Revenue Projections Will Drop, But Kicker Refund Will Stay
Oregon’s economy could dip into recession by the end of 2023, curtailing what has been a spectacular run of tax collections according to the latest quarterly economic and revenue forecast released today. Even if recession doesn’t occur, the revenue rocket ride will end.
A recession beginning at the start of the 2023-2025 biennium won’t derail an estimated $3.4 billion individual taxpayer kicker refund, state economists predict. Lawmakers will enter the 2023 legislative session after a long period of income tax payments outstripping projections, largely due to taxes on capital gains, but with the prospect of declining tax collections during the biennium.
State General Fund resources have continued to accumulate despite large income tax kicker refunds. Gross General Fund revenues have doubled since the Great Recession and especially shot up during the COVID pandemic. But now economists believe the outlook for the current and 2023-2025 budget cycles will be $1.19 billion less than the previous baseline estimate. They add that Oregon lawmakers should have more than $5.7 billion in education stability and rainy day fund reserves.
As recession takes hold, state economists say Oregon’s personal and corporate income tax revenue “will return to earth”. Income tax withholding has normalized over recent weeks, they explain, and “with labor costs and interest rates rising, corporate profits are expected to fall even if economic expansion persists.”
State economists anticipate a mild recession as the Federal Reserve ticks up interest rates to slow demand. They foresee state unemployment remaining around 4 percent from 2023 through 2030, with slower wage growth. However, recessions are hard to predict and subject to externalities like war and climate events. Gains in the current biennium will be offset by slower growth and lower tax collections in the 2023-2025 and 2025-2027 biennia, as well as another large kicker payout.
An “unsustainably hot” labor market has pushed up wages, contributing to inflationary pressures, state economists say. That could abruptly change if interest rates cool off the job market, driving up unemployment.
Gains in the current biennium will be offset by slower growth and lower tax collections in the 2023-2025 and 2025-2027 biennia, as well as another large kicker payout.
Predictably, legislative Democrats greeted the news of impending recession by pointing out the state’s currently robust economy, while legislative Republicans indicated they were poised to bring out budget knives to reduce spending. House Speaker Dan Rayfield said the legislature should continue to invest in housing, mental health and addiction and abortion access. Retiring Senate President Pater Courtney urged “careful” investment. Outgoing Governor Kate Brown said in a statement, “We must continue to make investments to benefit Oregon’s working families, so that all Oregonians can feel the benefits of our strong economic recovery.” Senate Republican Leader Tim Knopp said his caucus is “prepared to make prudent, fiscally responsible choices that focus on protecting core government functions Oregonians rely on every day, instead of growing government beyond our means.”
Oregon’s economy has outperformed the national economy because of faster population growth. The latest population estimates will be released next month, which will provide a window to analyze household income and poverty and the socio-economic makeup and employment of economic migrants.