A major revenue boost could supercharge the next Oregon budget — and money headed back to taxpayers

Oregon could send a whopping $5.5 billion back to taxpayers next year, state economists announced Wednesday, by far the largest tax rebate the state has doled out as part of its unique “kicker” law.

That rebate is roughly $1.5 billion more than a $4 billion kicker Oregonians were told to expect just three months ago, which also would’ve been a record haul. It comes as personal income and business taxes have surged well beyond what recession-wary economists had expected.

The news, part of a quarterly revenue forecast unveiled Wednesday, was not just positive for taxpayers craving some money back. Economists also now say lawmakers have about $2 billion more to spend in the next two years than expected in February.

“Available resources are up sharply,” state economist Mark McMullen told lawmakers in a committee hearing. “Not just today, but in the future.”

The dramatic increase in expected funds comes at an especially notable time: These are the assumptions lawmakers will use to build their next two-year budget.

With the infusion of another $2 billion — and a total of $33.8 billion in lottery and general fund revenues expected for 2023-25 — that spending plan is likely to look quite a bit different than a no-frills approach top budget writers unveiled in March.

Related: What's in the original proposal from Oregon's top budget writers

At the same time as revenues have surged, so has the tax money that appears headed back to Oregonians. The state’s novel “kicker” law refunds taxpayers any time personal income tax filings come in 2% or more above what lawmakers anticipated when building a budget. Those rebates will return to taxpayers as credits in their tax returns next year. Predicting revenues within that 2% “sweet spot” has proven impossible for economists of late, and Oregon has seen the kicker law triggered in each of the past five biennial budgets.

On the heels of Wednesday’s forecast, politicians and interest groups wasted no time lobbying for how to spend the additional money.

Gov. Tina Kotek said in a statement the forecast “lays a path for bold leadership.” She reiterated her call for major additional investments in housing, behavioral health care and education. And she pushed for around $280 million for wildfire preparedness, water safety, training more police officers and updating the state sex offender registry.

“We now have an opportunity with that forecast to finish this session in a way that lifts up the top priorities of Oregonians,” Kotek said in a meeting with reporters. Because of the newly expected revenue, the governor said she will no longer ask lawmakers to forgo contributing to the state’s reserve fund to pay for some of her priorities.

House Speaker Dan Rayfield, D-Corvallis, said the state must “stay focused on a budget that maintains existing services, and invests in housing, health care, good-paying jobs and education — while at the same time setting ourselves up well for future needs.”

Republicans, meanwhile, said the forecast signaled the need for the state to trim back a new activity tax on businesses in the state that helps fund K-12 schools.

“Despite the detrimental impact of the CAT Tax on businesses, Democrats have shut down any potential conversation around tax cuts to reduce the size of government,” House Minority Leader Vikki Breese-Iverson, R-Prineville, said in a statement. “House Republicans will continue to advocate for fiscal responsibility, a lower cost of living, and the viability of our business community.”

The higher-than-expected revenue comes despite slowing population growth and an economy that has gained back the jobs it lost in the pandemic. Economists said Wednesday part of the boom is a result of more Oregonians having higher incomes. About 5.3% of tax filers were in the state’s highest income tax bracket in 2021, versus just 3.9% the year before.

“We’ve rapidly seen more and more of our filers be subject to the top rate,” McMullen told lawmakers. “This was expected this year to come down sharply. … We haven’t seen it.”

At the same time, business taxes are up as inflation continues to spike prices. “There’s a lot of price premiums that businesses are pushing on their customers — both households and other businesses,” McMullen said. “We’ve seen a lot more business income, corporate profits and labor income and the like, and this flows straight into our revenue streams.”

Economists still say the state could see a recession, but with inflation slowing and the Federal Reserve appearing ready to ease off of interest rate hikes that could cool the economy, they are not worried one is imminent. “We’re still very concerned about recession risks, but with these changes that we’re seeing, we continue to think those recession risks are pushed off,” state economist Josh Lehner told lawmakers.

With the financial picture crystalizing, the question is how soon lawmakers will be able to actually pass a spending plan. Republican senators have been boycotting their chamber for weeks, and show no sign of returning anytime soon. Their absence blocks the Senate from passing any legislation, including the spending bills that combine to form the state’s next biennial budget.

Lawmakers are required to pass a balanced budget, and Democrats have planned to do so by the Legislature’s mandatory June 25 adjournment date. If the Senate impasse continues, however, lawmakers have passed a bill to fund agencies until Sept. 15.

In dueling statements Wednesday, Republicans and Democrats in the Senate continued to prod the other.

“Senate Democrats must come to the table in good faith, abandon their uncompromising, unlawful, unconstitutional agenda, and allow us to participate in floor sessions,” Senate Minority Leader Tim Knopp, R-Bend, said in a press release. “Senate Republicans have been clear that we are willing to pass substantially bipartisan budgets and bills that comply with the law.”

Meanwhile, Senate President Rob Wagner, D-Lake Oswego, reiterated his call for Republicans to return to chamber floor sessions. Many boycotting lawmakers have appeared in committee hearings this week, while refusing to grant Democrats the 20-member quorum needed to pass bills on the Senate floor.

“It is critical all 30 state senators are here to have a say and vote on how we invest this money to the maximum benefit of Oregonians,” Wagner said. “Senate Republicans must return so we can seize this momentous opportunity.”

Kotek said she has been in contact with legislative leaders, but has stayed largely out of discussions between the parties.

“I’m doing a lot of listening, a lot of cajoling, a lot of, ‘Hey, there’s an expectation here please get back to work,’” she said.

Related: Oregon voters tried to put an end to legislative walkouts. What happened?

The ongoing standoff threatens to take on a new tenor on Thursday, when six senate Republicans are expected to register their 10th unexcused absences. Under a measure passed by voters last year, any lawmaker with 10 unexcused absences cannot run for reelection. Four lawmakers have already hit that benchmark as of Tuesday.

“I hope people don’t do that,” Kotek said. “We need to show Oregonians that we can do some work here.”

The governor said she would consider calling a special session if lawmakers can’t agree on a budget before the regular legislative session concludes. And while she earlier ruled out sending state troopers to wrangle absent Republicans, she said Wednesday that could change if the situation doesn’t improve.

“I haven’t changed my mind on that at this point,” Kotek said. “I’m not saying I wouldn’t. I’m treating people with respect. Get back to work. I don’t need to chase you down.”