The economic recovery in Oregon is continuing to show progress across nearly all economic sectors on the eve of the seventh anniversary of the Great Recession. During a joint meeting of the House and Senate revenue committees, state economists asserted that employment figures have not returned to their pre-recession levels but are expected to before the 2015-17 biennium begins. As a result of Oregon’s economic dependence on the traded and natural resource sectors, the recession and recovery reflect more of a boom and bust cycle than many other states.
Corporations in Oregon are outperforming expectations set at the beginning of the forecast season. There is little doubt that the corporate income tax kicker will reach its two percent threshold by the end of the biennium. The personal income tax kicker, on the other hand, is close to reaching its two-percent threshold, only short by $29 million. Traditionally, at this point in a biennium, we know whether or not the personal income tax kicker will reach its threshold, sending the heavy task to the legislature to make up revenue losses in the state budget.
The uncertainty of the kicker at this moment in time suggests the revenue shortfall would not be nearly as traumatic as it has been in previous cycles where this has occurred. To quote state economist Mark McMullen, if the kicker kicks, “It would be a pain… but not catastrophic.”
The only reason why the personal income tax kicker has not reached its threshold yet is because personal income returns are down $18.5 million (0.1 percent). Yet, at the same time, both employment and real average wages have increased more than two percent in the third quarter of 2014. A deeper look into the numbers suggests that current receipts from increasing employment and wage gains will not be reflected in returns until April 2015. This means that we could see late growth in personal income tax revenues. Therefore, the seeds may have already been sown for the kicker to kick.
If personal income taxes reach the kicker threshold, it is likely to happen late into the legislative session. This will put lawmakers in a bind to adjust budgets accordingly to make up for the revenue shortfall. There are two possible scenarios for how this can shape the 2015 legislative session. If lawmakers fail to plan for the scenario of the kicker reaching its threshold, they would only have a limited amount of time to negotiate at least $288 million in cuts during the final six weeks of session, jeopardizing any number of line items in the budget. What is more likely, however, is that leadership will direct state agencies to itemize budget cuts early on in the session in preparation to accommodate the ensuing revenue shortfall.