economic forecast

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.”


Inching Closer to the "K" Word

It's amazing how quickly you can forget something like the personal kicker, the obscure Oregon income tax provision that can suddenly rain on the parade of an economic recovery for state government.

State economists gave lawmakers this week their latest quarterly estimate of economic progress and state tax collections. The news was good, maybe a little too good. Net proceeds for the State were projected upward by $54 million as a result of more people working, especially on housing. That means no budget cuts to existing state agency budgets.

But the latest uptick in state revenue is precariously close — about $72 million — from the trigger that would require the return of the entire surplus of $290 million or more to state personal income taxpayers, leaving an unanticipated hole in budget planning.

The personal and corporate income tax kickers were instituted by lawmakers to prevent lawmakers from spending "surplus" revenues that exceeded by 2 percent projections on which spending bills were based. The kickers were akin to a financial chastity belt to avoid legislative spending sprees during economic good times that couldn't be sustained in the inevitable economic bad times. 

Stuck in Low Gear

Oregon's stagnant economic recovery is likely to shift the legislative focus to reforming the Public Employees Retirement System to relieve pressure on the state and local budgets.The latest quarterly revenue forecast drew a sigh of relief from lawmakers who won't face the prospect of immediate spending cuts. But the accompanying economic forecast confirmed what people feel — Oregon's economic recovery is stuck in low gear.

If nothing else, the forecast served as the opening act of the 2013 legislative session.

New House Republican Leader Mike McLane seized the moment to underscore that 160,000 Oregonians are out of work and may have slim prospects if the state economy continues to limp toward recovery. "Without stronger private-sector job growth," he said, "the next legislature will have difficulty funding education and other services at the levels Democrats promised to voters in the recent election."

"As 2012 winds down," said State Economist Mike McMullen, "Oregon's economic expansion persists, but remains stuck in low gear. Growth continues to come in fits and starts — a strong quarter or two followed by a weak quarter or two, with the underlying trend remaining slow and steady." 

Solid Recovery with No Momentum

State revenues were up slightly, but the latest quarterly economic forecast released today in Salem shows Oregon's economy is headed upward at a frustratingly slow pace. The state economist said Oregon's recovery is on solid footing, but lacks momentum.

Increased revenues of $116 million were welcome news to nervous legislators meeting at the Capitol, but most of the increase came from a legal settlement, not economic growth. Personal income tax collections were actually down $22 million, while corporate tax receipts grew a slim $.2 million from the previous quarterly forecast. Lottery proceeds also registered a gain.

Those meager results were framed by news that the Kitzhaber administration is lopping off 190 positions in various state agencies. Many of the eliminated positions are vacant, but there will be some layoffs. In their February session, lawmakers directed the governor to identify $28 million in savings by reducing the number of managers, consultants and public relations positions.

While no one is happy with the rate of growth, the state's economy at least isn't going in reverse. Oregon's unemployment stands at 8.6 percent, higher than the national average of 8.2 percent, but a significant drop from the 9.6 percent rate a year ago. Portland's jobless rate has continued to inch down to 7.9 percent.

One bright spot in the economic forecast was the continued rise in exports from Oregon, but even that good news cast a shadow. Exports grew in 2011 by 3.5 percent, just a fraction of the 18.6 percent growth rate seen in 2010.

The not-much-changed revenue forecast probably means lawmakers are off the hook, at least for now, to make deeper spending cuts. However, legislative budget-writers are bracing for more cuts down the line as costs continue to rise while revenues remain stagnant. Rep. Dennis Richardson, R-Central Point, said the forecast is another reminder state spending needs to be reduced to fit within anticipated revenues.

Bits and Pieces from the Policy Trail

Here are some worthy tidbits — from a prediction of a recessionary echo to a call for merit-based appointments of judges, with thoughts about international trade, the Greek debt crisis and Occupy Portland thrown in for good measure.

  • Tim Duy on Oregon's Economy: The Oregonian cites Duy's report on a small improvement in Oregon's economy in September, but not enough to allay fears of an echo recession. The way Duy, from the University of Oregon, put it: "...I become very cautious that, in fact, a recession is brewing beneath the surface." He said the European financial crisis could push Oregon and the United States over the recessionary cliff.

    That's not good news for legislators as they head to Salem for "legislative committee days" later this month, including a report to the Joint House and Senate Revenuye Committee on the next state revenue forecast. Duy's comments portend more bad news and that could mean cuts in K-12 education, higher education, cops and prisons and human services, including health care. The further downturn also could put a dent in Governor Kitzhaber's plans for health care and education reform, both of which will be up for consideration in the February 2012 legislative session and both of which rest, at least in part, on decisions about the state budget.