Impact of federal tax plan on Oregon still uncertain

Oregon state coffers saw personal and corporate income tax collections go up in the past few months, not down as had been forecast, after the initial shock of the coronavirus pandemic resulted in widespread business shutdowns.

Though those gains will ease fears about the current state budget, state economists told lawmakers Wednesday that the downturn will affect future spending in the next two-year cycle that starts in July 2021.

"We basically erased the recessionary impact for the current biennium," Mark McMullen, the chief state economist, said at a joint meeting of the House and Senate revenue committees. "But as we go forward, it looks more like the June 2020 outlook as we converge toward a path of slower growth."

Personal income tax collections went up by $1.3 billion over the quarter, and corporate income taxes by about $400 million. Those sources account for more than 90% of the state general fund, which is the state's most flexible fund for spending.

Oregon Lottery proceeds also partially recovered, and state collections from marijuana taxes and the new corporate activity tax also were up. Those three sources have restrictions on how they are spent.

"We set a record," McMullen said, despite the economic downturn and despite $1.5 billion in personal tax credits applied from the kicker, which is money returned when collections exceed the two-year forecast.

Lawmakers met Aug. 10 to rebalance the state budget after the previous forecast, issued May 20, indicated that state tax collections would fall short by more than $1 billion. On Sunday, Sept. 20, Gov. Kate Brown vetoed some of the lawmakers' spending cuts and a $100 million set-aside for caseload growth.

Federal aid

McMullen and senior economist John Lehner said two main factors were responsible for growth in tax collections, instead of the sharp decline they projected in their May 20 report.

The earlier forecast was based in part on the record number of unemployment claims filed in March and April, after Brown's executive orders resulted in business shutdowns and curtailments. The statewide unemployment rate jumped from a record-low 3.5% in March to 14.2% in April — that was bad, but not as bad as the projected 20% unemployment rate.

Still, the Employment Department has reported more than 560,000 claims for regular benefits and 165,000 claims for newly approved benefits for self-employed and gig workers since the start of the pandemic.

The second factor was the massive amount of federal aid provided to Oregon through the CARES Act, which Congress passed and President Donald Trump signed March 27. Oregon got at least $14 billion, about half going to individuals and households and half to businesses.

Though the $1,200 stimulus checks are not taxable — they were phased out for higher-income households — unemployment benefits exceeding $2,400 are taxable under Oregon law. They include the extra $600-per-week payments that stopped at the end of July.

Businesses got money from the Paycheck Protection Program and other aid targeted to larger businesses.

That aid resulted in U.S. personal income increasing by about 10% from January, instead of decreasing by the same amount, after the start of the pandemic.

Asked by Sen. Ginny Burdick, D-Portland, McMullen said outside advisers that the state consults for the forecast are assuming there will be a follow-up aid plan to the CARES Act. But that is deadlocked in Congress, where the Democratic-led House passed a $3 trillion plan May 15 but the Republican majority in the Senate failed to advance a $500 billion plan on Sept. 10.

Unemployment persists

Oregon's overall unemployment rate remains high at 7.7% in August, though less than the 10% peak in the Great Recession of 2007-10.

"It's not like you can take 160,000 job losses in stride," Lehner said.

McMullen said that if jobs in the leisure and hospitality sector — hotels/motels, restaurants and bars — and other services do not rebound, Oregon will see a slower pace of economic recovery from the pandemic.

"I would say that next spring, we will be at the point with the largest labor market headwinds," he said in response to a question by Sen. Lynn Findley, R-Vale.

Though the downturn's effects on minorities are not yet precisely measured, Rep. Nancy Nathanson, D-Eugene, said it appears Hispanic and Black Oregonians have taken more of the brunt of job and wage losses. McMullen said those effects can be lost on the public when only statewide numbers are considered.

"You get thousands of low-income households and add them up, they have the same impact as a handful of the high-income folks," he said.

Lehner said the Portland metropolitan area, along with Central Oregon, the Columbia Gorge and the north coast, have unemployment rates exceeding the statewide average. The latter three areas were particularly hard-hit by a loss in tourism, while other areas of Oregon that normally fare worse in a downturn did not. The most recent downturn during which Portland fared worse than the rest of Oregon was in 2001-02.

"We expect some of these regional disparities to re-emerge," he said. "But today after the initial severity and shock of the recession and the first couple of months of recovery, this is the pattern we are seeing."

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