INFORMATIONAL: RELEASE OF MAY 2005 REVENUE FORECAST

 

TAPES 119, 120 A-B

 

SENATE REVENUE COMMITTEE

MAY 13, 2005   8:30 AM   STATE CAPITOL BUILDING

 

Members Present:                  Senator Ryan Deckert, Chair

                                                Senator Gary George

                                                Senator Rick Metsger

                                                Senator Floyd Prozanski

                                                Senator Charles Starr, Vice Chair

                                                Senator Kurt Schrader

                                                Senator Margaret Carter

                                                Senator Alan Bates

                                                Senator Ted Ferrioli

                                                Rep. Wayne Scott

                                                Rep. Tom Butler

                                                Rep. Vicki Berger

                                                Rep. Mark Hass

                                                Rep. Brian Boquist

                                                Rep. Sal Esquivel

                                                Rep. Larry Galizio

                                                Rep. Betty Komp

                                                Rep. Andy Olson

                                               

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

                                                Michael Kennedy, Senior Economist

                                                John Hawkins, CPA, Council of Revenue Forecast Advisors

 

Staff Present:                          Paul Warner, Legislative Revenue Officer

                                                Barbara Guardino, Committee Assistant

 

 

TAPE 119, SIDE A

005

Chair Deckert

Calls meeting to order at 8:30 a.m. Welcomes members of House Revenue Committee.

 

INFORMATIONAL: RELEASE OF MAY 2005 REVENUE FORECAST

010

Tom Potiowsky

Directs members’ attention to press packet (EXHIBITS 1, 2 and 3) which contains a summary of the full document. (The full document will be available on the Web site.) Briefly explains the quarterly forecast process.

 

058

John Hawkins

Explains the function of the Council of Revenue Forecast Advisors, a group of CPAs who work with individuals and industries. They meet quarterly. They see what clients are doing and what tax changes have occurred.

 

081

Chair Deckert

Asks, at their last meeting were they able to change the forecast? The new forecasting procedures are more accurate.

 

088

Hawkins

Changes have been made in the forecast, partly due to “final payments,” where taxpayers make payments based on what occurred in the previous year. Dollars coming in on April 15 were higher than anticipated.

 

105

Sen. Carter

Asks if he sees this as a trend for the rest of the year.

 

110

Hawkins

Responds, does not know, but there may well be a continued trend. We hope for good times ahead, but there are variables that could change that.

 

118

Rep. Butler

Relative to estimated tax payments, are you advising your clients because of the AMT (alternative minimum tax) to pay more frequently? What percentage of Oregonians pay AMT?

 

128

Hawkins

He advises people to make payments to avoid penalties. If income increased substantially, they would have a balance due. People are making minimum payments to avoid penalties and waiting until April 15 to pay the balance. Guesses that by 2011 people paying AMT will exceed those paying regular tax. This is a growing problem.

 

149

Rep. Butler

Asks whether the client base pay the AMT as a result of capital gains or charitable contributions.

 

154

Hawkins

Responds, Oregon is a high income tax state and the two most common tax credits people lose when using AMT are state taxes and dependents.

 

162

Chair Deckert

Asks, what percentage of Oregonians use AMT?

 

166

Hawkins

About 20 to 30 percent.

 

180

Potiowsky

Begins slide presentation: Oregon’s Economic and Revenue Outlook

Page 1, slide 2: Economic and Revenue Forecast

Page 2, slide 1: Governor’s Oregon Council of Economic Advisors Outlook for the U.S. Economy Compared to Global Insight

Explains, the Governor’s Council of Economic Advisors tried to find a consensus viewpoint on the outlook for the economy. Explains the model used. The governor’s council is a little more pessimistic on the outlook than the national forecasting service. This influenced the council’s forecast. Their concern is around energy issues, inflation, federal deficits, etc. They are worried the outlook won’t be as rosy as the baseline. They even consider a slim possibility of recession.

 

 

 

202

Potiowsky

Page 3, slide 1: Unemployment Rate by Region, March 2005. Oregon is now the fifth highest in unemployment in the nation. In March, Oregon had the third fastest job growth in the nation.

 

222

Potiowsky

Page 3, slide 2: Oregon’s Total Exports (1Q 1997– 4Q current dollars)

 

228

Potiowsky

Page 4, slide 1: Oregon Index of Leading Indicators

Slide 2: All industry groups posted job gains since 6/03 trough (March 2005); most since previous 11/00 peak, except for manufacturing and business. Some areas, especially manufacturing, were hit hard during the recession. It has gained, but still has a distance to go.

 

254

Potiowsky

Page 5, slide 1: Total Non-farm Employment (Annual Percentage Change). Believes 2005 is a solid year, but there are uncertainties coming.

 

267

Potiowsky

Page 5, slide 2: Manufacturing Industry Employment (Annual Percentage Change). Manufacturing is coming back, but not to its previous peak.

