Oregon’s massive kicker is spurring a fresh look at the state’s unique tax rebate law

On the morning of May 17, two soft-spoken state economists took a seat in a drowsy Capitol hearing room and calmly took a chainsaw to Oregon’s budget.

The economists, Mark McMullen and Josh Lehner, had made an educated guess two years before that Oregon income taxes would “return to earth” after an unexpected pandemic boom. They were wrong.

Now there would be stunning consequences. The economists told lawmakers that Oregon would have to send back more than $5.5 billion to taxpayers under the state’s “kicker” refund, dramatically reducing the state’s potential spending on a host of pressing crises.

“Last year was through the roof,” McMullen deadpanned, explaining that tax payments had shattered the expectations he and a cadre of economists and experts had set.

The kicker is an Oregon institution, triggered whenever personal income taxes and other non-corporate revenue streams come in at least 2% higher than state economists predicted when legislators were building a two-year budget. In those increasingly common cases, all the excess is “kicked” back to taxpayers.

The law was fashioned in 1979 as a blunt tool to keep state spending in check, but Oregon has never seen anything close to the $5.6 billion refund headed out the door next spring.

The sheer magnitude of that payout is kickstarting a fresh set of questions in the Oregon Capitol and beyond.

Democrats are increasingly pointing to the refund to explain why they can’t pay for a growing list of crises — housing and homelessness, public defense, mental health. But even with a stranglehold on state government, they are powerless to touch the money.

The state’s largest labor union is calling out the economists whose consistent underestimations of income tax revenue have sent $10.2 billion rushing out of state coffers over the last decade. Data suggest Oregon’s revenue forecasts are less accurate than most other states’.

And quietly, haltingly, some interest groups are considering an attempt to rejigger the highly popular kicker so that more money can be kept in state coffers the next time economists get it wrong.

In short, it seems everyone is talking about the kicker. That’s something that McMullen, the state economist who has the unenviable job of forecasting revenues for a fickle cast of politicians, is all too aware of.

“Who knows?” he said recently. “With a $5.6 billion kicker, there may be a chance that some heads have to roll.”

A record run

May’s news of a massive tax refund capped off a brutal run for McMullen. Since officially taking on the job of state economist in 2012, his forecasts had never failed to result in a kicker payment — the longest stretch since the law was enacted in 1979.

Worse for the economist, the kickers were growing larger. Taxpayers got back a comparatively modest $402 million in 2016, after McMullen and his team underguessed revenues for the 2013-15 budget. Two years later, the refund ticked up to $464 million.

Then Oregon began setting records. In 2020, the forecast forced the state to send back $1.7 billion. The money went out just as COVID-19 was wreaking havoc around the globe, but was set in stone long before the virus reared its head.

It got worse. A forecast McMullen issued in May 2019 locked into place the revenue expectations the state would hold for the next two years. By the time summer of 2021 rolled around, the world had grappled with the worst of the pandemic and the economic chaos it wrought. Massive job losses had been papered over with a flood of federal cash, the rich had continued to get richer, and Oregon was shocked to find it had hauled in $1.9 billion more in income taxes than expected — all of it headed back to taxpayers in 2022.

“In all my years in the Oregon Legislature, I have never seen a forecast like this,” then-Senate President Peter Courtney said when news of the eye-popping kicker emerged. The sentiment came with authority: Courtney, a Salem Democrat, joined the Legislature in 1981, just two years after the kicker came into being.

The revenue forecast isn’t solely up to McMullen. For each prediction, he spends a month poring over national economic modeling and meeting with no fewer than three groups of economists, agency staff and industry experts to arrive at a final number.

“It is the role of our office to make that final determination,” McMullen said. “That said, there are plenty of examples where, if it were up to us, we would go a different direction than our advisers, but we do respect the process.”

In May 2021, when he issued the forecast that lawmakers would use to craft the next two-year budget, McMullen and his team appeared determined to avoid another huge refund.

“The kicker law dictates that we stick our necks out with an aggressive revenue outlook,” the forecast read, “exposing us to the risk of a large budget shortfall should growth stall.”

But McMullen’s neck had a ways farther to stretch. Surging wages, persistent inflation, huge business profits and nervous investors cashing out massive stock market earnings all conspired to once again decimate expectations.

