The latest Oregon revenue report was more eye-popping than its predecessors, showing the state will bag $1.18 billion more in taxes and lottery proceeds than originally projected. The report pretty much solidifies that Oregonians will get what state economists call the “mother of all kicker” refunds when they file their 2021 tax returns.
The kicker could return $1.4 billion to personal income taxpayers, ranging from around $300 to Oregonians earning up to $40,000 per year to nearly $13,000 for high-earning filers. The average refund would be $636. The corporate income tax kicker also would be triggered, but its refunds, projected to top $660 million, would go to K-12 education reserves.
Released on Wednesday, the May forecast also projected stronger than anticipated state revenues in the next two biennia – an additional $1.25 billion in 2021-23 and $1.64 billion in 2023-25. The projections drew comments by lawmakers such as “unbelievable” and “stunning”. Senate President Peter Courtney, who has served in the Oregon legislature longer than any other member, said he has never seen a revenue forecast this good before.
State economists attributed the positive revenue outlook to federal monetary and fiscal policies that kept unprecedented levels of money flowing to businesses and households during the pandemic. Corporate taxes skyrocketed, personal income tax withholding increased by double digits and the Oregon Lottery recovered to notch a $21.8 million gain.
The roughly $2.6 billion Oregon will receive from the American Rescue Plan should help lawmakers patch a projected $1.3 billion budget hole, with funds left over to give individual lawmakers a voice in one-time investments in their House and Senate districts. An earlier agreement between Democratic and Republican leaders ensures every House District will receive at least $2 million in investments and every Senate District $4 million.
The prospect of huge kicker refunds triggered, as it has in the past, public rumination on how some of the refund could be used to shore up state programs. House Speaker Tina Kotek said she would favor redirecting some of kicker to “bold action and immediate relief” for struggling families. Legislative Republicans were quick to push back, insisting kicker refunds “belong to taxpayers” and “there is no justification to take [refunds] from them.”
The risk is that supply cannot keep pace with demand. The path forward may be bumpier than expected, even if the trajectory is up. Already supply constraints have emerged in semiconductors, lumber and rental cars to name a few. More bottlenecks are on the horizon.
The only shade on the rosy economic forecast was a discussion of what could go wrong to derail a strong economic recovery. The main obstacle state economists cited was employers not finding enough workers. Here is an excerpt from the forecast’s executive summary:
Oregon’s labor market is expected to return to full health during the upcoming 2021-23 biennium. With the strong near-term outlook for consumer spending, job growth is front-loaded such that the largest employment gains will occur this summer and fall. Total employment in Oregon will surpass pre-pandemic levels in late 2022 with the unemployment rate returning to near 4 percent in 2023.
While a jobs hole remains in the labor market, the same cannot be said for household incomes. Currently incomes in Oregon are 20 percent higher than before COVID-19 hit, thanks in larger part to the temporary federal measures put in place. Excluding the direct federal aid, incomes are back to pre-pandemic levels and expected to grow 6-7 percent this year and next.
However, with such a strong consensus near-term outlook, the risks do primarily lie to the downside. The risk is that supply cannot keep pace with demand. The path forward may be bumpier than expected, even if the trajectory is up. Already supply constraints have emerged in semiconductors, lumber and rental cars to name a few. More bottlenecks are on the horizon.
Furthermore, running through all of these issues is labor. Attracting and retaining workers is already much more challenging than expected given the economy went through a severe recession last year. There are a variety of simultaneous factors impacting the number of available workers including strong household finances, the virus itself, and lack of childcare or in-person schooling. While the temporary pandemic-related constraints will ease in the months ahead, the labor market is expected to remain tight for the foreseeable future in large part due to demographics and the large number of Baby Boomers retiring.