ORIENTATION MEETING

 

TAPE 23-24, A-B, 25-A

 

HOUSE REVENUE COMMITTEE

JANUARY 30, 2003   8:30 AM   STATE CAPITOL BUILDING

 

Members Present:                        Representative Lane Shetterly, Chair

                                                Representative Wayne Scott, Vice Chair

                                                Representative Joanne Verger, Vice Chair

                                                Representative Phil Barnhart

                                                Representative Vicki Berger

                                                Representative Pat Farr

                                                Representative Mark Hass

                                                Representative Elaine Hopson

                                                Representative Max Williams

 

Witness Present:                        Tom Potiowsky, State Economist, Office of Economic Analysis

                                                Michael Kennedy, Revenue Economist, Office of Economic Analysis

 

Staff Present:                            Paul Warner, Legislative Revenue Office

                                                Kathy Tooley, Committee Assistant

 

TAPE 23, SIDE A

004

Chair Shetterly

Calls meeting to order at 8:33 a.m.

 

 

023

Tom Potiowsky

Presented “Overview of Revenue Forecast Process”, (Exhibit 1), referring to the publication “Oregon Economic And Revenue Forecast”, (Exhibit 2).

 

032

 

 

046

 

 

048

Potiowsky

 

 

Potiowsky

 

 

Rep. Barnhart

Continued presentation, beginning “Oregon’s Revenue Forecast Process”, (Page 1, Slide Bottom, Exhibit 1).

 

Continued presentation, beginning “Revenue Forecast Methodology”, (Page 2, Slide Top, Exhibit 1).

 

Question and discussion interspersed.

 

069

Potiowsky

Continued presentation, beginning “General Fund Forecast Components”, (Page 2, Slide Bottom, Exhibit 1).

 

074

Potiowsky

Continued presentation, beginning “Economic and Revenue Models”, (Page 3, Slide Top, Exhibit 1). 

 

Questions and discussion interspersed.

 

101

Potiowsky

Continued presentation, beginning “Personal Income Tax Models, (Page 3, Slide Bottom, Exhibit 1).

 

128

Michael Kennedy

Presented overview of models behind the corporate and personal income tax forecast, beginning “System being modeled”, (Page 4, Slide Top, Exhibit 1).

 

143

Kennedy

Continued presentation, beginning “Personal Income Tax Model”, (Page 4, Slide Bottom, Exhibit 1).

 

149

Kennedy

Continued presentation, beginning “Developing Total Liabilities: Tax Calculator”, (Page 5, Slide Top, Exhibit 1).

 

152

Chair Shetterly

Asks Kennedy to inform the Committee about national consultant firm, “Global Insights”.

154

Potiowsky

Global Insights is a firm that provides extensive information on variables that affect the Oregon Economic Model. It provides a sense of what is happening in the national economy; and other factors such as the Iraq War and possible impacts on the national economy and on Oregon.  Global Insights was originally made up of two forecasting groups, DRI (Data Resources), and WEFA (Wharton Economic Financial Group).  Global Insights also consults with PGE and Pacific Power.

 

175

Rep. Williams

How accurate are they?

 

177

Potiowsky

In some areas okay. Corporate profits are hard to predict and the company does as well as others.

 

214

Kennedy

Continues presentation, beginning “Personal Income Tax:  Quarterly Collections Models”, (Page 5, Slide Bottom, Exhibit 1).

 

238

Kennedy

Continued presentation, beginning “Personal Income Tax:  Quarterly Collections Models, (Page 6, Slide Bottom, Exhibit 1). (Slides switched order).

 

242

Kennedy

Continued presentation, beginning “Timing of Collections related to the 2001 tax year (Millions), (Page 6, Slide Top, Exhibit 1).

 

258

Kennedy

Continued presentation, beginning “Personal Income Tax Collections Forecast”, (Page 7, Slide Top, Exhibit 1).

 

267

Kennedy

Continued presentation, beginning “Corporate Income Tax Models”, (Page 7, Slide Top, Exhibit 1).

