Posted by: Josh Lehner | May 16, 2013

Economic and Revenue Forecast, May 2013

  • Personal income tax collections this filing season have been slightly ahead of forecast in recent months, resulting in an upward revision to the near-term revenue outlook
  • Stronger Corporate tax collections now results in a projected kicker for 2011-13 as the May forecast projects corporate revenues to be 2.3% above the Close of Session
  • This projected kicker, while small by historical standards, results in less available resources in 2013-15 BN when it is credited to corporations
  • A slightly more optimistic economic outlook also contributes to an upward revision to the 2013-15 BN tax collections
  • All told, 11-13 General Fund and Lottery Fund available resources are up $126.3 million relative to the March forecast, however due to increased expenditures the ending balance estimate is up $115.1 million
  • 2013-15 BN General Fund revenues are revised higher by about $141.8 million and Lottery Fund resources are raised $14.6 million for a total revenue increase of $156.4 million

This morning our office released the May 2013 quarterly economic and revenue forecast. The full document, files and slides may be found over on our main website. You should also be able to follow along online in Hearing Room A.

Overall the outlook remains fundamentally unchanged, as seen in the first graph below. Our office projects that the economic growth will accelerate somewhat in the coming 2-3 years as three main things are happening. First, the two main drags weighing on recovery so far – housing and government – are lessening, which will boost growth. Second, the sentiment is changing for businesses and consumers alike and is now being reflected in the risks to the outlook for most economic forecasters. Third, balance sheets are in strong positions and continuing to improve, which should businesses and consumers feel more confident about their future prospects, will result in increased sales and economic activity.


The improved sentiment in economic forecast can been seen in this second graph illustrating the Wall Street Journal’s economic forecasting survey results. So far, most economists are sticking to their baseline forecasts and leaving growth rates unchanged, however the risks to the outlook have shifted. As shown in the green bars (measured on the right axis), so far in 2013 economists believe upside risks outweigh downside risks by about 60-40. This same pattern is true of our own Governor’s Council of Economic Advisors. The Council believes the baseline outlook is our best look, however there certainly is more upside risks than in recent years.


This improvement in the economy, particularly the projected pickup in employment growth, is built into the outlook. So far in recovery, Oregon’s private sector employment has increased at approximately a 2% annual rate, however our office expects this to increase to around 2.6% in the coming 2-3 years. Even so, these rates remain below the 3-3.5% rate Oregon has seen in past expansions. To the extent that some of these upside risks come to fruition – lower energy costs resulting in increased manufacturing activity, a stronger housing rebound, an increase in population, migration or the labor force participation rate – would likely increase the growth path, which would also increase the revenue outlook.


In terms of General Fund revenues for 11-13, these have increased $126.3 million, while Lottery resources are up $2.4 million. The increases in Lottery are due to stronger than forecasted sales in recent months. Our office built in weakness in sales in early 2013 following the expiration of the 2% payroll tax cut and sales were weak when compared with a year ago, however still above our baseline forecast. In terms of the General Fund for 11-13, the changes were nearly all in Personal (+$107.8 million) and Corporate (+$16.3 million). Personal tax collections are currently running ahead of forecast. Final payments this tax season are currently tracking just a bit ahead of forecast (and about 25% ahead of a year ago), however refunds are tracking low – which is a positive from a state revenue perspective. Corporate collections are projected to be a bit higher than in the March outlook, however this increase does puncture the 2% kicker threshold. Here is how this increase is characterized in the forecast document:

The rapid growth in corporate tax collections seen at the beginning of the year came to a sudden halt in April, leaving corporate collections very close to the kicker threshold (102% of the Close of Session forecast).  The May outlook assumes that revenues will come in $2.7 million above the threshold, generating a kicker payment of $20.3 million. Although a corporate kicker is incorporated into the baseline outlook, it is far from a sure thing.  The Department of Revenue is working through a processing backlog of refunds due to be recorded before the end of the fiscal year.  Should corporate revenues over the last six weeks of the biennium fail to match their level of last year (as they have in recent weeks), no kicker payment will be required.


The following graph takes a look at the source of the revenue changes since the last Close of Session forecast back in May 2011. The dark blue bars on the left illustrate the composition of the General Fund while the red bars on the right show both the total dollar amount of the forecast change and the percentage increase this represents. Based on our office’s historical errors, this current biennium is somewhat of an anomaly. Personal and Corporate income tax collections are off, on net, about $20.5 million, or -0.2%. All other General Fund revenues are up $237 million or 25%. This is largely a reflection of the rebalance plan put in place after the February 2012 annual session. At that time the General Fund forecast had declined by approximately $300 million and the Legislature moved to back fill some of those projected shortfalls. In this case, our 2 year ahead forecast (May 2011) turned out to be more accurate than our 1 year ahead forecast, which is not usually the case. In addition the other revenues that are considerably above Close of Session are generally due to some administrative or policy changes when discussing the liquor apportionment (bottle surcharge) and state court fees. All told, given the current forecast, the smallest error is on the largest – by far – component of the General Fund.


Finally, the last graph shows the evolution of the 2013-15 revenue outlook over the past 11 quarters. In terms of the revenue outlook, it largely follows the overall economic outlook in terms of upside and downside risk. Again from the document:

Although the baseline revenue forecast has not changed significantly, risks to the forecast are becoming skewed to the upside. Despite a relatively weak long-term outlook, a year or two of strong growth remains possible. In particular, if Oregon’s traditionally strong migration trends and labor force gains reappear, additional jobs and tax revenue can be expected.

 The primary downside risk facing the near-term revenue forecast is the uncertain future of the nationwide economic expansion. Should federal government austerity or economic weakness abroad derail the U.S. economy, the expected growth in Oregon’s tax collections will not materialize.


For much more information on the Oregon economy and state revenues, please refer to our full forecast document, over on our main site. In the coming week or so I will pull some of the information from the document and highlight it here on the blog.

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