On Wednesday, state economists Mark McMullen and Josh Lehner from the Office of Economic Analysis presented the March 2014 Economic and Revenue Forecast to the House Revenue Committee and the Senate Finance and Revenue Committee. Neither the economy nor state revenues have changed considerably since the close of session projections. This is both good and bad news. Accurate projections suggest that the economy is stabilizing as it continues to emerge from the recession; however, the economy stabilizing at current levels indicates temperate growth, which can affect state revenues in future years, as expected since the economic forecasts of 2010.
The economic indicators from Wednesday’s forecast appear strong. Oregon’s economy continues to grow as the labor force expands. Unfortunately, the national deliberations over the sequestration, fiscal cliff and debt ceiling tapered economic growth due to market uncertainty. Now that federal lawmakers have settled many of their short-term issues, the markets are stabilizing. Still, the positive impact of federal certainty is likely to take considerably more time to trickle down to the state governments as business expansion returns.
Economic growth in Oregon has been largely concentrated in the Portland metropolitan area. There has also been clustered growth in areas such as Bend and Medford, although indicators suggest that growth in these areas is beginning to taper back with a slowing housing market. The Salem metropolitan area did not decelerate like Bend and Medford, making up for the statewide losses. Some counties have experienced stagnant growth, most notably in Lane County, where a slowdown in manufacturing has had a serious impact on the local economy.
A reoccurring theme during recent economic forecasts has been the future of Oregon’s rural communities. State economists suggest the state is at a crossroads, compelling lawmakers and businesses to make critical decisions on where to invest or divest resources before damage to local workforces and infrastructures becomes irreparable. In order for lawmakers to keep the state’s struggling rural economies on life support, they will need to target investments to improve the productive capacity of local economies. Recommended investments in this category include transportation infrastructure and education, where investments have the greatest impact.
Continued economic growth coupled with gains in the labor force has made a positive impact on state revenues. Oregon’s labor force has experienced steady growth over the past two years as the economy has crept back. In 2013, job market growth led labor force participation by approximately four percentage points, which is as bad as the differential has been in state history. As a result, personal income tax revenues are up by $213.4 million (1.6 percent). However, corporate tax revenues are down by $50.7 million (-4.8 percent), largely due to several decisions by tax courts in Oregon that favored corporations and the holdup between filing deadlines, extensions and changes in the Internal Revenue Code. Additionally, other tax instruments (such as the lottery and sin taxes) have performed worse than anticipated in the past three months, increasing the likelihood of a near-term revenue problem despite economic growth.
The biennium is still young, however, and there is still considerable uncertainty for state revenues as there remain two more collection cycles before we are done. One concern that has been raised by state economists is the likelihood of the personal income tax kicker reaching the two percent threshold. As of right now, state economists believe that the kicker will not kick. However, it would only take $100 million in unexpected revenue to trigger the kicker and send the legislature into a frantic race to balance the budget.