Oregon’s lawmakers are weighing two options that would divert the state’s “kicker” tax rebate to pay for pension liabilities or education.
The state’s taxpayers are on track to receive $724 million of kicker rebates when they file their income taxes in 2020, according to the state Office of Economic Analysis’ most recent economic report in November. The state’s unique system is triggered when revenue for the state’s two-year budget cycle exceeds the final revenue forecast by 2%. Individual taxpayers receive a “kicker” rebate credit on their taxes for the following year.
Voters approved a ballot measure creating the rebate in 1980 in the wake of the anti-tax fervor of the late 1970s.
It originally applied to corporations as well as individuals, but a measure that passed in 2012 reallocates the corporate kicker revenue into a special fund for public schools. A 2000 ballot measure made the kicker part of the state constitution. It requires a two-thirds vote of the Legislature to divert the money for another purpose.
Critics of the trigger say it makes the state budget more volatile. Oregon has no sales tax and is heavily dependent on income taxes.
S&P Global Ratings analysts cited dependence on the personal income tax, and that the kicker makes it difficult to build a budgetary cushion, as credit challenges in an April 2018 credit report.
Oregon's general obligation bonds are rated AA-plus by both S&P and Fitch Ratings and Aa1 by Moody's Investors Service. All assign stable outlooks.
State Economist Josh Lehner said OEA hasn’t firmed up the numbers for the next quarterly forecast due out in three weeks and couldn’t say if the $724 million figure could change.
Changes from the 2017 federal tax law resulted in growth in revenues from taxpayers paying early, but like many states Oregon saw a decline in revenues in the fourth quarter, Lehner said.
Money anticipated from the tax law’s corporate repatriation program also doesn’t appear to be living up to expectations. U.S. corporations were required by the tax law to bring many years of their foreign earnings back onshore to be taxed at preferential rates. Initial estimates were too large and are being revised downward, Lehner said.
Despite those caveats, the Oregon economy is robust and economists have baked both factors into their assumptions, so Lehner doesn’t think they will affect the size of the kicker.
“The uncertainty around revenue is about taxpayer behavior around federal tax law reform. But that doesn’t mean revenues are going to be down substantially. Revenues are growing. We have seen a lot growth in the Oregon economy relative to the rest of the country,” Lehner said. “The uncertainty is about taxpayer behavior and shifting capital gains from one year to next.”
What may affect whether Oregonians see that money are the proposals to divert it for other uses.
One proposal would divert the money on a one-time basis into a fund created by Gov. Kate Brown to encourage local governments to contribute money to help reduce the state’s public pension liability. Another measure, SJR3, introduced by the Senate Interim Committee on Finance and Revenue, would permanently send the surplus to the Education Stability Fund.
If the money isn’t diverted, taxpayers with the median adjusted gross income of about $35,000 could get a $174 credit. The state’s top wage earners benefit the most. People who earn more than $401,000 could receive an estimated $7,175 tax break, economists said.
This represents the third straight biennium kicker rebate for Oregon taxpayers. The state returned $402 million in 2015 and $464 million in 2017.
“The legislature should only use kicker funds to pay down unfunded liabilities if it is part of a larger reform package; otherwise extra pension payments could become a regular occurrence,” said Marc Joffe, a senior analyst with the Reason Foundation.
Oregon’s unfunded liability, the amount by which the system’s obligation exceed its assets, was $22.3 billion as of December 31, 2017 and was 80% funded, according to a Public Employees Retirement System report.
"PERS actuarial assumptions should be reviewed,” Joffe said. “For example, its assumed rate of return should be further lowered from its current 7.2% level and employees should be asked to contribute to the system.”
He also suggested that new employees and higher income current employees should be offered benefit structures that reduce risk to future taxpayers, such as hybrid plans that combine elements of defined contribution and defined benefit plans.
Tax Fairness Oregon, a watchdog group, supports using the money to pay down the pension liability, warning on its website the kicker could mean tax increases to pay for pensions in a downturn.
Brown reportedly said last week that she wanted to preserve the tax rebate for certain taxpayers, but declined to weigh in on the potential diversions for this article. A spokeswoman said the governor was not available for an interview.
She has gone full throttle on educational programs from pre-K through college since releasing her proposed budget in December. She also worked with lawmakers last year to create a program to chip away at the pension liability.
Her budget would dedicate an additional $100 million to help schools cover increasing pension costs. But PERS estimates that $1 billion to $1.5 billion in additional contributions are needed for schools over the next biennium.
Brown and the Legislature created an employer incentive fund last year that offers matching grants to PERS employers with high benefit costs to create side accounts. It also directs any state legal settlements funds to PERS. Treasurer Tobias Read contributed $430,000 from a rate-manipulation settlement.
Brown also asked that an additional $1.9 billion be earmarked for education in her budget without designating where the money would come from. The State School Fund is funded at $8.97 billion, including $8.86 billion from the general fund and lottery funds and $102.1 million from marijuana tax revenue.
She also included a $100 million bond sale for the Oregon School Capital Incentive Matching Program and $225 million in bonding capacity for public universities.
