State economists release latest revenue forecast as budget shortfall looms

Today, state economists released the fall revenue forecast to lawmakers. Overall, Oregon’s economy is seeing strong vital signs. According to economists, the economy is approaching full employment and wages are outpacing other states, a milestone that has not been reached since 2000. However, signs of future weakness and uncertainty continue to plague state and national economic forecasters. There are four areas of particular concern. First, personal income is beginning to slow rather rapidly, which presents a unique revenue challenge for states dependent on income tax collections. Secondly, the manufacturing sector is performing significantly weaker than expected and is occurring broadly across the sector, from agricultural and natural resources to high tech and industrial manufacturing. Third, there has been a lack of productivity growth from the private sector (i.e. weakened investment) as the financial markets continue to show signs of a relative slowdown. The final indicator concerning economists today is that other states are beginning to miss their revenue targets as economic growth slows, signaling a trend that Oregon may soon follow unless financial markets regain lost momentum.

Revenue projections for the current biennium are slightly higher than the close of session estimate in June 2015. Forecasts suggest an additional $129.3 million in the general fund and projected income tax kickers. Looking forward, revenues for the 2017-19 biennium are $56.2 million lower than the last revenue forecast. That being said, state revenues are on track to increase by more than $1.6 billion as we approach the next budget cycle.

Although there will be more money for the state to spend, the Legislative Fiscal Office has released a report detailing $2.8 billion in additional expenditure in order to sustain existing programs at current service levels. Meanwhile, state agencies are in the process of defining their spending priorities for the next budget cycle, only deepening the projected budget hole.

One factor at the root of all of these discussions is the outcome of Measure 97, an initiative appearing on the November ballot that would drastically change the way business taxes are collected and expand the state budget by more than 25 percent. State economists spoke very little about the measure, surprising no one since their forecasting models are based on the current tax regime and do not include speculation for potential changes. The uncertainty over the measure, however, looms over any budget or revenue discussion as passage could result in the infusion of $6 billion in new revenue that would make current forecasts irrelevant in the budgeting discussion.

While we will not know the outcome of the ballot measure for another 55 days, it is clear the campaign will have a strong impact on the budget debate next session. If the measure fails, lawmakers will be required to balance the budget by either cutting state spending or raising revenues, or a combination of the two. Measure 97 is poised to be the most expensive ballot measure fight in the state’s history and the messaging from the campaign will certainly be an influential factor when lawmakers convene for session on February 1.