Higher wages for workers and more income for businesses lead to higher state tax revenues, creating the prospect of even bigger government spending and then appropriations in two years for those who pay income taxes, state economists announced on Wednesday.
Economists have described a robust Oregon economy that they say will inject $1.5 billion more into the public treasury over the current two-year budget cycle than the $23 billion that was budgeted.
Most of the extra money comes from $763 million more in personal income tax and $633 million more in corporate income tax. The higher recoveries are not due to higher tax rates, but to people and businesses earning more taxable income than expected when lawmakers set the state budget for the 2021-2023 cycle.
The report also noted another source of additional revenue for the state: inheritance taxes. The forecasts indicate that these should be higher by 72 million dollars.
“October collections were the second largest month on record and November collections were the eighth largest on record,” according to the forecast.
Senate Speaker Peter Courtney’s reaction to the news: “Wow.”
Lawmakers are currently in session in Salem debating plans for where to spend the additional $1.5 billion by July 2023. They will have to decide before the legislature adjourns as required on March 7.
While the legislature can spend the money now, Oregonians will have to wait to see their share.
Oregonians who pay taxes in 2022 and 2023 will likely receive credits on their income taxes in 2024, as required by a state law that sends money back to taxpayers if tax revenue exceeds the budgeted amount.
Taxpayers benefit from a similar budget in 2019-2021. This year, the median taxpayer gets a credit of about $420. State economists now expect the state to return $964 million to taxpayers in 2024, though that number could go up or down depending on tax revenue.
The additional money expected Wednesday is equivalent to about 6% of the state’s two-year general fund budget of about $25 billion. The state also has other revenue considered outside of the general fund, such as federal payments and dedicated taxes for special purposes, such as the corporate activity tax now used to help fund schools.
Oregon’s political leaders are using the promising forecast to push for more spending on their own priorities.
“We can build great projects across the state,” Courtney said in a statement. “We can get the homeless off the streets. We can do schools all year round. And we can better recruit, train and assess the police. A lot of work to do in a very short time.
House Speaker Dan Rayfield, D-Corvallis, said the Legislature should invest in schools, job training and programs that help Oregonians pay rent, mortgages and child care. children. Governor Kate Brown said the same thing in her own statement.
“This is a pivotal moment for Oregon,” Brown said. “We have a windfall of one-time resources this year, and we have the opportunity to make big investments — and do the big, bold work to help our working families and our businesses thrive. We can’t miss this moment.
Senate Republicans, meanwhile, said the extra money would be better spent on law enforcement, forest thinning and tax cuts. In a statement, Senate GOP Leader Tim Knopp, R-Bend, said his caucus wants to add $60 million to the Oregon state police budget to investigate illegal marijuana farms. and spending $50 million to thin forests to reduce the risk of devastating wildfires.
“We also have to be responsible with this money,” Knopp said. “We need to set aside more funds for the next recession. We also need to seriously consider giving Oregonians tax relief.
Republican House Leader Vikki Breese-Iverson, R-Prineville, did not offer her own view on how the extra revenue would be used, instead saying the state shouldn’t have the money in the first place.
“More money for the state is not the same as good news for Oregonians,” she said. “People are struggling to make ends meet as the state swims in tax revenue.”
The state should “eliminate financial burdens” for individuals and small businesses, she said, though she did not outline a specific way to do so. Her spokesperson referenced a brief speech Rep. Lily Morgan, R-Grants Pass, gave in the House on Tuesday, in which she said other states were cutting income taxes and changing the way property taxes were assessed, and that Oregon should do the same.
Inflation boosts tax revenue
State economists Mark McMullen and Josh Lehner explained in a 65-page report what is happening in Oregon’s economy that is driving up state tax revenue.
Oregon households are teeming with cash, economists said, though many Oregonians may not feel like it. People who were already wealthy before the pandemic have seen the biggest gains in recent years, and these high-income people are more likely to own real estate or stocks and benefit from them.
Middle and low-income Oregonians have seen their wages rise — the average wage has risen 17% since the start of the pandemic — but they are losing most of it to inflation. Over the past six to 12 months, inflation-adjusted wages have actually fallen for most workers, according to the report.
“For the typical worker, the vast majority of that is swallowed up in terms of price increases, so their real well-being and standard of living is not going up despite the fact that their incomes are going up,” McMullen said. .
A year ago, he said, most economic forecasters expected inflation to decline as the economy reopens and manufacturers ramp up production of the computer chips needed for a variety of products, including cars. Instead, inflation continued, and McMullen said more economists believed it could drag the economy down after another year of rapid growth.
But that inflation is also helping the business community in Oregon, they reported, because consumers continue to buy even when prices rise.
“With such strong underlying demand, companies have largely been able to pass on cost increases to their customers,” the forecast reads. “Profits and revenues have skyrocketed.”
But they warned the economy could be headed for a boom/bust scenario in which people lose their jobs and investors and governments lose money.
“Inflationary booms of the type we experience today do not usually end well, jeopardizing recent income gains,” the report said.
High costs could slow population growth
Population growth in the state slowed in 2020 and 2021, but economists expect it to pick up again this year. In an early indication, more people are turning in out-of-state driver’s licenses to the Department of Motor Vehicles this year than last.
Economic forecasts predict that Oregon will add about 30,000 residents per year, about half the number recorded by the state in 2017, 2018, and the years immediately preceding the Great Depression. Meanwhile, economists expect Oregon to add about 22,000 new homes a year over the next decade, enough to keep pace with population growth, but not enough to make up for the current shortfall of 110. 000 dwellings.
That means high rent and house prices will continue, and the cost of living in Oregon could deter people from moving to the state or entice current residents to leave. Slower long-term population growth means fewer workers and less tax revenue for states and local governments.
“To the extent that housing affordability pushes migrants away from Oregon, as it has from California, then our office’s longer-term forecast, 10-year forecast for the economy and State revenues would all be revised down because we would have a slower growing, smaller economy than we see now,” Lehner said.