 

269

Kennedy

Continued presentation, beginning “Corporate Income Tax Model”, (Page 8, Slide Top, Exhibit 1).

 

272

Kennedy

Continued presentation, beginning “Corporate Income Tax Quarterly Collections Models”, (Page 8, Slide Bottom, Exhibit 1).

 

Questions and discussion interspersed.

 

377

Kennedy

Continued presentation, beginning “Corporate Income Tax – Relationship Between Collections and Liability”, (Page 9, Slide Top, Exhibit 1).

 

382

Kennedy

Continued presentation, beginning “Corporate Income Tax Quarterly Collections Models”, (Page 9, Slide Bottom, Exhibit 1).

 

385

Kennedy

Continued presentation, beginning “Corporate Income Tax Collections Forecast”, (Page 10, Slide Top, Exhibit 1).

 

405

Kennedy

Continued presentation, beginning “Close of Session Forecast”, (Page 10, Slide Bottom”, Exhibit 1).

 

410

Rep. Verger

Are there any industries that you particularly, local or national, that closely measure what is happening in the economy?

 

416

Potiowsky

The high tech industry, especially semi-conductors and the influence they have on corporate profits income.  Also, lumber and wood industry, national and international factors affect that, for example Canadian soft lumber.  Transportation equipment is another area trucking industry affects Freightliner.  Interest rates, gasoline prices affect RV makers. 

 

451

Rep. Verger

Is there an industry that allows prediction of an economic decrease?

 

457

Potiowsky

There are few indicators:  The Institute of Supply Management can indicate when manufacturing might have problems.  In high tech, the Semi-Conductor Book to Bill Ratio, looks at orders in and shipments out, which indicates strength.  Turning points are extremely difficult to predict.  Office of Economic Analysis is in the process of building a leading economic indicator model for Oregon which may become a quicker barometer.

 

494

Chair Shetterly

Has the model changed over the past 5 to 10 years in measuring performance, or has it been consistent.

 

 

 

TAPE 24, SIDE A

 

035

Kennedy

The structure of the model has been the same since it was developed.  The liability model has changed in terms of what is driving income.

 

045

Warner

The structure is pretty much the same as it has been since 1981.  The key difference is in the components of adjusted gross income and the components of the tax base.  Another change is the emergence of high tech and the semi-conductor industry over the past 10 years, which the model has been able to capture.  The key is getting the upper income group which is paying a large part of the tax burden.

 

066

Rep. Hass

Have stock options and bonuses and capital gains from the high tech sector been factored into new models?

 

072

Potiowsky

Have incorporated into model, but collection of data provide delays.

 

089

Kennedy

Continues presentation, “Revenues Exhibit Considerable Volatility”, (Page 11, Slide Bottom, Exhibit 1).

 

092

Kennedy

Continued presentation, “Actual revenues compared to COS Forecast and naïve trend (13.5%). (Page 12, Slide Top, Exhibit 1).

 

113

Kennedy

Continued presentation “Data available for December forecast”, (Page 12, Slide Bottom, Exhibit 1).

 

122

Kennedy

Continued presentation, beginning “Quarterly PIT Collections Volatile – Product of Numerous Factors”, (Page 13, Slide Top, Exhibit 1).

 

190

Kennedy

Continued presentation, beginning “Data available for December forecast”, (Page 13, Slide Bottom, Exhibit 1).

 

Questions and discussion interspersed.

 

260

Potiowsky

Continued presentation, beginning “Unusual Times for the Economy”, (Page 14, Slide Top, Exhibit 1).

 

287

Potiowsky

Continued presentation, beginning “Estimated Data Available for the May 2001 Forecast Compared to Revised Data to Date”, (Page 14, Slide Bottom, Exhibit 1).

 

303

Potiowsky

Continued presentation, beginning “Latest Revenue Forecast”, (Page 15, Side Top, Exhibit 1).

 

315

Kennedy

Continued presentation, beginning “General Fund Revenue Forecast”, (Page 15, Slide Bottom, Exhibit 1).

