State economists from the Office of Economic Analysis reported tax collections in Oregon are far stronger than the underlining economy would normally be able to support. The overall outlook, however, tells a different story as the state and national economy begins to experience headwinds.
Oregon is projected to collect an additional $1.56 billion in personal income taxes and $675.6 million in corporate taxes compared to the original estimate produced in June 2017. These gains in tax collections are, in large part, responsive to the strong business cycle and interplay between state and federal tax laws. The Tax Cuts & Jobs Act (Public Law 115-97), enacted into law in 2017, limited or eliminated many income tax deductions in exchange for lower tax rates. Oregon uses federal taxable income as its starting point for state tax administration, so many of these limits were automatically adopted by default (subjecting more income to tax) without a corresponding rate reduction.
The economists characterized this surge in tax collections as an anomaly. Besides the changes to the income tax base, the growth has largely been attributed to the behavior changes of taxpayers. Tax planners and preparers are evaluating the new federal tax rules and consulting their clients to rearrange their tax structures to improve their positions. Additionally, one-time tax events created by the federal law—such as the new repatriation tax on multinational corporations and the legislature’s decoupling of the new deduction for pass-through business income—all factor into the supersized revenue growth.
Nonetheless, the growth in income tax collections will trigger Oregon’s unique personal income tax “kicker” refund law. The state will issue a medium refund of $346 to Oregonians on their next tax return and $675.6 million from the corporate income tax will be set aside for the rainy day account.
This growth is expected to be limited and, perhaps, temporary, as the overall economy begins to face substantial headwinds. According to the Wall Street Journal’s Economic Forecasting Survey (paywall), one-in-three economists are projecting a recession beginning in 2020 but there remains consensus among economists that growth will continue at a slower pace. Oregon’s economy is beginning to show some indicators of a slowdown as hours worked in the durable manufacturing sector have slowed in recent quarters but, for now, the overall outlook remains stable.