Today, state economists released the revenue forecast predictions for March 2015. According to the current forecast, the state is expecting revenues to exceed the two percent personal income tax kicker threshold by approximately $59 million. Therefore, if these predictions hold true, there will be a $349.3 million kicker returned to taxpayers in 2015. Unlike kickers in the past, however, the payment will be expended in the form of a tax credit on the taxpayer’s 2015 filing. There is also a $55.7 percent corporate income tax kicker anticipated. However, due to Measure 85 (2012), the amount in excess is transferred to the State School Fund. Economists will not know for certain whether the personal income tax kicker will “kick” until all of the returns from this year are filed, which will likely be during the fall.
Overall, there is no singular reason for the personal income tax kicker exceeding close of session (COS) projections. However, state economists suggested that the 2013 Special Session likely played a significant role. As part of the “grand bargain” in October 2013, the legislature passed a measure raising corporate and personal taxes to help support the State School Fund. Today, economists attributed $87 million of the $349 million gained to this measure. In other words, the special session could very well have pushed revenues past the threshold.
The reality of a personal income tax kicker creates a new challenge for lawmakers, as well as Gov. Kate Brown, who is only in her first day as the state’s chief executive. While they are writing the budget for the 2015-17 biennium, they will now have to account for the possibility of a $349.3 million tax credit next year. Therefore, there could likely be conversations about both tax increases and budget cuts in order to supplement lost revenue.
Sen. Mark Hass (D-Beaverton), Chair of the Senate Finance & Revenue Committee, has spent the past year encouraging his colleagues to consider changes to Oregon’s tax structure that would make revenue less volatile. In fact, Oregon’s tax model is one of the most volatile systems in the country with 68 percent of our annual revenues coming from the income tax. One of the suggestions being made by Sen. Hass is to consider implementing a sales tax, dedicating 75 percent of the revenues to the State School Fund and the remaining 25 percent to a low income tax credit. While a sales tax continues to be unpopular in Oregon, it presents an opportunity to stabilize school funding with a revenue source that does not boom and bust nearly as much as the overall economy. Under the current structure, revenues from income and capital gains taxes rise and fall based on the status of the economy. This inevitably leads to affluent revenues during periods of positive growth, increasing resources for the public school system. During recessions, however, this leads to a shortage of funds needed to sustain education investments. Converting to a sales tax would establish a less volatile stream of revenues that would promote reliable investments in education.
The fiscal conversation will be in full force in the upcoming weeks and months, now that attention will shift to the reality of a possible kicker-induced budget shortfall. Once the co-chairs introduce their biennial budget for 2015-17, which will likely be in the next month, we will have a clear idea of the pathway forward.