Just six months after McMullen unveiled the supposedly aggressive outlook, he was predicting a $558 million kicker. The following May, after what he called a “shocking” tax season, the number had risen to $3 billion. It kept ticking up until May of this year, when McMullen and Lehner sat down to explain to lawmakers that another wild tax year had ratcheted the refund up over $5.5 billion.

Not long after, one of Oregon’s most influential political players began quietly gunning for McMullen’s job.

‘Embarrassingly bad’

Service Employees International Union Local 503 is the state’s largest public-sector union, with tens of thousands of members whose salaries rely on an ample state budget. The union, along with other public-sector labor groups, had grown incensed by Oregon’s ever-mounting kicker payments, and had decided to do something about it.

“Oregon’s inaccurate revenue forecasting costs billions needed for critical public services,” read a memo the union sent to Gov. Tina Kotek’s office and others.

The forecasts weren’t just wrong, SEIU said, but especially wrong. The union’s research director, Daniel Morris, had pulled decades’ worth of national budget survey data to suggest that Oregon’s predictions are less accurate than most other states 75% of the time, and particularly so since 2014, not long after McMullen was appointed state economist.

The implication was that either McMullen, his forecasting model or both should go.

“Forecast errors should be expected, but consistently underestimating revenue is evidence of systematic biases and inaccurate assumptions,” the document said. “This has a real impact on the legislative and budget process and ultimately harms Oregonians and the services they rely on from the state.”

People who work intensively with state budget forecasts say it’s difficult to actually lay blame on states based on comparisons like the one SEIU was making. After all, every state has its own unique tax structure. But the union was not the only outfit that had concluded that Oregon’s budget forecasts tend to be less accurate than others’.

Lucy Dadayan, a tax policy researcher with the Washington, D.C.-based Urban Institute, has analyzed state revenue forecasts for years. Data she sent OPB comparing how well different states had correctly pegged future tax dollars largely agreed with the labor union’s findings.

According to Dadayan’s figures, just three states were worse at predicting total revenues from 2015 to 2022: Alaska, North Dakota and Wyoming, all states that rely on energy taxes that can be highly volatile. When Oregon’s comparatively accurate 2013-14 biennium forecast is included, the Beaver State rises to 41st nationally for forecast accuracy.

When it came to accurately predicting personal income taxes — the main element responsible for triggering the kicker refund — Oregon fared somewhat better. Eleven states with broad-based income taxes did a poorer job of accurately predicting tax revenues from 2013-2022 than Oregon.

While Oregon has had larger errors than most other states over the last decade, it’s not remotely alone, Dadayan said.

“It’s becoming increasingly difficult for revenue forecasters around the nation,” she said. “In general, the forecasting errors are becoming larger.”

That’s not comforting to McMullen’s critics.

“They’re deciding to under-inflate our revenue,” said Joe Baessler, interim executive director of another one of the state’s largest unions, American Federation of State, County and Municipal Employees Council 75. “It forces budgeting that is not in line with how much revenue is coming into the state and rolls back the amount of money we have for services that Oregonians want.”

Morris, the SEIU research director, says Oregon’s poor forecasting has sent far too much money out the door in the form of kicker refunds.

“Over the last five forecasts it’s been embarrassingly bad,” he told OPB. “There are real consequences for the families of Oregon.”

A former epidemiologist for the Oregon Health Authority, Morris said he became wary of Oregon’s forecasts when he saw the impact inaccurate guesses could have on agency budgeting. Artificially low forecasts meant artificially limited funding that could curtail efforts he saw as vital.

Watching kicker after kicker, Morris and Baessler have come to believe state economists purposefully low-ball Oregon’s revenue to avoid the specter of budget cuts.

“Those cuts are painful and unpopular,” Morris said. “If you guess low then people get kicker rebates, and people like to feel like they’re getting money back.”

But Morris has had a hard time getting traction with this view. Kotek’s office, he said, did not respond to SEIU’s memo. The governor declined to answer questions about Oregon’s revenue forecast process for this story.

A central reason for the lack of interest might be that few seem to blame McMullen. Oregon’s tax structure makes it particularly difficult to predict revenues.

An impossible task?

In Salem, the job of a state economist is sometimes seen as a lose-lose proposition.