 

287

Potiowsky

Page 6, slide 1: Private Non-manufacturing Industry Employment (Annual Percentage Change)

 

302

Potiowsky

Page 6, slide 2: Comparison of Last Three Forecasts: Personal Income Growth

 

312

Potiowsky

Page 7, slide 1: Comparison of Last Three Forecasts: Employment Growth

Slide 2: Oregon Outlook Summary. 2004 was the first job growth year after three consecutive losses. Transportation equipment sector has been particularly strong. So far the high gas prices have put a dent in growth, but not much. Wood products have done well, too.

 

330

Potiowsky

Page 8, slide 1: Risk to the Forecast … Examines the downside and upside

Points out the housing market is of particular concern. The stock market hasn’t done well so people are turning to housing, and this sets up a speculative bubble that could burst. In particular, the Bend area is vulnerable. On the upside, it’s possible that oil prices could come down rapidly.

 

410

Rep. Boquist

Asks question regarding regional oil prices, specifically refineries and high diesel fuel prices.

 

420

Potiowsky

Responds, Oregon is at a disadvantage for not having any refineries. Refineries are currently building up inventories, so that problem could somewhat correct itself. Oregon fuels will be a little bit higher, but if prices fell, Oregon would see a corresponding fall.

 

457

Rep. Boquist

Notes, a refinery in Washington state might close in the fall and increase the cost of diesel.

 

461

Potiowsky

Was not aware of that.

 

 

 

476

Rep. Berger

Asks the meaning of “controlled growth of China and India” (listed under “Upside”).

498

Potiowsky

Worries about governments moving their economies in the wrong direction. China and India are worried about fast growth and inflation and would like to slow it down. If they can do that, it will alleviate commodity prices, which would help us.

 

 

 

TAPE 120, SIDE A

036

Rep. Berger

Follow up – if their efforts are uncontrollable would they go into the geopolitical risk category?

 

040

Potiowsky

It could go either way.

 

047

Sen. Ferrioli

Asks about economists’ relative level of confidence in terms of percentage regarding the forecast’s accuracy. What are you comfortable with in terms of a plus or minus bracket?

 

060

Potiowsky

Responds, he believes there’s a 75% chance of a 4-5% movement around the forecast for 2005-07. Gives a 95% chance of movement of $1 billion or more either way around that figure. The forecast has the best chance of happening.

 

075

Ferrioli

Notes, one indicator is significant in the risk of downturn, and one is neutral. If you flip a coin will it land on its end?

 

086

Potiowsky

Our baseline forecast assumes additional risk. We are looking at a 50/50 chance of going on one side (of the coin) or the other.

 

098

Michael Kennedy

There’s a 95% chance it would fall within $1 billion either way.

 

101

Rep. Boquist

Asks, is Oregon trending down? Is there a lag ramping up before a decline?

 

105

Potiowsky

Essentially yes. There has been strong job growth since late 2003, and businesses are doing better. But, there is some question about a “soft spot” in the U.S. economy in the first quarter. Other news points to consumer spending as not robust, even though sales are up for April. Believes things may slow in 2006 and begin softening.

 

127

Kennedy

Begins Revenue Forecast

Page 8, slide 2: Personal income tax is the only real change. It is being driven by recent data. It’s important to go back into the methodology. What are the figures telling us?

 

140

Kennedy

Page 9, slide 1: Recent Forecast Performance

The only real change is much higher final payments. The question is, what is this telling us?

Page 9, slide 2: PIT (personal income tax) Methodology

Explains the methodology. One problem is, the last year there is data is 2003. In terms of final payments, economists know people owed more, but don’t know why. Next December there’ll be fewer estimated payments. The real question is whether they earned more or if there is a shift. This won’t be known for 2-3 years.

 

187

Kennedy

Page 10, slide 1: Interim Liability Estimation. Gives formulas. Gives example.

 

215

Kennedy

Page 10, slide 2: Final/Refund Depends on Liability Growth.

 

255

Kennedy

Page 11, slide 1: Interim Liability Estimation

Explains the upward surprise that has occurred in last 1 ½ months. There is a10% increase in liability. The question is, why? Some other form of income went way up. Will not know until January 2006. The problem is, if you don’t know the cause, you don’t know if it’s temporary or permanent. “Looking out into the future our economic scenario hasn’t really changed.” It is probably temporary. Gives example.

 

296

Sen. Ferrioli

In 2000-01 people over-paid their estimated quarterly taxes. Most accountants do the same thing, they let a cycle go by before advising clients to reduce their payments. This year people realized they’d under-accrued, which might account for the higher payments.

 

315

Kennedy

Responds, people will encounter those cyclical issues. It really doesn’t go down until income drops. Getting liability right is the most productive way to make an accurate collections forecast. Improvements to this forecast have come around that methodology.

 

359

Kennedy

Continues with slide presentation.

