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Ore. Tax Revenue Expected To Drop $2.3B Due To Pandemic

By Daniel Tay · May 21, 2020, 4:48 PM EDT

Oregon's tax revenue for the 2019-2021 biennium is projected to drop $2.3 billion because of the impact of the novel coronavirus pandemic, state economists said, with the state's reliance on income taxes making its revenue more volatile.

Revenue from personal income taxes is expected to drop $1.59 billion over the biennium compared with previous estimates in March, according to a presentation Wednesday by the Oregon Office of Economic Analysis. Revenue from the state's corporate activity tax is expected to drop $414 million, while corporate income tax revenue is expected to drop $233 million, according to the report.

While economists normally have a difficult time predicting turning points in the business cycle, the pandemic has made the state's economic outlook quite clear, state economist Joshua Lehner said in a statement.

"It became clear overnight that Oregon is in recession and that the downturn will be severe. Recovery will take years," Lehner said

The state's reliance on personal and corporate income taxes makes its revenue more volatile than other states', according to the report. This is because personal and corporate revenues are more closely tied to the business cycle, meaning large swings in business and investment income will result in swings in tax revenue as well, Lehner told Law360. 

Beyond the 2019-2021 biennium, the office projected a $4.12 billion reduction in tax revenues for the 2021-2023 biennium, and a $3.19 billion tax revenue reduction in the 2023-2025 biennium, as compared with the March forecast. When lottery revenue reductions are included, the state is projected to collect $2.69 billion less revenue in 2019-2021, $4.38 billion less in 2021-2023 and $3.38 billion less in 2023-2025, as compared with the March forecast.

Tax revenue from marijuana is expected to rise by $9 million for the 2019-2021 biennium as compared with the March forecast, but it is then expected to drop by $5 million for the 2021-2023 biennium and $18 million for the 2023-2025 biennium as compared with the March forecast.

In recent years, Oregon has lessened its dependence on income taxes and become more dependent on revenues from sales, such as revenue from the state's corporate activity tax, lodging taxes and marijuana taxes, according to the report. However, because of the impact to spending of stay-at-home and social distancing measures put in place to address the pandemic, it is too early to tell whether this diversification of tax types has helped or hindered Oregon's fiscal situation, Lehner told Law360.

In particular, Lehner noted the corporate activity tax had gone into effect only at the start of the year.

"You would think, over the long run, it's going to make the revenues more stable because it is a tax related to consumer spending, and now the first recession that we're going to go through with a new system is one that's going to hit consumer spending to a larger degree," Lehner said.

Whether the new tax made revenue more or less stable, given the nature of the recession, is "way too hard to say," Lehner added.

Democratic Gov. Kate Brown called in a statement for federal action to help states bridge their pandemic-induced budget gaps. The governor's spokeswoman, Elizabeth Merah, told Law360 that Brown was working with the state's congressional delegation on the matter. Merah also noted that according to a recent Moody's Analytics report, Oregon is one of the top five states best positioned to face the pandemic-induced recession because of the state's reserve fund.

Merah added that a special session might be called, saying discussions with legislative leadership were ongoing.

Legislative leadership did not respond to requests for comment. House Speaker Tina Kotek, D-Portland, and House Majority Leader Barbara Smith Warner, D-Portland, issued separate statements praising the state's preparedness thanks to its reserves.

House Republican Leader Christine Drazan, R-Canby, and Senate Republican Leader Fred Girod, R-Stayton, issued statements criticizing the governor's stay-at-home orders as hurting the state's economy.

"This revenue loss could have been mitigated if the governor had been a leader and opened our state weeks ago," Girod said.

Oregon will have $1.75 billion in effective reserves, consisting of its education stability fund and its rainy day fund, by the end of the 2019-2021 biennium, according to the report by the Office of Economic Analysis.

Oregon businesses in March asked for a delay in implementing the state's corporate activity tax. The deadline for the first estimated payments was not extended, but the Department of Revenue raised the liability threshold for the payments. Additionally, the department said certain payments under the federal Coronavirus Aid, Relief and Economic Security Act were not subject to the tax.

--Editing by Robert Rudinger.

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