Oregon Office of Economic Analysis

The Spring 2012 Fiscal Survey of States report was released recently. For those less familiar with the report, it is released twice a year by the National Governors Association (NGA) and the National Association of State Budget Officers (NASBO) and provides one of the best apples to apples comparisons across the states. Bloomberg Businessweek provides a nice summary article on the report overall. The big takeaway is that, just like the overall economy, budgets and revenues are improving and stabilizing, albeit at a slower pace than in previous recoveries. The growth and improvement is not uniform across the country and (tax) policy decisions are impacting the specific figures from the different states.

Given that Oregon is a Personal Income Tax state (the General Fund is over 86% PIT), I just wanted to take the opportunity to compare income tax collections across states based on the latest  data. The following uses growth rates for Fiscal Years 2011, 2012 and 2013 (Table 19,p 39). It is important to remember that FY 2011 is history and the data are actual revenue collections, FY 2012 is nearly history but does include a forecast element to the data and FY 2013 is a pure forecast number. The first graph is a box plot of PIT growth across the 42 states that levy these taxes. Note that the asterisks and circles represent outliers, the blue lines represent a standard box plot of min, 25th percentile, 75th percentile and max, the black line is the median, the black circle is the mean and the red line is Oregon.

The outliers are there due primarily to tax policy changes. E.g. Hawaii delayed refund payments in FY10 until July 2011, hence the large negative and the strong rebound in FY12 is due to the reversal of this policy plus normal growth. Generally speaking, FY11 was a good year for PIT collections given that employment began increasing in 2010 and the stock market rebounded. Oregon’s growth of nearly 12 percent was stronger than the average (and median) state. As noted in the report, growth has slowed in FY12 which is expected as the expansion begins to mature, employment growth was subdued and the stock market in 2011 was flat. Oregon’s projected growth in FY12 is just above the median state and just below the average state. Forecasts for FY13 reveal that the slow growth is expected to continue for at least another year. Michigan’s strong forecast (outlier) is due to the state limiting deductions and credits which will increase revenue above and beyond the underlying economic growth.

The second graph uses the same data, excludes the few outliers and then shows the states in histogram form instead of box plot. The blue bars are the number of states in each growth group, the solid green lines are what a normal distribution based on the mean and standard deviation of the data would look like and the red lines are Oregon specific data.

Obviously the same pattern is seen here however removing the outliers allows for a closer look at the states. In doing so, the data reveal that Oregon’s PIT growth is just a hair above the mean and median for both FY12 and FY13. Typically, given our underlying volatility, Oregon does experience larger revenue swings so that pattern is seen in the data however to a lesser degree given the slow growth across the board (employment, income, equity markets, population, etc).

I just want to focus for a minute of FY13 and the forecasts across the states. Right now all states, except Maine, are expecting for PIT collections to continue to grow slowly and the expansion to remain intact. As for the distribution of growth, more than a third of states are forecasting PIT growth of between 4 and 6 percent, Oregon included. This represents a slow rate of growth by historical standards. In Oregon it is a just about average when examining the past two decades (over both recessions and expansions) but lower than the typical expansion year.

While this rate of growth is our best guess of the coming fiscal year and the General Fund budget is currently in balance with a positive ending balance, the realm of possible outcomes continues to include everything from a recession that requires budget cuts to even a personal kicker. Given that all of these scenarios are still in play this biennium, I put together the following calculations. To simplify the scenarios, the following assumes that all non-PIT and non-Corporate taxes and fees come in according to the most recent forecast. The purpose is to give a sense of the relative magnitude of PIT growth needed to reach these various budget scenarios.

As it stands today, we are forecasting FY13 growth to look like FY12 growth – roughly 5 percent – however if it ends up coming in just as strong as FY11 growth – roughly 12 percent – then the personal kicker (technically defined as general fund revenues ex corporate) remains in play. On the downside, should revenues come in at just 3.7 percent then that difference will use up the ending balance of $95.1 million should no other actions be taken (legislative or otherwise). Further still, should revenues come in at about half the pace of the baseline forecast then the relative shortfall would use up the ending balance plus the two reserve funds (Rainy Day and Education Stability Fund), while growth of just 0.6 percent in FY13 would result in all currently available reserves, including E-Board, being exhausted, again absent other administrative actions being taken.

Summary: Revenue growth continues in nearly all states in the country, including Oregon. However budget pressures remain based on continued demand for services and unfortunately the risks to the revenue outlook remain large and largely negative – Europe, the Chinese slowdown and American fiscal policy to name the primary threats. If any of these events turn negative, budgets will likely be squeezed from the revenue side of the ledger as well. With that being said, the baseline forecast remains for a slow and steady expansion to continue in the coming fiscal year.