A recent economic forecast by the Oregon Office of Economic Analysis shows that state lawmakers have more than $500 million to spend than previously expected. Still, much of the money has been accounted for and a slow population growth could negatively affect Oregon’s economy in the future. Mark McMullen, the state economist, joins us with details of the forecast.
This transcript was created by a computer and edited by a volunteer.
Dave Miller: This is Think Out Loud on OPB. I’m Dave Miller. When Oregon lawmakers started their session earlier this month, they got some good news from state economists. The latest economic forecast says that there is $558 million more in state coffers than was initially expected. Still, a lot of that money has already been accounted for and Oregon’s stalling population growth could have a negative effect on the state’s economy in the future. Mark McMullen is the state economist. He joins us now. Welcome back to the show.
Mark McMullen: Thanks for having me, Dave.
Miller: So let’s start with these most recent numbers, the $558 million more that’s on hand than was originally budgeted for. Where did that money come from?
McMullen: So that’s $558 million, in addition to what we last told the legislature three months ago, in our last quarterly update. A lot of that’s coming from the spending side. In terms of the revenue outlook, it’s very stable right now and it is tracking very closely with expectations, aside from a few exceptions and different line items in revenue. So revenues were revised upward a little bit.
$76 million. $76 million is not a little bit, obviously. That pays for a lot of teachers, but it’s much less than a half a percentage point in terms of the two-year budget.
Overall, putting the spending side in there as well, we have $558 million in additional resources, as you mentioned - a lot coming from unspent appropriations from the last budget period here at the end of the year. The accountants closed all the books on the ‘21-’23 budget period and then went ahead and recovered the resources that weren’t used in the last biennium but were expected to be spent.
Miller: Can you explain in general that appropriated-but-unspent money? I mean, if we’re talking about around half-a-billion dollars, close to it, where does that money come from? Is it people whose positions existed but who weren’t hired? I mean, how do you get almost half a billion dollars of allocated money that’s not spent?
McMullen: So we’re getting outside of my sandbox here. I’m the revenue side of the equation and not the spending side. But this happens every biennium because the budget’s huge. And it comes from a whole wide range of agencies and spending programs. So each one has their own story as to why, whether there were cost savings or whether things didn’t get done or people didn’t get hired, or whatnot. But they sweep this across all of the state government, so again, while $400 or $500 million seems like a whole lot. Over the whole size of the budget, it’s pretty typical from biennium to biennium.
Miller: How much of the money that we’re talking about has already now been factored into spending plans for the current biennium?
McMullen: The Legislature, as of right now, has appropriated almost everything, except for about $1.6 million in additional resources. That will change after the short session and any additional spending plans that are put in place in the next couple of weeks. Right now, the vast majority of the budget has been spent. But lawmakers have left a decent cushion at this point.
Miller: Since becoming law in 1979 the “kicker” refund has been triggered more often than not, including the last five budget cycles in a row, for personal income taxes. I know we’re early here, but what is the current two-year cycle looking like right now, in terms of money that’s come in and how much money are you expecting over the course of two years?
McMullen: Now, we have seen additional resources in terms of corporate income taxes that aren’t included in the kicker base. But if we count just the kicker base, right now, the two-year forecast, we’re about $100 million above expectations. So that’s about 20% of the way there. The kicker threshold is about $500 million. We’re still well below the threshold, although we still have two tax-filing seasons to go in the biennium. So there’s still quite a bit of uncertainty out there.
Miller: Am I right that corporate tax revenues are up respectively, more than personal income taxes?
McMullen: Absolutely. And this has been ever since 2017 when we had law changes at both the federal and the state levels, we’ve seen a real explosion in our traditional corporate income taxes, not the new corporate activity tax. And our traditional corporate income taxes have tripled over that time. A lot of this is coming from the largest corporations and a lot of it coming from multi-state corporations that operate in all states, not just Oregon.
Miller: But for the purposes of projecting the revenues, on the corporate side and the income side, is it also the case that the projections are more off for corporate revenue than they are for personal income tax revenue?
McMullen: Correct. And both are some of the most volatile revenue streams and hardest to predict out there. But corporate really does take the cake.
Miller: How does our economic picture, right now in total, compare to the national picture?
McMullen: It’s looking pretty good. So at the national level, things are stable, with a wide range of consensus [among] economic forecasters and business leaders believing that we should be able to avoid a recession in the near term. And that’s good. But in Oregon and across the US, the labor market appears to be pretty much tapped out, in terms of difficulty finding workers still. And most folks who want a job have one at this point. So that’s made labor more expensive and made firms look to become more cost effective by investing in productivity enhancements and the like. So going forward, it looks like we’re depending more on productivity and not job gains. And in recent history, that’s been really good for Oregon.
Over this pandemic budget cycle, we’re third across states, in terms of output-per-worker. So the productivity gained rather than more workers. And we’re seeing it across every region of the state, with some of our rural counties being included as well. And so it looks like, going forward, this should continue because we’re really in a healthy environment for business investment, seeing a lot of start-up activity, R&D and the like.
