Even as Oregon’s economy shows signs of cooling, state lawmakers learned they will have $375 million more available than they budgeted for the current two-year cycle.

State economists disclosed the figures as part of their latest quarterly forecast on Wednesday, Nov. 15, to members of the House and Senate revenue committees at the Capitol in Salem.

The $375 million projected for the tax-supported general fund is on top of the two-year, $32 billion spending plan that lawmakers approved by June 25 for the cycle that started July 1. The previous forecast, presented on Aug. 30, projected a gain of just $40 million from the end of June. The $375 million (counting the previous forecast) represents slightly more than 1% of the budgeted total.

The report from the Oregon Office of Economic Analysis is likely to fuel pressures for more spending in the 35-day 2024 session, which starts Feb. 5, and is usually a time for adjustments to the budget.

Gov. Tina Kotek says she will ask lawmakers for some money to carry out recommendations of her task force on the future of Portland’s downtown. Those recommendations that will be unveiled Dec. 11 at the annual Oregon Business Summit.

She and lawmakers have ruled out more money for Portland Public Schools — where teachers are on strike — or general state aid to public schools after a record $10.2 billion state school fund in the current budget.

Kotek said in response to the report: “Oregon’s economy is continuing to stabilize, and that is good news for working families and businesses across our state.

“To keep our economy moving in the right direction, we need to address core issues for Oregonians. Housing production, the addiction crisis and access to child care are at the top of the list. I look forward to working with legislators in the upcoming 2024 session to make progress for Oregonians on these issues and more.”

The next quarterly economic and revenue forecast is scheduled for Feb. 7, a few days after the start of the 2024 session.

The $32 billion general fund comes largely from personal and corporate income taxes, which are the most flexible sources for spending. The state budget also relies on proceeds from the Oregon Lottery — which are accounted for separately — plus alcohol, tobacco and marijuana sales, and some other taxes. The budget also receives billions in federal grants and money from earmarked sources, such as fuel taxes, that can be spent only on specified programs.

“The (revenue) indicators have tracked closely to our expectations we presented to you last time, with a couple of exceptions,” State Economist Mark McMullen told the lawmakers.

Tax collections still up

Collections of personal income taxes, the largest source for Oregon’s general fund, are up by $101 million over the Aug. 30 forecast as measured by tax withholdings.

The written report by McMullen and senior economist Josh Lehner said: “Withholdings are growing at an annual rate of around 5%, in range with what is typically seen when Oregon’s economy is expanding. Although there are other factors involved… withholdings are mostly driven by wages and salaries. As such, Oregon’s healthy labor market continues to support tax collections.”

About the same time on Nov. 15, the Employment Department announced that Oregon’s economy lost a net 4,600 jobs in October and the statewide unemployment rate ticked up another notch to 3.6%, up from 3.5% in September. The October rate was still low by historical standards, which go back to 1976, and less than the national average of 3.9% for the month. Oregon’s rate for the past six months has been close to or matched the record low of 3.4% in the final two months of 2019, just before the onset of the coronavirus pandemic.

Later, during a virtual briefing for reporters, department economist Gail Krumenauer said Oregon employers reported 71,500 unfilled jobs at the close of September. She said they deemed 43,000 of them as difficult to fill, because of a lack of applicants, a shortage of qualified candidates, or unfavorable working conditions such as overnight shifts, on-call or temporary jobs. That figure approached 100,000 a year or two ago, but Krumenauer said similar pre-pandemic numbers were reported in 2019 when Oregon’s unemployment rate was also low.

She said Oregon employers have added 44,000 jobs during the past 12 months for a growth rate of 2.3%.

Collections of corporate income taxes, which are levied on profits, also remain strong at $97 million more than the Aug. 30 forecast. McMullen said that trend has continued despite receding inflation and increasing labor costs.

The written report elaborates: “Corporate profits have been expected to slow for some time, but have yet to do so. Recent months have shown further unexpected gains. As demand cools, firms are expected to lose their pricing power. When combined with higher labor costs, margins are likely to narrow significantly. Sharp declines in business taxes collected by some of Oregon’s local governments suggest that weaker collections at the state level may finally arrive soon.”

Effect of the kicker

Oregon will soon pay out a record $5.6 billion in personal income tax refunds, known as the kicker, when actual collections exceed budgeted projections by 2% at the close of the two-year budget cycle. Refunds will be made in the form of credits against state taxes owed on 2023 returns, which are due by April 15, 2024. Oregon law reverted to tax credits in 2011, saving the cost of preparing and mailing checks. The amount far exceeds the previous record of $1.9 billion two years ago.

The Oregon Department of Revenue has a kicker calculator on its website. It is about 45% of tax liability, though the state is empowered to withhold past-due child support and other amounts owed to it.

The kicker law was enacted in 1979, but voters wrote it into the Oregon Constitution in 2000. Lawmakers can draw from the kicker, but only by two-thirds majorities – and they have not done so since the 2000 vote. (If there are excess corporate income tax collections, however, that money goes into the state school fund under a different measure that voters approved in 2012.)

McMullen said the record kicker resulted largely from wealthier households taking capital gains — profits from the sale of assets such as stock — in anticipation of higher federal taxes by Congress in 2021. But Congress did not raise those taxes, and state collections resulting from capital gains dropped by 50% from the 2021 to the 2022 tax year. (Oregon taxes capital gains as ordinary income, similar to wages, and most households with capital gains pay at the top state rate of 9.9%.)

“The last two-year cycle was so far out of historical trends that it is now returning to its historic trend,” McMullen said. “We doubt we will see another year like the 2021 tax year anytime soon.”