Oregon Revenue Forecast Shatters Expectations, Largest-Ever Kicker On Its Way

Even state officials hardened by years of boom-bust financial forecasts couldn’t conceal their surprise Wednesday, as state economists delivered their latest snapshot of Oregon tax revenue outlook.

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The sheer magnitude of tax collections the state has seen in the last several months was just too large.

“I have never seen anything like this,” said state Sen. Mark Hass, D-Beaverton, who chairs the Senate’s revenue committee.

“It was truly a seismic event,” replied State Economist Mark McMullen.

After unprecedented tax collections during the tax filing season, Oregon’s revenue outlook for the current biennium is far, far stronger than anyone expected.

Oregon is expected to take in more than $900 million in additional general fund and lottery resources for the current biennium than officials predicted just three months ago. The state is expected to bring in more than $2.1 billion more in the current two-year budget cycle than economists initially predicted in 2017.

In Oregon, that means much of the unexpected money is headed back to taxpayers. The state’s unique “kicker” law refunds tax collections above initial estimates if those collections come in 2% or more above what was anticipated.

The state currently expects to collect 7.6% over initial forecasts, meaning an anticipated kicker refund of more than $1.4 billion — the largest by dollar amount in Oregon’s history.

That will translate into a credit in Oregonians’ 2020 personal income tax filings (those for tax year 2019), with a median expected rebate of $338 and the top 1% of earners seeing a refund of nearly $14,000.

At the same time, the state is anticipating an ending balance this budget cycle nearly $870 million larger than expected in March.

It’s unclear how much of the current prosperity will translate into future bienniums, economists said. Forecasters are predicting an economic slowdown in the near future.

Related: After Tumultuous Week, Oregon Senate Passes Historic School Funding Bill

While lawmakers receive revenue reports and forecasts each quarter, Wednesday's report was especially important. It’s the last prediction for resources the Legislature will hear before it passes the state’s next two-year budget, helping set the tone for the last month and a half of the legislative session.

In a short presentation to the Senate and House revenue committees Wednesday morning, McMullen appeared somewhat incredulous while laying out the numbers.

“The tax filing season was crazy in the last couple months,” he told lawmakers. “Both our corporate and our personal income tax collections are up more than 50% over last year."

The state is collecting more corporate taxes as a share of profits than it has in more than 15 years, and personal income tax withholdings as a share of wages are at an all-time high — more than 9% — McMullen said.

The “most likely suspect” for the windfall, he said, were federal tax reforms that gave taxpayers incentives to shift incomes to 2018. Oregon also likely has a growing corporate tax base, he said.

McMullen presented the numbers as bittersweet. In other states, he noted, record revenues are kept in state coffers. In Oregon, they flow back to taxpayers.

“This has been a difficult day for us,” he said.

But he added that the current revenue picture should put the state’s reserve funds at roughly $3.5 billion, an all-time high. And while kicker money might be gone — lawmakers have made no serious move toward diverting the money to other purposes at this point — the additional $870 million ending balance can be pushed into the next budget.

As always occurs, officials were quick to issue partisan takes on the revenue forecast shortly after its release.

In her statement, Gov. Kate Brown called the windfall a “unique opportunity to protect Oregon’s future.” She suggested she would use the new money to make “targeted investments” on things like the state’s ballooning pension debts, housing, foster care, state police and higher education.

House Majority Leader Jennifer Williamson, D-Portland, said in a statement lawmakers "must focus this windfall in areas where it serves the greatest good while preparing for the next downturn."

Meanwhile, Republicans were quick to point out Democrats recently passed a new business tax to pay for schools — a move legislative leaders have trumpeted as a fix that's been needed for three decades.

"We just passed a $2 billion tax that will hurt Oregonians on fixed incomes when we have revenue coming out of our ears with a $870 million dollar surplus and $1.4 billion dollar kicker that taxpayers deserve to get back in full," Senate Minority Leader Herman Baertschiger, Jr., R-Grants Pass, said in a statement. "This serves as another example of the majority party continuing to tax hard working Oregonians to fill the pockets of big government."

The drama of the revenue forecast places the budget discussions that will occur in Salem in the next six weeks in a new light.

Related: Oregon Legislative Leaders Present New Plan For Tackling Big PERS Debt

The state's top budget writers this year issued a framework that would include cuts to many state services, while funding schools and health care and placing more money into reserves. But that framework was issued prior to the new business tax, and well before economists had an inkling of how strong tax revenues would be.

Particularly contentious recently has been the issue of funding for higher education, which is not slated to receive any piece of the new business tax revenue. Brown has been clear that she could seek to put new revenue from the May economic forecast toward community colleges and universities.

Hass, the Senate revenue chair, suggested Wednesday such spending could be short-sighted.

“This is a historic windfall and, to me, in public finance when you have a temporary phenomenon ... the appropriate position is you sock it away,” he said. “I guess I would appeal to my fellow revenuers here to appeal to our colleagues that this goes to the rainy day fund or the [Public Employees Retirement System] fund or something. Not to spend it, because as you note, it is a temporary phenomenon.”