Oregon forecasters say the state is in line for a huge boost in its government revenue. But much of that is a statistical artifact from the pandemic years, columnist Tim Nesbitt says. (Tim Carpenter/Kansas Reflector)
Oregon may be near the bottom of all 50 states in some troubling categories, such as K-12 test scores and children’s mental health care. But it looks like we’ll be Number One when it comes to how much more revenue state government will have to spend in its next budget period.
Oregon’s state economist delivered another blockbuster revenue forecast in late February, projecting an increase in General Fund revenues of 29% in the next two-year budget period. This will give lawmakers a total of $8 billion in new money to spend above the nearly $28 billion that supports existing programs.
How real is this?
By comparison, Washington state is forecasting an increase of just over 7% in its next two-year budget, and California is trumpeting a one-year increase of just over 9%. New York projects a 7% year-over-year increase. I can’t find any state with anything close to Oregon’s growth in general revenues.
And, here’s another reality check: Oregonians’ incomes have risen by 6% annually, 12% over the past two years, and are expected to barely maintain that pace going forward. So how can the state’s General Fund, largely dependent on personal income taxes, be generating revenues at more than twice that rate?
The answer is that the new revenues projected for the next biennium reflect growth in personal incomes over the prior four years. The bulk of these new revenues comes from stepped up household income growth that began in 2021, most of which was refunded to taxpayers in 2024 and is now making its way into state coffers for the first time as spendable revenue in 2025-27.
Yes, I’m talking about the kicker, the refund Oregon taxpayers get if revenue comes in much higher than expected. Most of us who filed taxes last year got a portion of the unexpected $5 billion that was collected from recovering household incomes in 2021-23 and generated the largest kicker in Oregon history. The kicker was real money for us, even though it came as a credit on taxes owed rather than cash in our pockets.
But, for the state, it was money in and money out of the budget that never registered as part of the state’s revenue baseline.
Because of that kicker-induced, artificially-low revenue level in the current budget, it might look like the state is enjoying a revenue surge that can sustain higher levels of spending going forward. But the reality is that most of the new revenue forecasted for the next budget period is catch-up money from earlier gains in household incomes. Some $5 billion of the $8 billion is due to revenues from personal incomes that rose to record levels in the past four years but was siphoned off in last year’s kicker.
That 29% growth in revenue? It was years in the making – and will be two short years in its ending. After this one-time acceleration in tax receipts, even if all goes well in the larger economy, Oregon’s General Fund will still face a yellow flag down the track.
Revenues will be slowing to the more modest ongoing pace seen in our neighboring states and our own personal income growth of 5-6% a year through the end of this decade.
This is the challenge for the Legislature’s budget writers. Topline numbers of the kind released last month can give advocates for public service spending a false sense of abundance. They have compelling cases for be made for boosting funds for schools, early childhood programs and mental health care in particular.
But if lawmakers raise ongoing spending above 5-6% a year, or above $3 billion in the next budget period, they’ll be creating an unsustainable spending trajectory.
We learned a hard lesson in the late 1990s and 2000s, when a strongly growing economy generated both kicker refunds for taxpayers and rising revenues for the state’s budget, which later collapsed in the wake of two recessions and forced deep cuts in services thereafter.
Since then, lawmakers did a good job of building up reserves to weather economic downturns in the future. But what we’re facing now is a perfect storm of politically-created fiscal and economic crises, which states and their local governments have not had to deal with in our lifetimes.
The storm clouds darkened over the past few weeks, with the federal budget framework adopted by Republicans in the U.S. House of Representatives and the continuing chain-sawing of the federal workforce led by Elon Musk.
This is not to concede what is still to be contested. But the threats of federal cuts in funding for Medicaid, education and other vital state programs are real, and are likely to force states to struggle to sustain what they have in place before committing to new, ongoing funding levels that would have been hard to keep going, even in steadier times.
Thankfully for Oregon, there is a lot that can be done with an extra $5 billion to weather the political stormfront on the horizon. Just not yet, and not all at once.
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