If McMullen and his team overestimate how much revenue the state will bring in, lawmakers will overbudget and be forced to either cut costs or hike taxes to make up the difference. If the guess is too low — as it has been for the last decade — Oregon probably has to give the money back in the form of a kicker.

The $174,000-a-year role is so thorny that when former state economist Paul Warner retired from state service, the Legislature honored him with a resolution that called it “the least enviable in all of state government.”

McMullen, a University of Pennsylvania grad and former consulting director for influential financial services firm Moody’s Analytics, has come to understand what the resolution meant.

“For the most part, people understand the challenges,” he said. “But [the forecast] has such an extreme impact on resources that there are people that get legitimately upset.”

Tom Potiowsky, who preceded McMullen in the job, recalls competing pressures from lawmakers. Some wanted him to inflate his forecasts, he said, to decrease the likelihood that there would be a kicker and increase the likelihood their pet program could be funded.

“Then you would have other legislators that always felt that if the forecast is too high, we get all these spending programs and government’s too big,” Potiowsky said.

But researchers like Dadayan don’t fault McMullen for Oregon’s string of kickers.

One reason is that Oregon’s revenue streams are particularly hard to peg. Voters have repeatedly shot down proposals for a comparably stable sales tax, and the state’s general fund is more reliant on income taxes than any other state in the country.

Income taxes are notoriously volatile, and states like Oregon that tax wealthier people at higher levels tend to see larger swings.

“It makes us depend more heavily on high-income households,” McMullen said. “And high-income households are the ones with these volatile income streams.”

The resulting revenue peaks and valleys create what former state Sen. Mark Hass calls a “Swiss Alps effect.”

“We’ve got a tax code that brings in too much in the good times and not enough in the bad times,” said Hass, D-Beaverton, a former chair of the Senate Finance and Revenue Committee. “That’s really the inherent problem here. The kicker is symptomatic of that problem.”

Another thing working against McMullen is Oregon’s policy of passing two-year budgets — one of 16 states to do so. Divining what economic tricks or treats lie in store more than 700 days into the future, he says, verges on impossible.

“The potential for error grows exponentially,” McMullen said. “We’re not talking about twice as hard to forecast. We’re talking about more than twice as hard, even though we’re only looking out twice as far as the normal state.”

The kicker was born in the late ‘70s, as inflation created anti-tax backlash that swept the country. At the time, policies slashing property and income taxes got far more play in news coverage of a tax-relief plan signed by Republican Gov. Vic Atiyeh. The kicker policy, by comparison, got scant mention.

But it is the kicker that has endured. For decades, the law also refunded corporate taxes to businesses when they came in above expectations, but voters in 2012 opted to set aside those payments for schools rather than refunding them.

Today, experts say the kicker’s 2% error threshold is laughably low.

“Nobody can get it right within one or two percent,” said Don Boyd, who directs research on state finances at the State University of New York at Albany and has studied revenue forecasts around the country.

Of course, McMullen’s last forecast wasn’t off by just 2% — more like 25%. Next year’s kicker will reduce the state’s general fund budget this biennium by roughly one-sixth. It’s more general fund money than lawmakers spent in the current budget on public safety, courts, colleges and universities or many other nuts-and-bolts services.

Maybe most dramatic, it is so large that taxpayers can expect to be refunded nearly 45% of all income taxes they paid to the state of Oregon last year.

“No other state has a law like the kicker, and it causes more disruption than I think the intent, which was to have control over spending by the state,” said Potiowksy, the former state economist. “The volatility of our revenue sources make it really, really tough.”

While the kicker is unique in its specifics, there are similar policies around the country. Massachusetts recently sent $2.9 billion back to taxpayers, when revenues exceeded a state cap. Colorado has a means of issuing refunds for surging revenues. So does Hawaii.

Hass, the former revenue chair, now sees wisdom in the approach.

“My thinking on it has evolved over the years to the point where I do believe we need some kind of kicker mechanism,” he said.

Plenty in his party disagree.

The invincible refund

The kicker has never been popular among some Democrats, who say the policy makes it difficult to plan for a rainy day. (Despite this frequent argument, Democratic budget writers have consistently saved a portion of tax revenues in recent budgets and Oregon’s reserve funds currently sit at record levels.)

