Surprise from state economists: tax collections have risen, not fallen
Oregon state coffers saw personal and corporate income tax collections go up in the past few months, not down as had been forecast, after the initial shock of the coronavirus pandemic resulted in widespread business shutdowns.
Though those gains will ease fears about the current state budget, state economists told lawmakers Wednesday, Sept. 23, that the downturn will affect future spending in the next two-year cycle that starts in July 2021.
"We basically erased the recessionary impact for the current biennium," Mark McMullen, the chief state economist, said at a joint meeting of the House and Senate revenue committees. "But as we go forward, it looks more like the June 2020 outlook as we converge toward a path of slower growth."
Personal income tax collections went up by $1.3 billion over the quarter, and corporate income taxes by about $400 million. Those sources account for more than 90% of the state general fund, which is the state's most flexible fund for spending.
Oregon Lottery proceeds also partially recovered, and state collections from marijuana taxes and the new corporate activity tax also were up. Those three sources have restrictions on how they are spent.
"We set a record," McMullen said, despite the economic downturn and despite $1.5 billion in personal tax credits applied from the kicker, which is money returned when collections exceed the two-year forecast.
Lawmakers met Aug. 10 to rebalance the state budget after the June forecast, issued May 20, indicated that state tax collections would fall short by more than $1 billion. On Sunday, Sept. 20, Gov. Kate Brown vetoed some of the lawmakers' spending cuts and a $100 million set-aside for caseload growth.
The December quarterly forecast is scheduled Nov. 18. Brown's 2021-23 proposed budget, due Dec. 1, will be based on that forecast. There will be two more forecasts before the 2021 Legislature completes work on that budget.
McMullen and senior economist John Lehner said two main factors were responsible for growth in tax collections, instead of the sharp decline they projected in their May 20 report.
The earlier forecast was based in part on the record number of unemployment claims filed in March and April, after Brown's executive orders resulted in business shutdowns and curtailments. The statewide unemployment rate jumped from a record-low 3.5% in March to 14.2% in April — that was bad, but not as bad as the projected 20% unemployment rate.
Still, the Employment Department has reported more than 560,000 claims for regular benefits and 165,000 claims for newly approved benefits for self-employed and gig workers since the start of the pandemic.
The second factor was the massive amount of federal aid provided to Oregon through the CARES Act, which Congress passed and President Donald Trump signed March 27. Oregon got at least $14 billion, about half going to individuals and households and half to businesses.
Though the $1,200 stimulus checks are not taxable — and they were phased out for higher-income households — unemployment benefits exceeding $2,400 are taxable under Oregon law. They include the extra $600-per-week federal payments that stopped at the end of July. A six-week, $300-per-week extension ended eligibility Sept. 5, though payments are scheduled to start at the end of September.
Businesses got money from the Paycheck Protection Program and other aid targeted to larger businesses.
That aid resulted in U.S. personal income increasing by about 10% from January, instead of decreasing by the same amount, after the start of the pandemic.
Asked by Sen. Ginny Burdick, D-Portland, McMullen said outside advisers that the state consults for the forecast are assuming there will be a follow-up aid plan to the CARES Act. But that is deadlocked in Congress, where the Democratic-led House passed a $3 trillion plan May 15, but the Republican majority in the Senate failed to advance a $500 billion plan on Sept. 10.
Oregon's overall unemployment rate remains high at 7.7% in August, though less than the 10% peak in the Great Recession of 2007-10.
"It's not like you can take 160,000 job losses in stride," Lehner said.
McMullen said that if jobs in the leisure and hospitality sector — hotels/motels, restaurants and bars — and other services do not rebound, Oregon will see a slower pace of economic recovery from the pandemic.
"I would say that next spring, we will be at the point with the largest labor market headwinds," he said in response to a question by Sen. Lynn Findley, R-Vale.
Though the downturn's effects on minorities are not yet precisely measured, Rep. Nancy Nathanson, D-Eugene, said it appears Hispanic and Black Oregonians have taken more of the brunt of job and wage losses. McMullen said those effects can be lost on the public when only statewide numbers are considered.
"You get thousands of low-income households and add them up, they have the same impact as a handful of the high-income folks," he said.
Lehner said the Portland metropolitan area, along with Central Oregon, the Columbia Gorge and the north coast, have unemployment rates exceeding the statewide average. The latter three areas were particularly hard-hit by a loss in tourism, while other areas of Oregon that normally fare worse in a downturn did not. The most recent downturn during which Portland fared worse than the rest of Oregon was in 2001-02.
"We expect some of these regional disparities to re-emerge," he said. "But today after the initial severity and shock of the recession and the first couple of months of recovery, this is the pattern we are seeing."
