| According to state law, Oregon’s Governor must produce a recommended budget by December 1 this year. The State Legislature will use this recommendation as a starting point to fulfill its constitutional responsibility to produce a final balanced budget before July 1, 2025.
Policymakers have been concerned that there will be insufficient revenues during the 2025-2027 budget years to meet the predicted needs for services. Because of this potential shortfall, they have highlighted the following areas as top priorities:
- Boosting base-level funding for Oregon’s K-12 school districts
- Renewing the “provider taxes” from hospitals and insurance companies to fund the Oregon Health Plan
- Reexamining how the state pays for wildfire costs
- Addressing the significant deficit in the state highway fund, and
- Increasing resources for housing, homelessness, workforce, addressing climate change, and behavioral health services.
Each quarter, the state economist updates the Governor and legislators about the state economy and the predicted revenues that will be available to pay for state services. You can watch the latest quarterly forecast here.
I often write here about revenue forecasts. It is an important but impossible job and often not done well. How can even the best economist project global conflicts, supply chains, natural disasters, or pandemics two years into the future?? Guess too high, and we don’t have the money to pay our bills. Guess too low and we have to give the excess back to Oregon taxpayers in a “kicker”. Last year, we returned over $5 billion. Essentially, we do not budget on how much money we have, but on how much money we think we will have…
On Wednesday the members of the House and Senate Revenue Committees received the latest quarterly Revenue Forecast from the Office of Economic Analysis (OEA). The September forecast is an important one because it includes data on the taxes paid on time in April, as well as many of those filing late.
So here is the good news: Oregon’s economy in general is doing better than economists had expected a year ago. Economists are now predicting a successful transition out of the post-pandemic inflationary boom, with the clear likelihood that the Federal Reserve will cut interest rates soon as a result of declines in inflation and a more stable labor market. Similarly, the prediction now is that Oregon is likely to enter a healthy period of sustained economic expansion. Tax revenues in the first year of the biennium are already far ahead of what the economists predicted in May 2023, when the current biennial budget was finalized.
As a result of the more positive economic prognosis and the higher rate of tax collections, OEA is now predicting that by the end of this biennium personal income tax revenues will be $869.7 million (4.1%) higher than they had assumed last year when the current biennial budget was built.
This is good news for Oregonians but mixed news for state budget writers who work to pay for needed services. Remember that if revenues come in 2% or higher than was projected in the June 2023 forecast, all the dollars that came in above that original projection must be returned to taxpayers in tax credits. As a result of this forecast, the kicker is now projected to be $987 million, paid out in 2026.
Here are some of the details of what we heard on Wednesday:
- From an economic standpoint we’re doing about as well as you could hope for as we’re transitioning out of the post-pandemic inflationary boom.
- Inflation is now down to the 2.5%-3% range, close to the Federal Reserve goal.
- The labor market is cooling, as a result of slower hiring, perhaps more so than the Fed would like.
- Assuming that the Fed cuts interest rates, that will help rate-sensitive sectors like housing and construction and lead to more hiring there.
- Although the RATE of inflation is going down, that doesn’t mean that prices are going down in many areas. Retailers are still able to take advantage of consumers’ willingness to pay.
- We’re seeing more layoffs in Oregon right now than in the nation as a whole, particularly in higher-paid jobs and in three areas core to Oregon’s economy: semiconductors, shoe/fashion apparel, and timber. The first is largely due to restructuring by a single employer (Intel, which accounts for half of the employment in this sector). Timber layoffs are part of a multi-generational trend.
- Big investments in semiconductors are coming as a result of the Federal CHIPS Act. So the economists are expecting growth in this sector in the years ahead. They also see potential for future growth in footwear/apparel.
- Oregon is among the upper tier of states (#15) for productivity, but one of the lowest in birth rate.
- The improvement that we’re seeing in Oregon is despite the slowdown in our population growth (which has largely been responsible for our economic growth in the past). If we see an increase in Oregon’s population, the projected growth in our economy will be even greater.
- Corporate profits, especially for large multinationals, are at or near record highs, which in part has led to the big increase in corporate income tax revenues. It’s also partly due to increased collections from corporations, which are a little better here in Oregon than in the nation as a whole.
- Our Other Funds (Lottery Funds, Corporate Activities Tax, and Marijuana Tax) are all projected to be fairly stable, though Marijuana revenues are projected to go down as a result of over-supply and consequent price reductions.
- The Legislature continues to steadily build up its reserves in case of another unanticipated shock to the economy. By the end of June 2025 our Education Stability Fund will be $1.007 billion, our Rainy Day Fund $1.899 billion, and our ending fund balance $1.841 billion, for a total in reserve of $4.747 billion, or 17.6% of general funds—among the best in the nation.
Oregon’s kicker law has been around since 1979. Proponents told voters the kicker law would act as a “spending cap.” In actuality, the law has nothing to do with how much money the Legislature spends or how much money the state needs to operate. The kicker only measures how well the economist predicts how much money we could get in income taxes for the next two years.
Here’s an interesting example of economic unpredictability.
In June 2023, the state economist’s projection was too low by almost one billion dollars. One reason was due to the unexpected tax collections from the $1.3 billion Powerball winner in Oregon in April 2024. Although the discrepancy is enormous, there was no way for the economist to foresee that the Powerball jackpot would rise to $1.3 billion, or that the winner would be an Oregon resident. A graph detailing the impacts of the Powerball jackpot is included below. |
