The Office of Economic Analysis presented its December 2013 economic and revenue forecast to a joint legislative committee on Thursday morning. While the economy in Oregon continues to recover from the recent recession, the outlook for the state budget is not nearly as promising as lawmakers face the potential of the personal income tax kicker reaching its statutory threshold in 2015. The key takeaway left by state economists was that the state budget is at a critical turning point.
Employment, household income and tax revenues have steadily increased over the course of the past several months in Oregon. During the past several revenue forecasts, state economists have acknowledged the dire state of rural economies. The May 2013 forecast highlighted the looming mass exodus of the younger generation in rural communities in response to a diminishing employment outlook. The December 2013 forecast shared a different message, however. For the first time in recent memory, Oregon is experiencing a broader geographical recovery where growth is not positioned solely in the metropolitan areas.
One trend presented in the latest forecast shows that gains in employment have largely been concentrated in the part-time workforce, artificially inflating the economy. There are some concerns that further implementation of the Affordable Care Act will continue to increase the number of part-time workers and create a drag on the economy.
As employment indicators continue to show an economy pulling itself out of recession, the progress is not translating as positively for state finances. Although there have been considerable gains to employment, they are not at the same caliber as previous expansions. Additionally, personal investment income is not expanding at the same pace as the rest of the economy and will likely hinder further economic growth.
Receipts from personal income tax collections are up 5.6 percent from last year. While this is positive news for the overall state of the economy, the September 2013 forecast called for collections to be up by 6.5 percent. The state is sitting at the halfway point for the personal income tax kicker threshold, increasing the likelihood for the kicker to go into effect next spring. Mark McMullen, with the Office of Economic Analysis, suggested a 50-50 possibility that the kicker will reach its threshold in 2015. If so, this will be the first time since 2007 that lawmakers will be forced to re-balance the biennial budget as a result of the kicker.
Corporate tax collections remain large in a historical perspective as near-record profits continue with the expanding economy. State economists are wary of the economic gains from corporate receipts, however, as profits are largely subject to boom and bust cycles of the economy and therefore increase the downside risk to the economic outlook. Corporate tax collections are $18.5 million higher than the projected level in the September 2013 forecast. The corporate kicker is projected to be $27.2 million and will be dedicated to education spending in 2015-17.
Oregon appears to be operating in the black as the 2013-15 budget remains in relatively strong shape. This is in large part due to the special session in October when the legislature passed HB 3601, raising an estimated $244 million in the current biennium as part of Governor Kitzhaber’s “grand bargain.” Current projections show the General Fund and Lottery resources up by $172.4 million (0.9 percent) from the close-of-session estimate. Corporate tax collections are $26.1 million lower than the end-of-session projections; however, the uptick in personal income tax collections has offset this. Overall, the state is expecting $136 million in additional revenues so long as there is no kicker.
The special session tax bill could possibly be offset by the personal income tax kicker in 2015, something that was never vocalized as legislators evaluated the “grand bargain.” In fact, implementation of the revenue bill could very well make the kicker reach its threshold.
Economists acknowledged that the personal income tax kicker will remain under the microscope in the months ahead. Whether or not the kicker threshold hits will be determined by the rate of economic growth in the state, leaving a short-term revenue boom a possibility. If the kicker does reach the threshold, lawmakers may need to rebalance the budget to ensure that the state does not run itself in the red.