New Oregon economic forecaster predicts higher revenue, higher kicker

Oregon’s new chief state economist estimates the state will have about $37.8 billion available to spend in the next two-year budget cycle after reworking how the state calculates its economic forecast.

The state’s also on track to pay out a $1.8 billion kicker to taxpayers in 2026. But new chief economist Carl Riccadonna, a former Wall Street analyst hired in September, is changing the way Oregon models its expected revenue with an eye toward more accurate forecasts that reduce the amount returned to taxpayers through Oregon’s unique kicker law.

Riccadonna and senior economist Michael Kennedy presented their first quarterly forecast to lawmakers Wednesday and previewed some of their findings on a call with reporters Tuesday evening. Under the new forecast, lawmakers could have nearly $6 billion more to spend in the upcoming 2025-27 budget cycle compared to the last one.

Riccadonna’s hiring followed years of record kicker payouts. Oregon’s unique tax credit kicks in whenever income tax payments in a two-year budget cycle are at least 2% higher than budgeted, sending the excess back to taxpayers when they file state income taxes the following year.

The state has sent kicker payments every two years since 2016, including a jaw-dropping $5.6 billion to taxpayers who filed in 2024. The latest forecast estimates a 2026 kicker of $1.79 billion, up from $1 billion in the September forecast.

“My mandate joining DAS back in September was to really get to the bottom of what’s happening here, and so what my team has done is kind of deconstruct and reconstruct a lot of the forecast models to figure out what was happening,” Riccadonna said.

Riccadonna and Kennedy attributed the high kickers — and corresponding decrease in funds available to lawmakers — to flaws in former state economist Mark McMullen’s economic model. It was too pessimistic and didn’t treat the kicker as a tax liability, they said.

“If you look back, as the kicker gets bigger and that difference gets bigger, the errors get bigger,” Kennedy said. “You get this recursive effect where the errors are just going to get bigger and bigger as the kicker gets bigger, unless you go back to a world where liability in the model is really the real liability, and you don’t have this difference.”

Kennedy said the state’s prior revenue forecast model was also more pessimistic than necessary, including taking a national forecast provided by a vendor and adjusting it downward. That’s on top of what Riccadonna described as “pervasive pessimism” among economists that the post-pandemic economic boom would end in a recession, while he said it’s looking increasingly likely that Oregon and the country will instead have a soft landing — a gradual shift from high growth to a flatter economy.

Legislative leaders, governor react

The forecast estimates lawmakers will be able to spend up to $37.8 billion in the 2025-27 budget, well above the $31.9 billion general fund budget they approved in 2023. Gov. Tina Kotek is working on her budget proposal for lawmakers, who will spend the first six months of 2025 negotiating in public and private to pass a spending plan.

Democratic legislative leaders and Kotek welcomed the new forecast, saying it proved the state’s economy remains strong and resilient. But they also noted that the state still faces a difficult budget cycle, without the federal COVID relief money that provided a buffer in recent years and with a transportation funding deficit and uncertainty at the federal level.

“While this positive economic forecast is welcome news and makes the start of the legislative budgeting process a little easier, we are still entering into a very tight budget cycle,” said Senate President Rob Wagner, D-Lake Oswego. “Current critical services must be maintained and legislators will need to make smart choices about how to sustain prior one-time investments to address the important needs facing every corner of Oregon.”

During a press conference with tribal leaders Wednesday, Kotek said changes to how the state models revenue will help with stability in future years.

“I think the truing up of the calculation of the new chief economist is really going to be helpful to provide stability when we’re trying to do budgeting every two years, and I think his assumptions around the recalculations made a lot of sense to me,” she said.

Republicans, meanwhile, expressed concerns about lower kicker payments if the state more accurately models revenue.

“The kicker is the people’s money, and it should remain so,” said Sen. Lynn Findley, R-Vale and a member of the Senate Finance and Revenue Committee. “While this biennium’s kicker appears secure, changes to the revenue model could lead to smaller refunds in the future, and we need to ensure taxpayers are treated fairly.”

House Speaker Julie Fahey, D-Eugene, said state economists have an obligation to accurately estimate revenue levels.

“Although the current forecast is strong and our reserves are healthy, potential changes at the federal level create uncertainty,” she said. “Oregonians should know that even if there is instability at the federal level, here in Oregon there are responsible, focused leaders who will be steady hands at the wheel. We are prepared to use available resources to deliver on what Oregonians need most.”

And incoming House Minority Leader Christine Drazan, D-Canby, said while the state budget might be doing well, family budgets are still stretched thin from years of inflation.

“Besides plenty of general fund revenues to pay for critical services, the state has deep reserves and an ending balance of over $2.7 billion,” she said. “This is a lot of money from Oregonians, for government to use wisely, to meet its duty to Oregonians themselves. It’s time for government to do its part by improving efficiency, strengthening transparency and providing excellent service. This is not the time for politicians to ignore agency failures, and then push new fees or increased taxes.”

oregoncapitalchronicle.com