Forecast: Oregon tax, lottery revenues shoot up $2 billion despite COVID-19 recession
Oregon lawmakers on the House and Senate revenue committees received a state revenue forecast update on Wednesday. Economists now predict the state will receive $2 billion more than estimated in May, near the start of the recession.
Oregon economists unveiled a shockingly large upward revision in tax and lottery revenue projections on Wednesday: $2 billion more than they predicted in May, around the start of the COVID-19 recession.
Income and overall financial inequality emerged as a theme in the forecast, as state economists and lawmakers struggled to reconcile the robust personal and business earnings underlying the windfall tax revenues with the plights of Oregonians struggling in the COVID-19 recession.
News of the windfall, which is largely based on actual income tax payments over the summer, comes one month after state lawmakers held a special session to close an anticipated $1 billion budget shortfall through a combination of program cuts and fund shifts.
State economist Mark McMullen attributed the dramatic change to a flood of 2019 personal income tax payments near the extended July filing deadline and economists’ failure to fully appreciate the amount of federal COVID-19 aid to businesses.
“Not until July 15 did we see this windfall of tax payments,” McMullen said. By that time, the state had received and processed 95% of Oregonians’ income tax returns and “they weren’t sharing nearly this kind of income growth,” McMullen said.
The 5% of filers who submitted their returns at the last minute “include many of our highest income earners,” McMullen said, which suggests they “did particularly well” financially in 2019.
McMullen called it “somewhat shocking, this disconnect between personal income taxes and corporate taxes and the underlying income and jobs that are out there.”
Major companies that file corporate tax returns reaped $200 million to $300 million in additional revenue through the federal Paycheck Protection Program — a loan program to maintain payrolls, that can turn into a grant — “as well as the other corporate bailouts,” McMullen said. That does not include businesses that file taxes using personal returns, which includes many doctors, lawyers, small businesses and even larger firms.
The huge infusion of federal dollars early in the pandemic will create some uncertainty as economists work to predict state tax revenues in future years. For example, McMullen said businesses and accountants are currently discussing whether those firms can deduct payroll and rent expenses on their taxes as they normally would, if the federal government rather than the business paid the costs. If firms can deduct the expenses paid by the federal government, that would mean less tax revenue for the state than if the deductions are not allowed. McMullen said he expects the question will be decided in the courts.
With the tax revenue boost, Oregon is now on track to end the current two-year budget in June 2021 with a $1.7 billion savings cushion, up from the $500 million in reserves lawmakers built in last year, economists said.
Oregon state economists updated lawmakers Wednesday on tax windfalls, which — along with legislative budget adjustments in the August special session — boosted the expected budget cushion from around $500 million as of 2019 to $1.7 billion.
Economists predicted the tax revenue picture will worsen in coming years, although their economic modeling did not predict as steep of drop-offs in tax revenue in upcoming budgets as in the May estimate.
Oregon’s two-year state budget is approximately $25 billion and the latest revenue forecast predicts general fund and lottery revenue will be more than adequate to fund that. The problem will come in future budgets, including the 2021-2023 budget for which Gov. Kate Brown’s administration and legislative budget writers are now planning, because economists do not expect tax and lottery revenues will grow fast enough to keep pace with spending levels necessary to maintain current government service levels.
Chris Allanach, an economist who serves as Oregon’s legislative revenue officer, said state spending on a biennium-over-biennium basis has grown by 13% to 15%. Allanach said revenue growth for the next two-year budget will likely be closer to 8%, which would force lawmakers to cut some state programs and services.
Escalating personnel costs are one reason taxpayers would have to spend more to buy the same level of public services in the next two-year budget. The state is phasing in $200 million worth of salary increases for everyone from front line workers to government executives in the current budget, for total pay increases that will average up to 15%. The full cost hits in the second year of the current budget but will apply to both years of the 2021-2023 budget.
On top of cost increases to maintain the status quo, lawmakers will face demands to boost spending on safety net and other programs to help Oregonians struggling during the recession. The federal government covers a large share of many of those program costs but the state typically must still chip in and those bills add up quickly.
In a statement on the forecast, the governor said the state must continue to sock away money in rainy day funds and should make prudent financial decisions.
“We must prepare for the costs of continuing to provide critical services in the next biennium––from health care to affordable housing to wildfire readiness and response,” Brown said. “This year, we must celebrate every piece of good news we can get. But even with the welcome news of increased revenue projections, my commitment remains to make prudent financial decisions and position our state to manage unforeseen economic challenges that may come our way.”
Brown said during a wildfire briefing Wednesday afternoon that she still expects the Legislature to convene for a third special session after the November election to potentially consider the state’s wildfire response and other issues, and in the coming weeks she expects to work with lawmakers to approve interim housing assistance for people displaced by wildfires and funding for debris removal.
House Speaker Tina Kotek, D-Portland, said in a statement that “income inequality is glaringly clear in this forecast” and ”our decisions in the next few months should be focused on supporting those most impacted by the recession and being wary of the potential volatility in revenue over the next year.”
Senate President Peter Courtney, D-Salem, noted that despite the improved forecast, “Oregon is facing hardships like we’ve never experienced before. Wildfires continue to burn across the state. We are still facing a global pandemic. We have lost too many lives, homes, and businesses.” He urged lawmakers to work together to help struggling Oregonians.
In a statement, Senate Republican Leader Fred Girod of Gates accused the governor of creating deeper income inequality in the state through her pandemic response orders, such as restricting restaurant and bar operations.
Girod also said there is no need for the state to raise taxes.
Although lawmakers are not currently considering a specific tax proposal, left-leaning groups have urged the Legislature to undo Oregon’s automatic adoption of state tax breaks mirroring federal CARES Act breaks for businesses and wealthy individuals. Those tax cuts included allowing businesses to retroactively apply net operating losses to the five tax years preceding the loss and lifting the $500,000 cap on the amount of business losses that could be used to reduce taxes on other earnings, such as capital gains from selling stock.
Democratic legislative leaders declined to roll back the tax cuts in August.
House Republican Leader Christine Drazan of Canby also warned the Legislature against raising taxes. “Rural Oregonians are still suffering disproportionately, as are women and those in starting wage jobs that lost so much with the shutdown orders,” Drazan said in a statement. “We must oppose higher taxes and come together to advance policies that support full economic recovery for all Oregonians.”
As state economists and lawmakers said repeatedly during the revenue forecast meeting Wednesday, the strong earnings of upper income individuals and businesses that fueled the surprise tax revenue rebound should not obscure the degree to which lower income workers are struggling.
“Why are we having so much revenue when we know the underlying economy is not healthy?” McMullen said. Part of the reason is that lower income employees such as restaurant and personal services workers have disproportionately borne the pain of COVID-19 economic shutdowns and changes in consumer behavior. People at the top of the economic ladder in Oregon and the rest of the country earn so much, McMullen said, that their income growth can hide the income losses for those closer to the bottom.
Forecast: Oregon tax, lottery revenues shoot up $2 billion despite COVID-19 recession Oregon lawmakers on the House and Senate revenue committees received a state revenue forecast update on