New Biennium Projections Include $5.6 Billion That Went for Kicker Tax Refunds
Oregon’s rosy revenue forecast of $8 billion more to spend next biennium seems out of step with budget shortfalls in many states, including neighboring Washington. The Oregon income tax kicker may be the cause of confusion and potentially overconfidence.
Tim Nesbitt, former labor leader and gubernatorial adviser, explains in an op-ed published by the Oregon Capital Chronicle that Oregon’s annual income growth is lower than growth rates in budget-struggling Washington and California.
Oregon’s revenue forecast for next biennium looks impressive, he says, because the $5.6 billion sent back to taxpayers as kicker refunds now will be part of the 2025-2027 biennial revenue projection. What looks like a 29 percent revenue increase is actually only a 6 percent growth over the last year, he explains.
“Because of that kicker-induced, artificially low revenue level in the current budget, it might look like the state is enjoying a revenue surge that can sustain higher levels of spending going forward,” Nesbitt observes. “But the reality is that most of the new revenue forecasted for the next budget period is catch-up money from earlier gains in household incomes.”
“This is the challenge for the Legislature’s budget writers,” he says. “Topline numbers of the kind released last month can give advocates for public service spending a false sense of abundance. They have compelling cases for be made for boosting funds for schools, early childhood programs and mental health care in particular.
But, Nesbitt adds, “If lawmakers this session raise ongoing spending above 5-6 percent a year, or above $3 billion in the next budget period, they’ll be creating an unsustainable spending trajectory.”
The state’s budget position is also precarious because Oregon income taxpayers filing returns for the 2025 tax year are in line for another $1.7 billion in kicker refunds.
The state refunds state revenue that exceeds its final biennial budget revenue projection. Because revenues have outpaced projections in recent biennia, Oregon income taxpayers have received substantial refunds. The kicker refund for the 2021-2023 biennium was the largest in state history.
Another warning sign comes from Washington, DC where President Trump has begun imposing stiff tariffs that will affect major Oregon importers and exporters, as well as cutting the federal workforce and some federal programs. The exact impact is unknown but an economic downturn, or even a recession, could develop in the next year or two.
House Republicans have approved a budget reconciliation measure that would likely include significant federal spending cuts in Medicaid and food benefits.
“The threats of federal cuts in funding for Medicaid, education and other vital state programs are real,” Nesbitt predicts. “They are likely to force states to struggle to sustain what they have in place before committing to new, ongoing funding levels that would have been hard to keep going, even in steadier times.”
Oregon is better positioned than other states, perhaps ironically, because of the kicker refund. The previous legislature couldn’t spend what it had to refund to taxpayers. “Thankfully for Oregon, there is a lot that can be done with an extra $5 billion to weather the political stormfront on the horizon.” Nesbitt says, adding a note of caution, “Just not yet, and not all at once.”
Governor Kotek’s Recommended Budget
Governor Kotek’s recommended General Fund and lottery budget for the next biennium is $39.3 billion. That’s up from the $33.5 billion General Fund and lottery budget lawmakers approved in 2023
Her budget doesn’t include many new programs and instead reflects budgetary pressures caused by inflated costs. “People understand this from their own household budgets,” Kotek said. “While our economy is strong and wages are up, and people, if you just look at the numbers, are making more, their expenses are up. And in the case of the state, our expenses for health and human services have really grown, so the expenditure line is outpacing the money coming in the door.”
Democratic leaders in the House and Senate appear to agree with Kotek’s budgeting approach. Final budget numbers until after the May revenue forecast. They were able to move forward on some new spending in the $425.6 million budget rebalancing measure released last week.
The bulk of new spending in the rebalance measure would go to the Oregon Health Authority and the Department of Human Services that experienced higher than predicted caseloads this biennium. Their higher spending levels will attract an additional $1.2 billion in federal matching funds.
Other state funds were earmarked to fight wildfires, avoid placing foster children in hotels and stockpile supplies for future emergencies. A total of $5 million will go to support container shipping at the Port of Portland.
