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State projects a record $3 billion kicker

Taxes kept rolling into Oregon’s coffers at record amounts this year, but state economists say much of that money is likely to go back to taxpayers in 2024 in record credits against their state tax bills.

While they also are not forecasting an economic downturn soon, the economists say that if it happens in 2023 or 2024, Oregon’s tax collections could drop by as much as 20% — and the state’s discretionary budget still relies largely on personal and corporate income taxes.

The Oregon State Capitol in Salem. Construction of the state's third capitol building began on December 4, 1936. It is (as of 2018) the fourth-newest capitol in the United States.

The latest projections are for a record “kicker” of $3 billion in credits to taxpayers against their 2023 tax bills — paid out when they file returns in spring 2024 — and $931 million in excess corporate income taxes that will go automatically into the state school fund.

Still, shortly after the state’s quarterly economic and revenue forecast was released Wednesday, Gov. Kate Brown said the forecast will yield slightly more money that can be spent on one-time needs in the next state budget cycle in 2023-25.

“The good news is that the continued strength in the economy will allow the Legislature to look at additional one-time investments in the coming budget cycle — like those we’ve recently made in housing, behavioral health and child care — to further spur growth and support working families,” Brown said in a statement, “so that all Oregonians see and feel the benefits of our economic bounce back.”

Though Brown leaves office Jan. 9, 2023, her administration will prepare most of the next state budget that goes to the Legislature. Whoever is elected governor Nov. 8 will have until Feb. 1 to propose changes.

Even allowing for $1.9 billion in credits against taxes after the 2019-21 budget cycle, state economist Mark McMullen said Oregon still collected $1.2 billion more than economists projected a year ago, when they prepared a forecast for the current two-year budget. Though McMullen said the trend is similar in other states dependent on income taxes, their gains were 35% to 40% above forecasts; Oregon’s was 70%.

“We never really could have imagined the sort of things we have seen in the past couple of months. What that has left us with is unprecedented balances for the current cycle,” he told lawmakers on the House and Senate revenue committees. “Those are largely, but not entirely, offset by a larger kicker in 2023.

“We’re going to do our best to explain how we could possibly be this stupid to make this kind of forecasting error in the outlook.”

Under a 1979 law, which voters wrote into the Oregon Constitution in 2000, taxpayers get a “kicker” when actual tax collections exceed 2% of the forecasted amounts at the time that lawmakers approve the two-year budget. The rebate covers the entire excess, not just the amount above 2%.

McMullen said the principal reason tax collections are higher now is that higher-income taxpayers are cashing in on capital gains, which are profits from the sale of assets such as stock. Unlike the federal tax code, which offers a tax break, Oregon taxes capital gains as ordinary income with a top rate of 9.9%. Some taxpayers may anticipate federal changes that will increase their taxes.

Based on a conference call with economists from other states the previous day, McMullen said:

“The trend is the same; it’s not an Oregon phenomenon. We are seeing it across the board. It’s a lot higher than our 2% threshold for the kicker, which made a dramatic change for the outlook for 2023-25.”

However, as part of a presentation McMullen and senior economist Josh Lehner made to the lawmakers, they said there are increasing signs of a potential downturn, which would result in less money coming into state coffers.

Potential indicators of a downturn:

— Shrinkage of economic activity, as measured by the gross domestic product in the first quarter of this year.

— The war between Russia and Ukraine. Though the United States has cut off Russian oil, which accounted for only a small share of its imports, Lehner said there are indirect effects on oil prices, although the price has stabilized at $100 to $110 per barrel.

— Continuing problems with supply chains, particularly the coronavirus-related economic shutdowns in China, a major manufacturer of goods.

— Inflation, which has been running at annual rates (8%) not seen since the early 1980s. “Consumers are pessimistic because the cost of living is rising,” Lehner said. Though wages nationally have risen 17% since the onset of the pandemic two years ago, Lehner said the average drops to just 5% when adjusted for inflation — and rising prices eat away at that gain.

“With recessionary risks rising, a steep revenue decline of the sort Oregon experienced during the technology and housing busts in increasingly likely going forward,” one of their slides said.

In the dot-com downturn in 2002 and the Great Recession of 2007-10, Oregon’s tax collections dropped by as much as 20%. If another downturn comes, McMullen said it probably would occur in 2023 or 2024, in the first two years of the term of the next governor.

Oregon does have about $5 billion stashed away in the form of two reserve funds — one for education, the other for general use — and ending balances. Only the full Legislature can tap that money, and there are restrictions on how much can be drawn from the reserve funds during a budget cycle.

The total amounts to just under 20% of the general fund budget, which is the most flexible spending for programs such as state aid to schools, other education, human services and public safety. Total state spending includes other funds and federal grants, which are earmarked for specific purposes.

Lawmakers did use $400 million from the education reserve to balance the 2019-21 budget. That was before Oregon and other states received federal aid from the American Rescue Plan Act, which President Joe Biden signed several weeks after he took office in 2021. Oregon state government received $2.6 billion; lawmakers have committed or spent all but $452 million, which will help balance the 2023-25 budget they will approve a year from now.

“Even with revenue growth, it is still important that we proceed with caution and plan for the future,” Brown said in her statement. “Strong leadership in Oregon has led the state to a place where we have ample reserves to help us weather unprecedented times. We need to continue that forward-looking leadership as we head into the next budget cycle.”