On August 28 the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides, and forecast data, click here. The following is the blog post from Josh Lehner, Senior Economist.
The economy has transitioned out of the inflationary economic boom and into what will hopefully become a sustained expansion. So far the Federal Reserve appears to be threading the needle. High interest rates were needed when inflation was running near double-digit rates, but no longer. The key will be when, and how quickly the Fed adjusts course. Expectations are interest rate cuts will begin next month. This should stabilize and revive rate-sensitive parts of the economy in the year ahead. The labor market is expected to improve as well following the past year where slower hiring has led to a rising unemployment rate, despite layoffs remaining low. While imminent recession fears appear misplaced, the longer high interest rates remain, the probably of recession rises as economic growth slows.
Getting a read on the current state of Oregon’s economy is challenging. Over the entire cycle to date, Oregon’s economic performance has been solid. Employment gains, income growth, and population change are all roughly in the middle of the pack across all states, but a bit below the typical state. Top 15 productivity gains have helped overall growth. However, in recent months withholdings and job gains have picked up. The number of personal income tax returns filed and processed so far this year has increased. These data could be the first indication that Oregon’s patterns of growth have shifted out of the pandemic era lull, and back toward something more like the typical expansion. However, they could also be more noise than signal. Only time will tell. For now, the economic forecast remains essentially unchanged compared to recent outlooks. These green shoots of stronger gains indicate there is more potential upside than believed in some time.
While the economy is slowing down from the inflationary boom, state revenues continue to outpace expectations in recent months. In particular, both personal and corporate income taxes have come in noticeably higher than the previous forecast. Consumption-based revenues like lottery, the corporate activity tax, and recreational marijuana have more closely matched expectations.
Getting a handle of recent personal income tax collections is challenging. So far, the number of returns processed to date, and the amount of collections have outpaced previous expectations. Even so, compared to the past decade, collections are relatively low compared to the liability reported on returns. Ultimately how these data reconcile, with either less reported income or more payments than expected, will only be known after the extension filing season.
Available resources for the General Fund in the current 2023-25 biennium are raised by $676 million (+2.0%) compared to the prior forecast. Two-thirds of this increase is due to tracking actual tax collections alone. One-third of the increase is due to a stronger revenue outlook through the remainder of the biennium. Increased revenues in the current biennium also increase the projected kickers. The personal kicker now stands at an expected $987 million that will be returned to taxpayers in 2026. The corporate kicker now stands at an expected $883 million and will be retained in the General Fund and spent on education next biennium.
Looking ahead to the 2025-27 biennium, available resources are revised lower by $66 million compared to the previous forecast. Increases in corporate, estate, and interest earnings are not enough to fully offset the larger personal kicker being paid out. That said, when looking at the state budget and the combined resources of 2023-25 and 2025-27 the General Fund forecast is raised $610 million.
Consumption-based tax collections for the corporate activity tax, the lottery, and recreational marijuana in the current 2023-25 biennium are lowered a combined $27 million (-0.5%) compared to the prior forecast, and lowered a similar $34 million (-0.6%) in the upcoming 2025-27 biennium.