 

322

Kennedy

Continued presentation, beginning “Historical and Forecast General Fund growth, not including Kicker refunds”, (Page 16, Slide Top, Exhibit 1).

 

347

Kennedy

Continued presentation, beginning “Factors Influencing Projected Growth in General Fund Revenues”, (Page 16, Slide Bottom, Exhibit 1).

 

352

Kennedy

Continued presentation, beginning “Factors Influencing Projected Growth in General Fund Revenues”, (Page 17, Slide Top, Exhibit 1).

 

366

Rep. Williams

Commented that a 13.6% growth rate, even a 7% growth rate seems aggressive.

 

384

Chair Shetterly

Should see how this fares in March forecast.

 

391

Kennedy

Will answer in next few graphs. Continued presentation, beginning “Personal Income Growth”, (Page 17, Slide Bottom, Exhibit 1).

 

390

Chair

Does the coming boom forecast assume the same manufacturers in high tech in Washington County that we had in the 90’s, or production overseas.

 

438

Kennedy

The economic model forecast is less optimistic because Oregon may not be the recipient of the increase in high tech to ‘90s levels.

 

451

Potiowsky

For December, the economic forecast indicates that Oregon is coming out of recession, but not to 90’s levels. High tech projections do not get back to pre recession rates until late 2004.

 

 

TAPE 23, SIDE B

 

030

Kennedy

Continued presentation, beginning “Factors Influencing Projected Growth in General Fund Revenues”, (Page 18, Slide Top, Exhibit 1).

 

037

Kennedy

Continued presentation, beginning “Capital Gains, Retirement Income Outpace Gross Income Growth”, (Page 18, Slide Bottom, Exhibit 1).

 

039

Kennedy

Continued presentation, beginning “Factors Influencing Projected Growth in General Fund Revenues”, (Page 19, Slide Top, Exhibit 1).

 

041

Kennedy

Continued presentation, beginning “Effective Tax Rates Climbs in 1990s”, (Page 19, Slide Bottom, Exhibit 1).

 

065

 

 

 

 

185

Kennedy

(Continued presentation, beginning “PIT Forecast slightly below long term trend”, (Page 20, Slide Top, Exhibit 1).

 

Questions and discussion interspersed.

 

End of Revenue Forecast Overview.

 

188

Chair Shetterly

Informed new members of the Committee of Paul Warner’s background as the former State Economist 1989-1999.

 

215

Warner

At the Chair’s direction, provided the Committee with a review of revenue forecasting methodology, “Revenue Forecast Review”, Exhibit 3, and a memo to the House Revenue Committee, entitled “Review of Revenue Forecasting Process”, Exhibit 4.  The scope of the review included:

 

·         An explanation of the large forecast error for 2001-2003 fiscal year.

·         Recommendations for methodological improvements for the forecast process.

·         Recommendations for improvements in the forecast process.

·         Recommendations for any statutory changes that could potentially improve forecast results and/or process..

 

Told the Committee that he has worked with Legislative Council to begin drafting some of these recommendations.

 

250

Warner

Explained economic forecasters are generally conservative, and that this was the first forecast below the close of session estimates since 1981-83. Looked at December vs. May forecasts for 2001, 2002 calendar years.  Shortfall fell primarily between following four areas.

 

 

 

·         Wage and salary income is $10.6 billion less for 2001-2002. with a revenue reduction of 37% or $742 million

·         Corporate income accounts for 23% of error, $464 million, attributable to the change in the national profit forecast, $272 million; bonus depreciation enacted by Congress, $100 million; and the remaining $75 million due to the apportionment factor.

·         Capital gains, 17%, $340 million

·         Business income and investment income, 10%, $203 million.

 

Questions and discussion interspersed.

 

 

TAPE 24, SIDE B

 

064

 

 

 

103

Warner

 

 

 

Warner

Gave history of Forecast Process starting in 1980.  Its first task was to develop the Oregon Econometric Model the structure of which is basically the same today, (Page 3, Exhibit 4).

 

Discussed strengths of the current system, (Exhibit 3).  Four strengths stand out:

 

·         Formal links to National Forecast Model.