State Sen. Lew Frederick is one of the most vocal opponents. The Portland Democrat needs little prompting to begin expounding on all of the things Oregon could do with the forgone money: fully fund schools, bolster mental health care, pay for road maintenance.

“We have the money,” Frederick said. “It’s not available because of the way we’ve designed the kicker, and because folks have been told that somehow [spending it] is taking money from them. It’s not.”

He’s not alone. State Sen. Jeff Golden, D-Ashland, has argued the state should carve out $1.7 billion of the forthcoming kicker to start a self-sustaining fund to prepare for wildfires. State Rep. Paul Evans, D-Monmouth, talks about reserving some of the money to bolster county probation services.

But despite running state government — they control both legislative chambers and the governor’s office — Democrats are largely helpless to touch the kicker cash because of foresight by the GOP.

In 1999, while in control of both chambers, Republican lawmakers put a measure on the ballot transferring the kicker refund from state statute — where its fate rested on the whims of legislators — to the state constitution, which only voters can alter.

“I saw the issue back then as the kicker going away if and when the Democrats ever took control,” said Senate Minority Leader Tim Knopp, R-Bend, who was a House freshman the year he helped lead the charge to put the kicker in the constitution. “I knew the pendulum would at some point swing back to Democrats.”

Then, as now, Knopp believed the kicker represents “the only true spending limit that exists” for state government. And when Oregonians agreed to enshrine the law in the state constitution it became virtually invincible.

Most voters, after all, are unlikely to vote against a law that offers them what’s effectively a tax cut every two years. Polling conducted by the firm DHM Research in 2019 showed 68% of voters supported the policy, and just 28% opposed it.

Lawmakers have the power to suspend the kicker on their own, and did so twice to ward off budget shortfalls in the early ‘90s. But once again, Knopp’s 1999 effort has made that difficult. The ballot measure changed the law to require a two-thirds vote in both chambers to suspend the kicker, a tougher hurdle than the former three-fifths requirement.

Under the current makeup of the Legislature, that means that Democrats need Republican votes in order to suspend all or part of the kicker. And those aren’t likely.

“This past session, I was approached multiple times by Democrats who wanted to use the kicker for some purpose, and their requests were well over $10 billion,” Knopp said. “The reason I haven’t done any of that is, once you open the door, you’re going to spend it all.”

The state’s highest-ranking Democrat has shown no appetite to spend kicker money. Kotek has repeatedly declined to entertain the idea of diverting the refund to address her top issues of housing and education.

“That personal income tax relief that will come in next year’s taxes is really important to Oregonians,” Kotek told reporters in October. “If Oregonians want to have a conversation of where the personal income tax kicker goes in the future, let’s have that.”

Quiet talk of reform

In fact, some groups are preparing for just such a conversation.

Earlier this year, North Star Civic Foundation, a Portland-based think tank, began circulating a proposal that backers hope could allow the state to harness some of the tax money that currently goes out the door when the kicker kicks.

The idea is to sequester revenue from capital gains — taxes on profits made when people sell things like stocks, bonds or homes — in a new fund that is separate from the state’s general fund. Citing Reed College research that shows capital gains taxes are an increasingly potent source of volatility in state revenue streams, North Star believes walling off this revenue will blunt the kicker’s impact, giving the state more cash for necessary expenses.

“It’s not our intention to repeal the kicker,” said Caitlin Baggott Davis, North Star’s CEO. “It’s our intention to add stability to the general fund.”

To that end, North Star has been floating its proposal with sympathetic lawmakers and other interested parties.

But as Baggott Davis acknowledges, such a change might come with a major hurdle. Since plucking money out of the general fund could drastically impact the amount of kicker money that flows back to taxpayers, there’s an open question about whether it could be enacted by lawmakers, or would need to be approved by skeptical voters. Legislative lawyers have said in the past that similar proposals needed to be approved at the ballot.

An answer isn’t likely coming any time soon. Democrats are sensitive to the lingering possibility of a Republican walkout, and have signaled they will keep contentious policy proposals — like toying with the kicker — off the table during next year’s monthlong short session.

“We are convening a group of problem solvers interested in developing solutions,” Baggott Davis said. “I don’t think anyone is motivated by urgency.”

In the meantime, McMullen continues releasing revenue forecasts.

In the latest one, last month, he told lawmakers that the state is inching toward another kicker.