State economists: Tax collections remain stable
Oregon state tax collections remain stable despite a gradual economic recovery from the shock of the coronavirus pandemic, which resulted in widespread business shutdowns — and a two-week freeze that started Wednesday, Nov. 18.
But state economists told lawmakers Wednesday, Nov. 18, that stability could be in danger if the pandemic continues unchecked and if there is no new federal aid by early next year.
State Economist Mark McMullen and senior economist Josh Lehner said this in their summary: "While the economic recovery continues, the virus remains in control. Expectations were already that growth would slow noticeably over the colder, wetter months ahead. The latest surge in COVID cases all but ensures it."
They spoke at a virtual meeting of the House and Senate revenue committees.
Oregon, like the rest of the nation, has seen an upward spike in COVID-19 infections.
Gov. Kate Brown has ordered a two-week freeze statewide — four weeks in Multnomah County — in an attempt to slow the spread of the coronavirus. The order limits restaurants to takeout service; social gatherings to no more than six people from two households; and groceries and pharmacies to 75% of capacity.
McMullen said the good news is that preliminary trials of vaccines may lead to control of the pandemic by the summer or fall of 2021.
The bad news?
"A lot of people have dropped out of labor-force participation," he said. "It is lower because of the virus. Without public intervention, these numbers are not good. We are holding out hope that our treatments and vaccines will prevent us from going into that situation."
The latest forecast projects a $7 million increase in personal income tax collections from the September forecast, and a $54 million increase in corporate income tax collections. Both are relatively small changes in the overall two-year numbers.
This forecast also is the basis for Brown's 2021-23 proposed budget, which is due Tuesday, Dec. 1. Two more forecasts are scheduled before lawmakers wrap up budget work in mid-2021.
Oregon Lottery proceeds also are back up. They declined steeply in the early months of the pandemic because of the shutdowns of restaurants and bars that feature video lottery machines.
McMullen said the current two-week freeze is unlikely to trigger a big downturn in tax collections. But if a shutdown persists for months, he said, tax collections could drop by hundreds of millions.
Withholding growth is key
One key indicator that has the economists optimistic is the amount of tax withholding, which is up 5% after it took a nosedive at the start of the pandemic.
McMullen said growth is less than Oregon has experienced in recent years, "but most states would kill for 5% income-tax withholding growth … This is the most encouraging part of the recent revenue performance. It doesn't necessarily speak to the future."
The economists said in their Sept. 23 forecast that state tax collections went up instead of down as they indicated in their June forecast, largely because of an infusion of $7 billion to individuals and $7 billion to businesses in Oregon from the federal CARES Act passed in March. But Congress has not acted since then, and two unemployment benefit programs are scheduled to end Dec. 26.
One program pays benefits to self-employed and gig workers, who were not covered by the current system. The other program extends benefits from 26 to 39 weeks.
More than 250,000 Oregonians are receiving unemployment benefits, compared with 25,000 before the pandemic started in mid-March. Unemployment benefits in excess of $2,400 are subject to federal and state taxes.
McMullen said the outside consultants employed by the Oregon Office of Economic Analysis foresee congressional approval of a smaller federal aid plan — the CARES Act was $2.2 trillion — by the end of this year. He said the latest forecast he prepared assumes it will pass early in 2021.
"I can see saying that the first half of 2021 is going to be soft, with little employment gains, if we see no help at the federal or state level," he said.
Renewed call for aid
Brown, in a separate statement after the forecast, renewed her call for congressional action.
"What is abundantly clear is that our state, like so many others across the country, needs another round of federal stimulus money," she said. "This is a worldwide public health crisis, and it demands a coordinated, national response. And we simply cannot wait until Congress convenes in January."
Lehner said some economists argue that the economic recovery can continue without new federal aid, but that recovery has been uneven across Oregon job sectors, particularly retail sales and the hospitality industry such as restaurants and bars, hotels and travel.
"Tens of thousands, if not hundreds of thousands of Oregonians, continue to face a weak labor market," he said. "Their job prospects will not brighten until the pandemic is over. They need all the assistance they can get so that they do not fall further behind."
Oregon's numbers are tracking closely with national averages. The state unemployment rate in October was 6.9%, down from 7.9% in September. In past downturns Oregon has fared worse relative to the rest of the nation, and better once a recovery is under way.
"The fact that the economy was relatively healthy going in (before the pandemic) should help going forward," McMullen said,
Still, he said, there are a couple of things to watch.
One is a steeper loss of manufacturing jobs, which at the end of the 1970s accounted for about one-third of all Oregon jobs. That share has declined to about 10% of Oregon's non-farm workforce. But it had remained stable until the current downturn, when Oregon lost 8% of its manufacturing jobs from October 2019 to October of this year, compared with 5% nationally.
