State's tax 'kicker' hits record heights

State Economist Mark McMullen said his office has drawn back slightly from a projected “mild” recession, starting this fall, that would cut into state tax collections and Oregon Lottery proceeds – the two most flexible sources of state spending.

“Although we are expecting more resources, it still makes a lot of sense to be prudent until we are exactly sure what those budget thresholds will turn out to be in the end,” McMullen said at a joint meeting of House and Senate revenue committees.

“We have seen the economic outlook improve and person and corporate income taxes outstrip expectations,” he said. “But there is still a tremendous amount of uncertainty here in this outlook.”

The upshot of the latest report by the Oregon Office of Economic Analysis:

• Lawmakers will have almost $700 million more available than previously projected in tax collections in planning state budgets — $489 million in the current cycle and $207 million in the 2023-25 cycle. Gov. Tina Kotek has proposed a $32.1 billion state budget, which would direct hundreds of millions of dollars that would have gone to state reserves to build houses, teach kids to read and improve access to mental health services. Oregon has about $2 billion in reserves. The 2021-23 budget legislators approved two years ago totaled $26.8 billion.

• A record $3.93 billion, up from $3.7 billion in the most recent forecast Nov. 16, is projected to be returned to individual taxpayers. The rebate will be in the form of credits subtracted from their 2023 tax returns, which will be filed next spring. (The 2011 Legislature reinstated credits, instead of checks that were mailed the previous fall.) The previous record for a kicker was $1.9 billion, which amounted to 17.34% of tax liability; the estimate is now for 31.5%.

• A record $1.55 billion, up from $1.3 billion in the Nov. 16 forecast, is projected from excess corporate income taxes. The previous record was $851 million. Oregon voters in 2012 directed these amounts to go into the state school fund, not rebated to businesses.

The corporate income tax is separate from the state’s corporate activity tax, which lawmakers approved in 2019 based on business receipts to raise money for specific school improvement programs.

Under a law that dates back to 1979 — and which voters wrote into the Oregon Constitution in 2000 — taxpayers get a rebate when actual tax collections exceed budget projections by 2%. The rebate can be suspended, but it requires specific economic triggers and supermajority votes in the Legislature – and lawmakers have not done it since voters put the kicker into the Constitution.

Improved outlook

McMullen said the new forecast takes into account some signs of a slower growing economy and easing inflation nationally. (In Oregon, the statewide unemployment rate has gone up a full percentage point in the past few months, from a near record-low 3.5% to a still-low 4.5%. But the private sector has continued to add jobs.)

“We have seen encouraging inflation reports, but not entirely encouraging,” he said. “There is still quite a lot of risk,” especially if the Federal Reserve continues to increase interest rates in its efforts to tamp down consumer demand and wage growth.

In response to a question by Rep. Daniel Nguyen, D-Lake Oswego, McMullen said that despite announcements of layoffs in technology and other job sectors, “it’s only a drop in the bucket in terms of jobs.”

Gov. Tina Kotek offered her reaction in a statement:

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

A 2007 law created a rainy-day fund and required 1% of the ending balance in the two-year budget to go into that fund.