Why Do Economists Say Oregon’s Financial Good Times May Be Coming To An End?

Oregon’s skyrocketing revenue growth is going to cease, state analysts, warned Wednesday.

Even if the state and country don’t enter a recession in the next year, recent tax receipts that officials have called “amazing,” “unbelievable,” and “striking” are set to fall, state economist Mark McMullen told lawmakers.

McMullen: “Even if we don’t enter a recession, not all of this revenue boom is sustainable.” “We’re hungover.” McMullen and Josh Lehner say the hangover hasn’t arrived.

In their quarterly presentation, the pair deviated from their usual practice of presenting lawmakers simply as a “baseline” projection. They also outlined a recession on Wednesday. McMullen told lawmakers it’s a “coin flip” which scenario will happen and warned a recession might be deeper than expected.

The state’s short-term revenue projection is positive in either scenario. Personal income taxes and taxes on corporate profits and stock market gains haven’t slowed.

Under the more bullish “baseline” prediction, analysts say Oregon would see $600 million more in the current two-year budget cycle than they projected three months ago, driven by personal income taxes. That would result in Oregonians receiving a record $3.46 billion in kicker, a provision that recovers personal income taxes if they are at least 2% higher than expected.

McMullen said business tax figures haven’t weakened. “That’s terrifying. This is our most unpredictable revenue prediction, along with capital gains.

The optimistic scenario anticipates weaker revenue growth than predicted in May. Each of the next three two-year budget cycles could see lower revenues than predicted.

Economists say Oregon could enter a “mild recession” by 2023. Lehner said rising salaries from an unsustainable labor market might fuel inflation, prompting the federal government to raise interest rates, sparking a downturn and a substantial increase in the state’s low jobless rate.

Lehner: “The labor market must cool.” If Oregon enters a recession, the budget cycle through June 2023 will still be $50 million more than planned. The next two biennial budgets are $1.2 billion and $1.4 billion below projections.

McMullen: “This would mean huge program cuts.” Unavoidable.

Economists Say Oregon's Financial Good Times May Be Coming To An End
Economists Say Oregon’s Financial Good Times May Be Coming To An End

How will lawmakers incorporate competing forecasts into next year’s budget? McMullen and Lehner argued that cutting state services needlessly is not ideal.

McMullen: “We need to see the recession’s white eyes before making dramatic revenue cuts.”

Underestimating a revenue cliff is risky. State Sen. Lee Beyer said the coming scenario reminded him of 2002 when lawmakers held five special sessions to rework the budget amid a collapsing economy.

Beyer, whose term ends at the end of the year, said those who will be there should be cautious.

Oregon is better protected from a slump in 2022 than in 1992. The state’s financial reserves will reach $2 billion by June 2023. Oregon has $3.7 billion in unbudgeted revenue. Leaving that money alone could assist offset future downturns.

Democrats responded to the unclear outlook by highlighting the solid economy.

Thanks to Oregon’s economically responsible decisions in recent years, the state has large reserves to weather economic challenges. “We must continue to invest in Oregon’s working families so that all Oregonians may feel the economic recovery’s benefits.”

Senate President Peter Courtney, D-Salem, stated, “We should invest cautiously… and be on our toes.” Oregon is prepared for a recession.

Corvallis Democrat and House Speaker Dan Rayfield said the Legislature would keep spending on housing, mental health, and abortion access. Republicans said they’re willing to cut spending.

Senate Minority Leader Tim Knopp, R-Bend, said the legislature must make tough choices to decrease wasteful spending and fix government. Senate Republicans are prepared to make smart, fiscally responsible choices that maintain vital government activities Oregonians rely on every day.

The state’s strategy will depend on how hard Oregon’s coffers are being squeezed and whether Democrats can hold control of the legislature and governor’s office in a challenging election year.

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