The other is capital gains, profits from the sale of an asset such as stock, which in Oregon do not get preferential tax treatment and account for a disproportionate share of income-tax collections. McMullen said the amount is flat, but overall state tax collections could drop — as happened in the 2001-02 and 2007-10 recessions — if taxable capital gains decline.
"That kind of shock to the economy will reverberate downstream," he said.
Link to Oregon Office of Economic Analysis web page for latest report
Reactions to the latest economic and revenue forecast
Gov. Kate Brown:
"Today's forecast projects relatively stable state revenues. While this provides some sense of relief in uncertain times, we know that the sacrifices Oregon's businesses are making right now to prevent the rapid community spread of COVID-19 will not be reflected until the next revenue forecast is released in January.
"We continue to face uncertainty about Oregon's economy moving forward. What is abundantly clear, however, is that our state — like so many others across the country — needs another round of federal stimulus money. This is a worldwide public health crisis, and it demands a coordinated, national response. And we simply cannot wait until Congress convenes in January.
"Our workers who are facing unemployment and the discontinuation of federal benefits programs at the end of the year — and employers who have had to close businesses for the betterment of public health — need help. And they need it right now.
"I am calling on Congress to put aside their partisan differences and deliver on a coronavirus relief package, including another round of Federal Pandemic Unemployment Compensation and an extension of the Pandemic Unemployment Assistance program and the Pandemic Emergency Unemployment Compensation program. There is no time to waste. We urgently need congressional action to provide direct help to local governments, businesses, and families so that we can all continue to provide critical services to Oregonians during this crisis.
"In addition, this year's wildfires have burned over 4,000 homes and structures in communities across Oregon. The state faces significant costs as we work to remove debris and rebuild wildfire-impacted communities. We cannot recover from these fires alone — we will need substantial federal support.
"I remain committed to exploring additional state-level solutions to assist Oregonians and Oregon's businesses, especially those that have been hard hit by the pandemic, including the hospitality industry, small businesses, and women, Black, indigenous, people of color, and tribal-owned and operated businesses.
"I also remain committed to making prudent financial decisions and to position our state to manage unforeseen economic challenges that may come our way."
Senate President Peter Courtney, D-Salem:
"Today's forecast is up. The state budget is stable. We are keeping our heads above water. This year has brought new needs and new challenges. A lot is uncertain … too many are hurting. Together, we must keep moving forward."
House Speaker Tina Kotek, D-Portland:
"The COVID-19 pandemic is raging like never before in Oregon. Our economic recovery is fully dependent on getting this virus under control. As the state's budget situation has stabilized and since Congress is unlikely to pass another relief package this year, I urge the governor to declare a catastrophic disaster so the Legislature can convene a remote special session in December.
"We need to utilize some portion of the state's reserves as soon as possible to help struggling Oregonians and small businesses through the winter months. I am particularly interested in seeing the state spend $100 million to keep Oregonians housed and stabilize the rental market as the pandemic continues into 2021."
House Majority Leader Barbara Smith Warner, D-Portland:
"We are reminded today how tenuous our state's recovery is as COVID-19 cases surge in every corner of Oregon. While there are positive signs in here, as we have heard time and again from our state's economists, it is critical for our economic recovery that we get this pandemic under control. I applaud Gov. Brown for taking decisive action to keep Oregonians safe and healthy.
"I've been dismayed at Republicans across the state calling for individuals to defy public health protocols. We all want to be able to go about our lives as they were before the pandemic, but that cannot happen if individuals refuse to do their part to slow the spread of this virus. We desperately need our Republican colleagues to join us and start taking this pandemic seriously. This isn't about politics — it's about people's lives and livelihoods. As we have seen in places like Iowa and North Dakota, prematurely reopening the state would be wildly irresponsible and have deadly consequences.
"As we have from the start of this tumultuous year, Oregon House Democrats remain committed to standing up for every Oregonian, prioritizing funding for critical programs and services people are counting on, ensuring historically marginalized communities in this state are not yet again sidelined in the next economic recovery, and helping all those affected by wildfires and the COVID-19 crisis recover."
House Republican Leader Christine Drazan of Canby:
"Today's forecast shows that our state economy is stable, but this is not a reflection of reality for most Oregonians who have been impacted by these shutdowns. The most recent 'freeze' will hurt Oregonians and business owners and make an already tenuous recovery even harder for families.
"Now more than ever we must protect jobs, support business growth, manage our reserves and control spending to ensure a long-term recovery for all of Oregon."
You count on us to stay informed and we depend on you to fund our efforts. Quality local journalism takes time and money. Please support us to protect the future of community journalism.