NOTE: Adds official reactions below. Adds date of next forecast.
Gov. Kate Brown:
"Today's revenue forecast is a testament to the resiliency of Oregonians and to how we — as a state — have been able to manage the COVID-19 pandemic by working together.
"Oregon workers and business owners have risen to the challenge, by following health and safety guidelines and continuing to go to work, helping our economy to begin recovering from the impacts of this pandemic while preventing large-scale outbreaks. By working together to keep major sectors of the economy open, including construction and manufacturing, we have kept Oregonians working and businesses operating, all while keeping people safe at the same time.
"This does not, however, take away from the massive impact that this disease has had on our communities, particularly its disproportionate impact on Black, Indigenous, People of Color, and Tribal communities and those dependent on the service economy.
"While revenue projections are up for this biennium, the revenue forecast did not balance our upcoming budget, and we must tread lightly. We still face structural inequities, as well as fluctuations in health care spending related to ongoing COVID-19 response, at the same time we face a serious budget deficit. In addition, many of our critical pandemic response efforts, from testing to personal protective equipment, have been funded with CARES Act funding, which expires at the end of the year. 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.
"Oregon has a history of being smart with our reserves and saving for a rainy day. We cannot abandon this approach in the middle of a pandemic, with cold and flu season rapidly approaching. Or while response and recovery efforts to a historic statewide fire emergency continue, and the costs of those efforts to save homes and lives continues to grow. We must prepare for the costs of continuing to provide critical services in the next biennium –– from health care to affordable housing to wildfire readiness and response.
"This year, we must celebrate every piece of good news we can get. But even with the welcome news of increased revenue projections, my commitment remains to make prudent financial decisions and position our state to manage unforeseen economic challenges that may come our way."
Senate President Peter Courtney, D-Salem:
"Oregon is facing hardships like we've never experienced before. Wildfires continue to burn across the state. We are still facing a global pandemic. We have lost too many lives, homes, and businesses. We are in a dire situation. Today's forecast showed us that our economy is up from last quarter. This is good news. Our needs are great. The Legislature must work together to help struggling Oregonians."
Senate Republican Leader Fred Girod of Lyons:
"Thanks to federal action, Oregon has $1.7 billion in its ending balance, and there is absolutely no reason to raise taxes. The corporate and personal income taxes set new tax collection records.
"Governor Kate Brown's government overreach during the COVID-19 event has deepened the income inequality in the state and lower-income Oregonians have been hit hardest. Hard-working Oregonians have also been impacted by the wildfires. Cities and counties across the state that rely on tourism for income have been decimated and are not recovering quickly, and the perpetual violent riots in Portland have damaged Oregon's national image for anyone who thought about relocating here."
House Speaker Tina Kotek, D-Portland:
"The substantial improvement in today's revenue forecast highlights the uniqueness of a recession brought on by a global pandemic. While we are in a better financial position than we expected to be, it is still an unpredictable road ahead, particularly without further federal relief assistance.
"Oregon and the country are still facing a deep recession that is disproportionately impacting lower-income communities. Income inequality is glaringly clear in this forecast. I am pleased that the Legislature took a measured approach to rebalancing the budget in August by strategically using one-time dollars to protect critical services that are essential to encouraging an equitable recovery.
"Our decisions in the next few months should be focused on supporting those most impacted by the recession and being wary of the potential volatility in revenue over the next year."
House Republican Leader Christine Drazan of Canby:
"It's clear that the federal stimulus is working to sustain families and businesses, and by extension, state revenues in the short term. This is encouraging news, but long term is another story as more than 150,000 Oregonians look for work and families and communities across the state are just beginning the difficult process of rebuilding and recovering from devastating wildfire losses.
"Rural Oregonians are still suffering disproportionately, as are women and those in starting wage jobs that lost so much with the shutdown orders. We must oppose higher taxes and come together to advance policies that support full economic recovery for all Oregonians."
House Majority Leader Barbara Smith Warner, D-Portland:
"The last seven months have been a tragic and unprecedented time for our state, nation and world. The dual crises of COVID-19 and historic wildfires exacerbated by climate change, have claimed the lives, livelihoods, homes and businesses of far too many Oregonians. My heart breaks for every single individual who has been impacted.
"With so much happening, I am heartened to see that, at least, our economy is showing signs of recovery. Thanks in no small part to the leadership of Governor Kate Brown during these crises and the prudent fiscal management of Democratic leadership over the last decade, we have been better positioned than most states to weather the storm. And yet, there is a long way to go.
"Ahead of the Legislature is one of the most challenging budgets of our lifetimes. We must continue to stand 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."
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