Oregon’s tax revenues have continued to outstrip state economists’ predictions, with nearly $1.9 billion more in tax receipts now expected in the current budget cycle that ends in June.
The surge in anticipated tax receipts will also likely trigger a big increase in the state’s unique “kicker” tax rebate that taxpayers would receive when they file their taxes next year: $5.5 billion, up from a predicted kicker of $3.9 billion at the last forecast just three months ago, according to economists’ presentation to state lawmakers Wednesday.
“Available resources are up sharply, not just today but in the foreseeable future,” said state economist Mark McMullen.
Economists warned last year that Oregon could enter a mild recession sometime this year. Still, Oregon received $310 million more than anticipated in personal income tax payments in the first quarter of the year. On top of that, McMullen said he and fellow state economist Josh Lehner made methodological adjustments to their forecasting model to better account for inflation and the fact that the state’s top marginal tax rate is fixed, not indexed to inflation, so rising wages have pushed more Oregon workers into the top tax bracket. Those changes boosted the state’s revenue outlook.
“It’s not that the recession risks aren’t real,” Lehner said. But there are signs that inflation could be slowing and the Federal Reserve is reconsidering continued increases in interest rates “which would have sent the economy into recession at some point,” Lehner said. Economists are “still very concerned about recession risk” but the risk appears to be farther out, perhaps not until 2024, he said.
Economists’ ability to accurately predict the state’s future revenues can have a major impact on the state budget, because of the kicker tax rebate. The rebate is triggered when tax revenues for a biennium come in more than 2% above economists’ forecast from the start of the budget cycle. The state must return the full amount above the forecast to taxpayers.
The higher-than-expected tax receipts and revenue forecast could clear the way for the Democratically controlled Legislature to boost spending in the next two-year budget, which they have until June 25 to pass.
In March, Ways and Means Committee co-chairs Sen. Elizabeth Steiner and Rep. Tawna Sanchez, both Democrats from Portland, proposed a budget that would increase state spending moderately from the current level, $29.2 billion to $30.4 billion for 2023-2025. They noted the state budget has grown significantly in recent years, boosted by windfall revenues and federal pandemic funding and they committed to continue setting aside money in the state’s rainy day and education stability funds.
Steiner and Sanchez proposed a similar amount for state worker pay increases as Democratic Gov. Tina Kotek earlier this year: $450 million, of which $120 million would specifically be set aside for retention and recruitment incentives. They also want to set aside $65 million to raise the pay of unionized private sector home care and personal support workers. But with a tight budget year in mind, lawmakers were looking at restricting spending on a plan to improve reading instruction in Oregon schools.
The top budget writers did agree with Kotek that core schools funding for the next two years should be $9.9 billion, more than the $9.5 billion that state budget analysts calculated Oregon would need to hold steady at current service levels but less than the $10.3 billion that schools advocates, including school boards and the statewide teachers union, say is necessary to prevent cuts. Enrollment in public schools declined in recent years and funding is tied to students. Some school districts want to keep staff that they hired with federal pandemic funds, for example the 40 additional social workers hired by the Beaverton School District.
Kotek proposed earlier this year to divert $765 million in savings from the rainy day account and use the money to tackle the state’s housing shortage, homelessness crisis, behavioral health care needs and poor education outcomes. On Wednesday, Kotek reiterated her call for lawmakers to approve a budget that fully funds her priorities, including $120 million to help every school district in the state improve early reading instruction. Kotek also asked lawmakers to approve $64 million to improve water quality and infrastructure in communities around the state, $207 million for wildfire protection system advancements, $6.3 million to increase the number of training slots for police officers and $6.7 million to reduce the backlog of updates to the state’s sex offender registry. However, Kotek said it would no longer be necessary to divert money from the rainy day funds due to the latest tax revenue windfall. “We have resources right now to meet the needs of the state,” Kotek told reporters on Wednesday.
Thanks to higher interest rates, there’s a new wrinkle for state leaders to consider: state funds are earning substantial returns. Lehner said the state is on track to reap approximately $270 million in interest earnings for the current fiscal year and around $350 million next year. That’s a huge increase from the $20 million in annual earnings the state typically received before the Federal Reserve hiked interested rates, Lehner said.
Republican and Democratic lawmakers raised concerns Wednesday about some of the long-term economic factors discussed in the forecast. Rep. E. Werner Reschke, R-Malin, pointed out that more Oregon workers are winding up in the state’s top marginal tax bracket, with a 9.9% tax rate on income over $125,000 for individuals and over $250,000 for joint filers, as inflation drives up wages. “Wage increases are great as long as they outpace inflation,” Reschke said. He noted that the top marginal tax rate is fixed, whereas lower marginal tax rates are indexed to inflation. Approximately 40% of the state’s personal income tax revenue comes from individuals in this bracket, McMullen said.
Rep. Daniel Nguyen, D-Lake Oswego, said he was concerned by the combination of increased taxes and the state’s slowdown, and possibly even decrease, in net migration in recent years.
“It’s good news for today, but I also worry very much about our population and people wanting to live and work here,” Nguyen said.
— Hillary Borrud; hborrud@oregonian.com; 503-294-4034; @hborrud