Oregon wages

Kicker Refunds Balloon, State General Fund Shrinks

The latest Oregon economic and revenue forecast predicts a ballooning personal income tax kicker and a shrinking state General Fund. The forecast says good economic times remain, but cracks in the economy are showing.

The latest Oregon economic and revenue forecast predicts a ballooning personal income tax kicker and a shrinking state General Fund. The forecast says good economic times remain, but cracks in the economy are showing.

The headlines for the latest economic and revenue forecast zeroed in on larger-than-anticipated income tax kicker refunds. Overlooked was a prediction that Oregon’s General Fund going forward will be “significantly smaller”.

The forecast, which is produced quarterly by state economists, is generally positive. “Oregon continues to hit the sweet spot for now. Growth is strong enough to keep up with an increasing population and deliver economic and income gains to Oregonians. The share of working-age residents with a job is higher than the average state. Both wages and overall household incomes continue to rise at a faster rate.”

That rosy outlook was tempered, however. “The state is not immune from national and international developments. While topline manufacturing indicators in the state look good, cracks may be forming due to the [US-China] trade war.” 

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When the forecast was released this week, most eyeballs focused on the income tax kicker, which is expected to balloon from an estimate in May of $1.4 billion to $1.57 billion, making it one of the largest refunds in state history. 

“Kickers of this size occur about once every decade, typically around the peak of the business cycle,” according to the forecast executive summary. “As was the case with the large kicker generated during the mid-1980s, changes in federal tax policy played a large role in generating above-trend state collections last biennium.”

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Oregonians with higher incomes will get the largest refunds, ranging in thousands of dollars. The average kicker refund, based on an adjusted gross income of $64,300, is projected at $739. Refunds will apply when filing 2019 personal income tax returns.

Kicker rebates are triggered when actual state revenues exceed forecasted revenues in the state’s biennial budget by 2 percent or more. Individual Oregon taxpayers receive refunds. Corporate kicker refunds are diverted to shore up future school funding shortfalls.

The overlooked portion of the forecast traced the shrunken General Fund to the “enactment of a Corporate Activity Tax (House Bill 3427),” which includes “personal tax rate cuts and is expected to reduce business tax liability.” Personal and corporate income tax revenue account for the majority of Oregon’s General Fund.

“While the Corporate Activity Tax will clearly be a net positive for the state budget as a whole, it will reduce General Fund resources since the new collections will not be deposited there,” state economists said.

“Heading into the new biennium, uncertainty about the performance of the nationwide economy has become paramount,” state economists warned. “Growth will certainly slow to a sustainable rate in the coming years, but the path taken to get there is unknown.” 

“Fortunately, Oregon is better positioned than ever before to weather a revenue downturn. Automatic deposits into the Rainy Day Fund and Education Stability Fund have added up over the decade-long economic expansion,” they added. “When the expected ending balance for the current biennium is included, Oregon has more than $2.5 billion in reserves set aside, amounting to more than 12 percent of the two-year budget.”

The quarterly forecasts contain a lot of interesting data about Oregon’s economy. Here are a few nuggets:

  • “Oregon continues to see healthy rates of growth when it comes to employment, income and GDP. However, the state is no longer significantly outpacing the nation like it was a couple years ago. “

  • “Personal income growth remains stronger, meaning Oregon income per capita, per worker and per household is rising faster than nationwide.”

  • “Businesses face a combination of issues. First, sales will continue to grow. Firms will need to invest and hire to chase those increasing sales, market share and profits. Second, the pace of those sales increases will be slower. Migration and job growth are tapering in a mature expansion, meaning there will be more potential customers, but the increases next year will be smaller than this year. Third, the increased uncertainty regarding the economic outlook may have firms wary of investing and hiring as they may be less confident they can recoup the fixed costs of expanding if the underlying sales do not materialize. Fourth, businesses continue to face a relatively tight labor market in which attracting and retaining workers remains a key issue. To fill positions, firms must compete on price and also continue to cast a wider net and to dig deeper into their resume stacks to find candidates they may have previously passed over in a different labor market.”

  • “For households, a slowing economic outlook still brings good news, although a recession clearly does not. For Oregonians not working today, there has not been a labor market this strong since the late 1990s. Job openings remain plentiful and firms are more willing to overlook incomplete skill sets or gaps on resumes in order to hire and expand. Now, a strong economy cannot overcome structural mismatches in terms of skills or geography, but it does ease cyclical and frictional reasons for unemployment. For those already working, a tighter labor market raises wage growth. The outlook calls for 4 percent average wage growth per year, similar to what Oregon has experienced in recent years.

  • “Weekly hours worked in manufacturing are dropping quickly so far in 2019, with Oregon’s decline more than twice the nation’s. This gap between ongoing employment gains and fewer hours worked per employee is not sustainable.”

  • “While Oregon exports are down over the past year or two, they are holding up relatively well when compared to other states. This is in large part due to a few, isolated increases masking weakness elsewhere in the data. In particular, Oregon exports to China are surging due to increases in computer and electronic products and chemicals. So far these have not been impacted by the tariffs.

  • “To the extent that commodity exports are down, then US exporters can and will need to find other international markets to sell their goods. Additionally, given the recent Chinese retaliation of not buying any US agricultural products, these adjustments will clearly need to be accelerating and ongoing to avoid further declines in export activity.”