backfill them. We knew that we needed to keep a larger ending fund balance than we normally do because of the uncertainty.
And you remember, during session, we didn’t know if this bill was going to pass or not. But we knew that there was a lot of uncertainty being created by the tariffs. There was a lot of uncertainty being created by what was in or not in and whether it was going to pass. So we kept more in our ending fund balance, which makes it so that we can weather some storms.
We do have a deficit, however. We’re going to have to go back to the drawing board, go through our budgets again and figure out where we can make cuts, while still maintaining our core government services.
Miller: As we talked about with Carl Riccadonna, Oregon’s rolling reconnect policy means that when the federal definition of taxable income for personal and corporate taxes changes, Oregon’s definition automatically changes as well. Do you think that’s a good policy?
Lieber: Yeah, as the co-chair, I’m on the spend-it side and not the raise-it side. But that being said, obviously the spend-it side is very, very connected to how much money we’re raising. I think it is easier to be connected to the federal because when you do your taxes, then you have one sort of taxing thing that you’ve got to read to do your taxes. So it certainly isn’t always a bad thing to be connected to the federal taxing.
I don’t know. I think we’re going to have to have a real conversation about whether or not we want to disconnect selectively or not. I do think, as Carl pointed out, that we’re probably too late for ‘25, but we could make some decisions for taxing years ‘26 and ‘27. That’s going to have to be a discussion that we have. There is an upside sometimes to tax cuts because they can economically stimulate.
But I want to go back to the reason and where these tax cuts are landing. We’re focused here on this revenue, but the real issue here is that these tax cuts are being borne on the backs of extraordinarily vulnerable Oregonians. So for example, we’re going to spend much more money in trying to pull down billions of dollars less in federal funds. When I think of H.R. 1, I think of it in these three buckets. We have the revenue impacts and I think that Carl Riccadonna really, really outlined what those are. I think we’re going to have some impacts in this biennium, as well as other future bienniums.
The second piece to H.R. 1 that we’re really thinking about and struggling with is that it’s gonna cost Oregonians a ton more. And what I mean by that is, for example, when people get on Medicaid, we redetermine them every two years. H.R. 1 is telling states that we have to redetermine people every six months and have a work requirement, which is going to cost more money just administratively.
And the third bucket that I think about is this bucket of like how much less dollars come into play and are going to come into Oregon. And I think the long-term consequences and fallout of that is something that I am extraordinarily concerned about. For example, I am really concerned about hospitals. The hospitals, many of them, especially rural hospitals, operate under sort of a razor thin edge, and they’re already on a razor’s edge here. I think we’re going to be seeing hospitals closing because of this fallout. Food assistance – many, many communities rely on food assistance and many grocery stores rely on food assistance, the federal money that was coming in to stay open. My concern is that we’re going to see more and more food deserts where we have grocery stores who can’t sustain themselves anymore.
So we’ve got to rethink how we fund things. We’re going to have to rethink how we do it with less money while spending more money to do it, while we’re trying to continue to make sure we protect as many services for as many people as possible. Dave, this is going to be an extraordinarily challenging time.
Miller: It’s also something that we’ll be talking about for months or years to come. Kate Lieber, thanks very much.
Lieber: Thank you. I appreciate it.
Miller: Kate Lieber is a Democratic state senator from Beaverton in Southwest Portland, one of the co-chairs of the Joint Committee on Ways and Means – that is the Budget Writing Committee committee in the Oregon Legislature.
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