Oregon’s latest budget projections reveal ‘shocking’ improvement from last forecasts

Oregon’s current budget will be nearly untouched by the economic impacts of the COVID-19 pandemic, and future budgets won’t be as hampered as initially thought, state economists announced Wednesday.

Those conclusions, which state economist Mark McMullen told lawmakers were “somewhat shocking,” turn on their head assumptions about how deeply Oregon has been harmed by record job losses brought on by the coronavirus. But while the impacts of the COVID shutdown are slower and weaker than expected, economists warn that they will not insulate the state from necessary cuts in the future.

“How can it be that [the pandemic is] not a state revenue event?” McMullen told lawmakers. “Obviously it will be ... but it sure looks like it’s not going to happen in the current biennium — at least not to a significant extent.”

McMullen now predicts that Oregon will bring in $2 billion more in the current budget than he was anticipating in June. Combined with cost-saving actions lawmakers took in an August special session and recent vetoes by Gov. Kate Brown, that could leave Oregon with $1.7 billion more than it currently plans to spend this budget.

McMullen ascribed a number of reasons to the much-improved outlook. Billions in federal aid has helped prop up Oregonians, he noted, meaning revenue-killing steps like layoffs have been held at bay in some cases. He said those impacts are likely still coming.

“The lights were turned off all at once, but that demand shock has yet to feed through,” McMullen said. “This traditional recessionary dynamic is just getting started, even though technically the actual recession might well be over.”

Despite that warning, projections are up across the board.

Much of the bump in expected revenues comes in the form of personal income taxes that have flowed in far higher than expected. Economists say Oregon will bring in nearly $1.3 billion more in the current budget than expected in May, meaning personal income tax is now expected to come in even higher than last year. McMullen says that appears to be a function of rich Oregonians doing “particularly well in 2019.”

Corporate income taxes, too, are expected to come in above last year’s totals, a factor McMullen said “was a shock to me.” Corporate taxes are performing so well, in fact, that McMullen expects they will trigger a “kicker," sending any money above initial projections to a fund for schools.

Lottery revenues have also outperformed expectations, as people showed an increasing willingness to patronize bars and restaurants. Cannabis taxes and money from a new commercial activities tax are expected to come in higher, as well. (McMullen noted that part of a reason for the rosier commercial tax outlook is that people will need to spend money to rebuild homes lost in ongoing wildfires. )

Upcoming budgets are less heartening. While the two-year budget stretching from 2021–23 is now expected to benefit from $1.4 billion more than predicted in June, that’s not enough to offset a $4.4 billion hit economists forecast three months ago. A similar dynamic is expected in the 2023-25 budget.

Even so, economists now believe the state’s economy will recover from the blow of the coronavirus sooner than initially expected. In June they predicted Oregon would lose more than one in five jobs and take four years to recover. Now they predict job losses will be below 15% and recovery will take closer to three years.

Despite the whiplash in the state’s economic outlook, lawmakers were circumspect in discussing the improved projections Wednesday. Many noted that the numbers belie a situation in which many Oregonians and businesses are struggling to dig out of the economic fallout from the pandemic. Hardship could increase, they noted, as federal aid dries up and prohibitions on evictions come to an end.

“I’m concerned that the picture that we’re hearing right now is that everyone is fine and doing remarkably well,” said Rep. Nancy Nathanson, D-Eugene.

McMullen agreed, noting that revenue numbers don’t fully reflect the economic hardship. The impact of many lower-income Oregonians suffering reduced wages or unemployment can be offset on state returns by rich citizens seeing a big income boost, he said.

Legislative leaders in both parties tempered their reactions to the economic news.

“While we are in a better financial position than we expected to be, it is still an unpredictable road ahead, particularly without further federal relief assistance,” House Speaker Tina Kotek, D-Portland, said in a statement. “Oregon and the country are still facing a deep recession that is disproportionately impacting lower-income communities.”

Senate Majority Leader Rob Wagner, D-Lake Oswego, had similar sentiments:

“Oregon’s economy remains in a difficult place,” he said. “The COVID-19 public health emergency has caused extraordinary difficulties for families and our economy. In addition, Oregonians have been devastated by a tragic wildfire season that is not over yet. It’s clear that Oregon still faces great challenges ahead.”

House Minority Leader Christine Drazan, like others in her party, was quick to credit federal aid for the new projections and warned Democrats against seeking to raise taxes.

“It’s clear that the federal stimulus is working to sustain families and businesses, and by extension, state revenues in the short term,” Drazan said in a statement. “This is encouraging news, but long term is another story as more than 150,000 Oregonians look for work and families and communities across the state are just beginning the difficult process of rebuilding and recovering from devastating wildfire losses.”

The improved outlook for the immediate budget comes days after Gov. Kate Brown issued a series of vetoes she said would leave the state in better shape for upcoming crises. On Sunday, the governor snatched back $100 million lawmakers had set aside for addressing emergency costs in the state’s safety net. She also blocked planned budget cuts to a number of state agencies that have been fighting the state’s unprecedented wildfires.

In announcing those moves, Brown signaled that a major goal was leaving more money in the state’s coffers at the end of the current budget. With the new forecast, it appears Brown needn’t have worried.