This morning the Oregon Office of Economic Analysis released the latest quarterly economic and revenue forecast. For the full document, slides and forecast data please see our main website. Below is the forecast’s Executive Summary and a copy of our presentation slides.
The economy remains in a Great Recession-sized hole. However given the nature of the cycle to date, diverging trends have emerged. In particular, lower-income households have borne the brunt of the recession. The combination of higher-income households being less impacted to date, and the large federal income support means consumer spending and tax collections have held up much better than expected.
The strong economic growth in recent months is encouraging, as many workers on temporary layoffs are recalled. However, normally it takes a year or two for the recessionary shock to work its way through the economy. When the outlook darkens, firms usually don’t fire their workers immediately. Only over time, when the phone starts ringing less, do weak sales lead firms to cut back on parts and labor. These spending cuts in turn leads to lost income for suppliers and workers who reduce their downstream spending accordingly. This traditional recessionary dynamic is just getting under way, even though the labor market is improving as thousands of temporarily unemployed workers return to their jobs.
Overall the current state of the economy is much better than feared at the time of the previous forecast. But the economic outlook in the years ahead is only improved modestly. It takes time, even under the best of circumstances to regain lost ground due to recessions. 2020 so far is anything but the best.
In the near-term Oregon’s economy is impacted by COVID-19 and the wildfires that destroyed our communities. Over the long-term, Oregon’s ability to attract and retain skilled, working-age households is one of our comparative advantages. To the extent the pandemic, wildfires, or protests and clashes of violence impact this advantage remains to be seen, but they all represent downside risks to the outlook. On the other hand should telecommuting and remote work increase as a result of the pandemic and changing business practices, Oregon stands to take advantage.
Previously when Oregon faced double-digit job losses and unemployment, the recovery took five years once underway. All told, our office expects this cycle to be faster given the stronger economy before the pandemic and the somewhat limited amount of permanent damage to date. Expectations are Oregon’s labor market will return to health by mid-2023. Even so, growth is likely to slow in the months ahead as the easy economic gains related to the recalls play out, the loss of federal support weighs more on consumers, and concerns over the spread of the virus increases in the coming, colder months.
Despite the sharp reduction in economic activity, Oregon’s primary revenue instruments have continued to grow. Collections of Personal Income Taxes and Corporate Taxes both set record highs over the post-shutdown (March-to-September) period this year. Could it be the recession might not have a significant impact on state tax revenues? Of course not. However, the fact of the matter is that the economic pain has yet to be fully reflected in Oregon’s revenue data.
Timing is part of the reason. As is the unprecedented amount of federal aid. Although recovery rebate checks associated with the CARES Act are not taxable in Oregon, enhanced unemployment insurance benefits are. Around $170 million in personal income tax collections have already been withheld from unemployment insurance checks. However, to date, this is not far off of what was assumed in the June forecast. What was missing from the June forecast was the positive impact on tax collections associated with federal aid for businesses. Forgivable loans associated with the Payroll Protection Program, together with even larger industry bailouts for major corporations, have led to a surge in business tax liability. Ignoring the business income that flows through Personal Income Tax returns, federal business aid has increased traditional Corporate Tax collections by $200-$300 million.
Another factor supporting strong tax collections is the fact that high-income households have been relatively spared from economic losses to date. Given widening economic inequality, high-income households have an increasingly disproportionate impact on aggregate economic indicators like spending and income. This dynamic is even more pronounced for Oregon’s Personal Income Tax revenues given our progressive rate structure. However, even though high-income households have fared relatively well to date, the 5% net job losses we have already seen among high-wage industries are more than large enough to strain tax collections.
Finally, unexpected spillovers from the 2019 tax season have also boosted revenues in the current biennium. As year-end tax payments came in, both Personal and Corporate tax collections surprised on the upside. Unlike the traditional April surprise, however, this surprise did not come until July due to the fact that the tax filing deadline was extended. Tax returns processed so far do not reflect such strong liability growth in 2019. This suggests that the highest-income filers, who often file extended returns in the fall, earned more than other filers last year.
Due to the unexpectedly large flow of collections seen over the past year, the General Fund revenue outlook for the 2019-21 biennium is now no different than it was before the recession hit. Although the reduction in state revenues has been delayed, the pain will eventually be felt given the magnitude of the damage to Oregon’s labor market. With little change to the economic outlook, the September 2020 revenue forecast converges back close to the June 2020 forecast over time.
If the September 2020 forecast proves accurate, not only is the General Fund is in very good shape for the current biennium, but there will be additional revenues available to apply to 2021-23. Following the June 2020 revenue forecast, the Oregon Legislature met in a special session and enacted measures that filled the expected budget hole for 2019-21. As a result, the additional revenues in the September 2020 forecast are not needed immediately. Instead, an expected General Fund ending balance of $1.7 billion will be available to apply to the 2021-23 budget period.
See our full website for all the forecast details. Our presentation slides for the forecast release to the Legislature are below.