Image for Drastic Budget Cuts May Loom as State Tax Revenues Plummet

Business closures and layoffs in response to the coronavirus pandemic will reduce state tax revenues by as much as $3 billion in the current biennium, posing difficult budget choices for Governor Brown and lawmakers. The economic lockdown also has affected local government revenues that will require budget cuts.

State agency heads submitted this week their contingency plans if required to chop 17 percent, as Brown requested, from their respective budgets. Proposals included shuttering 10 of Oregon’s 14 prisons, reducing K-12 school funding, closing state police offices in several small communities and trimming need-based college student aid. The potential budget cuts listed by state agency heads are for now just suggestions.

Brown and lawmakers have some options. They could tap into the state’s $1.6 billion in reserves that have been accumulated to deal with revenue declines during an economic downturn. More financial assistance could come from the federal government. House Democrats unveiled a $3 trillion emergency financial measure this week, with nearly $1 trillion targeted for states and local governments – and with fewer restrictions to plug budget holes than the $1.3 billion emergency funding Oregon has received. The fate of the so-called HEROES Act is uncertain, as Senate Majority Leader Mitch McConnell declared it dead on arrival in the GOP-controlled upper chamber. Negotiations with public unions will be part of the budget picture.

How deep the revenue shortfall will actually be won’t be known publicly until next week with the official release of the quarterly economic and revenue report from state economists. The $3 billion shortfall projection has been bandied about for more than a week, suggesting at least the scale of the revenue drop.

More troubling, the report might sound a dire warning about a slower than hoped for economic recovery as the virus remains not fully controlled and an effective vaccine is still months away from approval. Such a warning also would take into account the lasting damage inflicted by the economic lockdown, which has led to permanent closure of some businesses and nonprofits and the expected delayed opening of bars, restaurants, entertainment venues and sports arenas.

Sheltering in place also has taken its toll on gas tax receipts and lottery revenues, which could slow road repairs and impact state park funding.

Some of the damage resulting from the pandemic is psychological. Many families have seen paychecks disappear, sending them to food banks for the first time in their lives. With schools closed, parents have become at-home educational coaches as children cope with online learning – or struggle to find internet access to get online lessons. Quarantine fatigue has set in for many people, creating stress or amplifying already existing anxiety, which become a more severe problem with anticipated budget cuts affecting Oregon’s mental health services.

The Oregon General Fund budget for the 2019-2021 biennium is $22.4 billion. Personal income taxes make up 85 percent of General Fund revenue, with corporate income taxes and lottery funds masking up the rest. A new corporate activity tax went into effect January 1 that was designed to generate $1 billion in additional revenue to boost K-12 school funding. Business groups have called for a delay in implementing the new tax, which Brown has rejected. She has relaxed rules on the payment of first quarter CAT assessments.

As tax revenues have fallen because of reduced economic activity, spending has spiked to deal with the health care effects of the coronavirus, such as increased testing and acquisition of critical medical supplies.

Rumors continue to swirl around a legislative special session in June to address budget gaps resulting from the forecast and COVID-19 economic collapse. In addition, lawmakers may gavel into another Emergency Board budget hearing later this week to authorize the use of a portion of the Coronavirus Relief Fund Oregon received weeks ago. No agenda for the hearing has been set at this time, however.