Oregonians could get record tax kicker, but threat of recession remains

Oregon taxpayers are on track to receive a record $3 billion, personal tax kicker, in 2024 powered by "unprecedented" income tax returns, state economists told lawmakers Wednesday during the release of the state's quarterly revenue forecast and economic outlook.

"This season, Oregon and all the other income tax states saw an unprecedented flood of revenues at the filing deadline," state economist Mark McMullen said. "What that's left us with is unprecedented balances for the current biennium."

Since the last quarterly forecast was released in February, economists increased the state's revenue forecast by more than $2.4 billion.

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Oregon lawmakers touted the state's economy while saying they needed to be responsible for how they disbursed the increased funds.

"Even with revenue growth, it is still important that we proceed with caution and plan for the future," Oregon Gov. Kate Brown said. "Strong leadership in Oregon has led the state to a place where we have ample reserves to help us weather unprecedented times."

However, McMullen noted that most of this revenue spike will be offset by the time economists consider what the state will have to work with next biennium because Oregon's unique kicker law will send most of the money back to voters.

The kicker is triggered when actual revenues exceed start-of-biennium projected revenues by at least 2%. So far actual revenues are 14% above predicted; kicker calculations are expected to change over the course of the current biennium.

In addition to the $3 billion personal income tax kicker, the corporate kicker is also expected to be tripped, sending $930 million to the state's K-12 budget.

Progressive lawmakers have long advocated for removing or reforming the kicker, seeing it as a policy that benefits the super-rich at the expense of state programs.

Republicans have staunchly opposed such suggestions.

“Thanks to the kicker, Oregonians will get some of their taxes back and with it, a much-needed break from the increasing burden of inflation,” Senate Republican Leader Tim Knopp, R-Bend, said. “Now, more than ever, it's essential to protect the kicker. Too much spending got us into this inflation mess, it’s not going to get us out."

Taxpayers have seen several record kickers in recent biennia, and economists said that so far those rebates haven't negatively impacted the state's spending capacity because the underlying economic factors that were generating the kicker were strong enough to still increase resources available to lawmakers.

However, because this particular kicker is dependent on uniquely large personal income tax payments, that pattern may not hold. From the previous quarterly forecast, forecasted revenues for the 2023-2025 biennium are down more than $1.9 billion.

"We're seeing a lot more of (the kicker) offset the balances that we've built up," McMullen said. "That's largely because of the temporary nature ... of this taxpayer-behavior-driven stuff that's going to go away."

Economists also told lawmakers there remains the threat of a recession, either in the short term or long term due to general negativity about the economy or potential unintended consequences stemming from actions the Federal Reserve is taking to combat inflation.

The country's inflation rate was about 8.3% last month compared to one year ago, as measured by the Consumer Price Index.

McMullen said there was "strong consensus" from the advisors to the Office of Economic Analysis that a recession should not be built into the immediate economic forecast, instead suggesting a "soft landing" approach that the Fed is trying to pull off.

The argument for that is individuals and businesses still have plenty of cushion in their balance sheets, plus the supply chain issues largely responsible for the current inflationary pressure are expected to abate in the coming months.

However, McMullen noted, the Fed has not typically been successful threading the needle on combating economic factors without causing a "monetary policy-induced recession." There are also factors outside of the Federal Reserve's control.

“Unfortunately, it’s still quite possible that we would enter into a recession in the very near term because it’s not really always about fundamentals," McMullen said. "Recession is fundamentally a psychological phenomenon where everyone becomes pessimistic at the same time and businesses and households all pull back at the same time and they create this self-fulfilling prophecy. That doesn’t need to have underlying issues or imbalances to happen.”

Reporter Connor Radnovich covers the Oregon Legislature and state government. Contact him at cradnovich@statesmanjournal.com or 503-508-6131, or follow him on Twitter at @CDRadnovich.

This article originally appeared on Salem Statesman Journal: Oregonians could get record kicker, but threat of recession remains