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December economic forecast

December 7, 2017

Oregon Economic and Revenue Forecast, December 2017

Oregon Office of Economic Analysis

The primary risk facing the near-term revenue forecast is the potential for tax legislation at the federal level. From a broader economic perspective, the most significant local impact of federal tax changes will be what happens to the amount of federal taxes paid by Oregon’s households and businesses. However, in addition to what happens to the federal tax bill, many federal law changes stand to have larges impact on Oregon’s own revenue streams.

Oregon’s tax collections are tied to federal tax law both directly and indirectly.  The starting point for calculating Oregon income tax is taxable income from a filer’s federal return.  As a result, most federal changes to what is defined as income, or to what can be deducted or excluded from it, directly feed into Oregon tax collections.  After the last major federal tax reform in 1986, Oregon’s income tax revenues increased 20% the following year.

The most recent proposals call for increasing the standard deduction, while eliminating a range of itemized deductions.  Changes to the standard deduction only impact Oregon tax collections indirectly, while changes to itemized deductions can also directly flow into Oregon collections. Oregon defines its own standard deduction levels, disconnecting its revenues from the federal policy. Itemized deductions are where much of the uncertainty lies for both Oregon’s taxpayers and its state revenues. Oregon filers, high and low income alike, itemize at higher rates than the national average. Oregon’s taxpayers are able to claim a relatively large amount of deductions, in part due to a large amount of state income taxes paid.

As is always the case regarding tax policy, the devil is in the details. Federal tax reform has not yet passed, with amendments and revisions likely still to come.  Initial rough estimates by the Oregon Department of Revenue and Legislative Revenue Office suggest that the upward pressure created by federal reform could be large enough to trigger Oregon’s unique kicker law all else being equal.

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