·         Governor’s Council of Economic Advisors

·         Maintain a Single Forecast Point

·         Regular Formal Quarterly Updates.

 

155

Warner

Recommended technical changes (Exhibit 3):

 

·         Updating taxpayer sample to 2000 tax year, will be adjusted because 2000 tax year was not a normal year

·         Industry specific data, withholding by sector

·         Leading Index can help with citing turning points with monthly read

·         Personal income and adjusted gross income

·         Wage rates/bonus projections

·         Produce Methodology review on a regular annual schedule.

 

210

Warner

Recommended structural and reporting changes (Exhibit 2)

 

·         Establish a Revenue Forecast Board, requires statutory action.

·         Create a Legislative/Executive Board that would have appointing authority for state economist position, may require statutory action.  A function of the board would be the release of forecasts simultaneously to appointing authorities.

 

251

Chair Shetterly

A 4 member board has its problems, asked Warner to look into drafting legislation to go to a 5 person board, to avoid a deadlock.

 

Questions and discussion interspersed.

 

312

Chair Shetterly

For the record, “There has never been as far as I know, and I will say this on the record, any issue as to the independence of the actual numbers in the forecast or the information going into it or the credibility of (the State Economist).”

 

280

Warner

Continued with a third structural/reporting recommendation,

 

·         Create a Revenue Forecast Advisory Committee that would review preliminary revenue numbers and make recommendations or reactions to the forecast.  The ultimate decision maker in the forecast process to rest with the State Economist.

 

359

Chair Shetterly

Asked if the committee would be a corollary to the Governor’s Council on Economic Advisors; on the revenue side of the forecast process?

 

350

Warner

Answered yes. Warner recommended that the committee be exempt from open meetings law given the sensitivity of the revenue numbers and the need for candid advice.

 

392

Warner

Continued with a fourth structural/reporting recommendation:

 

·         Recommended a monthly revenue tracking report. This would be a procedural change and would not require a statutory change.

 

417

Warner

Historically, the Office of Economic Analysis, had one duty and that was to forecast General Fund Revenue.  Additional duties consistent with their mission such as lottery forecast, and prison inmate forecast; have been added.  Recommended through the Legislative Fiscal Office Budgetary Review process that other ancillary functions be given to other agencies.

 

442

Chair Shetterly

Asked the Committee if anyone felt uncomfortable with possible legislative changes as a result of the revenue forecasting recommendations.

 

 

TAPE 25, SIDE A

 

033

Rep. Berger

Told the Committee she was concerned that forecasting took a lot of hits, and that the recommendations were an overreaction to forecast errors resulting from rapid changes in numbers and “folks taking heat for it”.

 

038

Chair Shetterly

Felt it would be an overreaction if the committee suggested creation of an economic forecaster within the legislative branch, but felt recommendations were a fine tuning of the process.

 

060

Potiowsky

Advised the Committee that a lot of the items in “C and D” (Exhibit 3) were thought about before 2001 such as formation of a Revenue Forecast Advisory Committee.

 

082

Warner

Advised the Committee that he does not see a fiscal impact.  The Advisory Committee would be people within government appointed on a voluntary basis.  There may be a fiscal impact with the Forecast Board.

 

099

Rep. Hopson

Felt moving some of the functions to other agencies needs investigation so that the core mission of the State Economist is not weakened.

 

105

Chair Shetterly

Ask Warner to continue to work with Potiowsky and Legislative Counsel to draft legislation for Committee review..

 

115

Chair Shetterly

Meeting adjourned at 10:30 a.m.

 

 

Tape Log Submitted by,

 

 

 

Kathy Tooley, Committee Assistant Reviewed by Kim Taylor James

 

Exhibit Summary:

1.       Potiowsky, Kennedy, “Oregon’s Revenue Forecast process”, 21 pages.

2.       Potiowsky, “Oregon Economic and Revenue Forecast”, 103 pages

3.       Warner, “Revenue Forecast Review”, 1 page

4.       Warner, Memo “Review of Revenue Forecasting Process”, 7 pages