Miller: But you did tell lawmakers that the main change in the economic outlook, the most recent one, is a little bit of a downward revision in terms of population and job gains, which could reduce personal income tax receipts going forward. How big a deal is this?
McMullen: That’s right, Dave. It has the potential to be a very big deal. But our advisors aren’t ready to go there yet. So between the last time we went in front of the Legislature and when we did most recently, a couple of weeks ago, we got an additional data point for population.
So the mid-year 2023 numbers from both the Census Bureau and Portland State University came out. And while they differ, they’re both flat, relatively again, for a second year. And this is something that Oregon is not used to. The last time we saw population declines or negative out-migration happened in the early eighties, when all of the timber mills across the state closed and people were forced to move out to look for jobs. This one is fundamentally different, where there are plenty of jobs out there.
But yet, we’re seeing a slowdown in our traditionally very strong migration trends.
And the leading suspect there would be affordability of the area with folks moving to other states or more affordable regions. And so yes, given this, another additional slow population growth data point, we lowered the outlook going forward for both population and employment gains. And those do accrue and become larger the further we go out in time.
Miller: What is the most likely scenario, going out a couple of years, in terms of the potential hit to Oregon’s economy?
McMullen: So our baseline or most likely scenario is that migration trends reaccelerate, not back to what we’re used to in previous periods of economic expansion, where we saw big waves of workers coming into the state. [These were] not just any workers, but young working age households, very productive workers, those in their root-setting years. The gold standard for economic development is people buying their houses and choosing their school districts and furnishing them and the like. So, we do expect that to bounce back. But given the broader demographic mix that we’re looking at, it’s very modest compared to what we’re used to in the past. So, a half a percent of growth every year.
Now, we have presented to the Legislature and the governor an alternative long run scenario. What happens if things have fundamentally changed, and our migration trends don’t bounce back as expected. And those numbers were surprisingly less catastrophic than we had worried when we started the exercise, for a couple of reasons. One, again, our baseline outlook is pretty slow population growth going forward. And the second is, we only look out 10 or 15 years in terms of our outlook. So a lot of these population growth issues don’t really fully accrue until you’re out 20 or 30 years.
Miller: I want to turn back to the big question of forecasting revenue at the statewide level. Our political reporter Dirk VanderHart did a deep dive into this in December. And he pointed out that, according to a few different analyses, only three states did a worse job than Oregon in terms of revenue forecasts between 2015 and 2022. What do you see as the big challenges in Oregon?
McMullen: Yeah, those multi-state studies, to begin, are not very accurate. You can’t really compare different states with different systems and different timing and the like. But just for a few, Oregon looks out two years in its budget rather than one, which given the uncertainties out there in the world, really do cause challenges.
The second issue is our dependence on very volatile revenue streams in our general fund. We’ve diversified our tax base in recent years, but not in the general fund. We’ve added some more consumption-based taxes. A lot of them, [with] the corporate activity tax being number one. But we have a lot of lottery revenues, cigarette taxes, vehicle privilege taxes, lodging taxes, and a whole list of things that aren’t in the general fund. And so not measured in these studies yet, are [these that are] meant to stabilize the revenue base and for which the forecasts are quite a bit more accurate.
Whereas, our corporate and personal income taxes are variable, which formed the basis of the general fund. And they’re even more volatile than in most states for a couple reasons. One, because our underlying economy is more boom and bust. A place like Kansas where economic growth is pretty stable year over year, is a lot different than Oregon where any time the US grows, we grow faster. And most of the time when the US shrinks, we shrink further.
And then finally, we have a progressive system in our income tax, where we have the top rate increase quite a bit. So when times are good, not only do we see more [ taxable] income tax come in, but then it’s taxed at higher average rates because more people creep up those brackets. And more of the income is realized at this top bracket, particularly the hardest stuff for us to forecast [which] is all the investment and business type income that passes through the personal income taxes.
Taxpayers can realize this at different times than they earned it in the market. So they’ve had a stock for 10 or 20 years. They’re afraid the capital gains tax is gonna go up, like people were a year or two ago. And they decide to pull all those realizations into, in this case the 2021 tax year, which made last biennium particularly difficult to handle.
Miller: So there’s two huge issues there that you’re outlining. One is just the entire makeup of our economy. And the way revenue works here, the way taxes work. But then there’s also the budgeting question, the fact that lawmakers in Oregon, which is not the norm among the majority of states, budget in two-year cycles. And your forecasts then necessarily are also two years out. You’ve said that that makes forecasting more than twice as hard, even though you’re only looking twice as far out. What do you mean?
McMullen: Well, obviously, there are shocks to the economy at any given point in time. It’s more likely that you’re going to have something happen, a pandemic or whatever it may be, over that period of time. So it kind of compounds these errors, particularly if one of these shocks comes early in the forecasting period. Then you’ve changed the trajectory for a whole two years. And so it has more time for that error to compound.
Miller: Mark McMullen, thanks very much.
McMullen: Thank you.
Miller: Mark McMullen is the Oregon state economist.
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