Page 11, slide 2: 2005 Tax Year

Last year the withholding growth accelerated in the second half. It’s up 7.2%. Expects growth to be closer to 6% this year. Estimated payments are up this year 17.1%.

 

425

Rep. Butler

Expresses concern that those estimated taxes are based upon the prior year’s liability. Looking at capital markets, believes that 17.1% is the protective estimated payments, and a large portion is protection from capital gains. Is concerned that this 17.1% projection needs to be narrowed down quickly.

 

TAPE 119, SIDE B

025

Kennedy

Regarding the potential variation around the 2000 liability number of $4.8 billion, we know that 17% is reflective of last year, but have no clue what’s going on with non-wage income this year. Gives one scenario.

 

045

Rep. Butler

The markets that are hottest, with regard to real estate, generate huge amounts of capital gains. They could have created a large portion of the gain outside the stock market, and that could be short-lived. Wants to make certain the estimated tax driven number is muted.

 

068

Kennedy

This forecast is centered at the middle point. It doesn’t assume there will be repeats, nor does it assume that capital gains will fall again. “We have absolutely no clue what drove 2004.”

 

084

Kennedy

Resumes discussion about liability (page 11, slide 2).

 

 

Page 12, slide 1: Corporate Income Tax …

Page 12, slide 2: Recent Forecast Performance. No real signals.

 

090

Chair Deckert

Asks, what are the kicker implications?

 

092

Kennedy

The kicker for corporate is projected at $62 million.

 

101

Kennedy

Page 13, slide 1: Oregon Corporate Profits (billions) graph. Projects a slight softening.

Page 13, slide 2: General Fund Revenue Forecast, 2003-05 biennium. Projecting $10.5 billion total GF resources. Changes are negligible other than personal income tax. Total change for this biennium is $105.6 million.

 

118

Kennedy

Page 14, slide 1: Kicker Update 2003-05. A personal kicker is irrelevant due to Measure 30. For corporate income taxes, the kicker is $62.6 million above the forecast.

 

125

Rep. Boquist

Asks question concerning line 4. It shows the forecast was off 6% in 2003-05.

 

130

Kennedy

Responds, if you take out the $580 million that HB 2152 would have estimated, it puts you at 2.3% above on personal income tax.

 

135

Chair Deckert

Asks, how much of the $62.6 million corporate kicker goes out of state?

 

140

Kennedy

Above 80% of corporate income taxes are paid by multi-state corporations. Wouldn’t expect it to have as much impact as a personal income tax kicker would. Corporations will take a credit on their 2005 returns.

 

 

 

155

Kennedy

Page 14, slide 2: GF Forecast Variance by Forecast

Looking at the average forecast over the past 2 ½ decades, there is very little variation from here on.

 

170

Kennedy

Page 15, slide 1: Potential Variance from March Forecast

 

189

Kennedy

Page 15, slide 2: General Fund 2005-07 Forecast.

If it seems too good to be true it probably is.

Personal income tax next biennium is estimated at $10,041.4 million.

 

211

Sen. Metsger

On the subject of cigarette and liquor taxes, Washington state recently increased its prices. How do cross-border sales figure into this budget?

222

Kennedy

That figure is going to be negligible. People already cross the border to purchase cigarettes and liquor here.

 

231

Potiowsky

Cigarette revenues are estimated to increase perhaps 1%. Consumption has been falling.

 

145

Kennedy

Continues slide presentation. “The total change in GF resources for next biennium is $224 million.”

 

249

Kennedy

Page 16, slide 1: Risks to 2005-07 Forecast

Every risk has an up side and down side. Since we don’t know what capital gains are doing, there is a risk there, up and down. One thing that can change this equation would be tax law changes. Looking at historical variations, there is very little likelihood (5%). The boom and bust period was unique. There is a potential for mini-bubbles that could pop, but that’s not likely.

 

297

Kennedy

Page 16, slide 2: General Fund Revenues ($billions). Comparison of General Fund Resource Forecasts.

 

315

Kennedy

Page 17, slide 1: General Fund Revenue Growth

Factors out the kicker. Future growth rates adjusted for the kicker are 11-12%.

 

339

Sen. George

With these numbers appearing relatively flat for 2007-09, might it not be smart to look at this new-found money as something to put into reserve?

 

360

Kennedy

Will not speculate on this. Comments, there’s been a significant drop in the gross income tax returns and the liability owed (gross effective rate). One reason is that deductions and subtractions have kept growing while income has fallen.

 

398

Rep. Butler

Concerning the $11.6 billion in the general fund, how much reserve should there be in cash carryover to protect against TANS? Follow-up questions.

 

425

Potiowsky

TANS interest is just one element of the overall risk. In the best of possible worlds, a $1 billion reserve would be ideal. In previous presentations, we’ve talked about a 4-5% range around the forecast.

 

TAPE 120, SIDE B

020

Kennedy

Begins overview of Lottery Revenue Forecast …

Page 18, slide 1: Lottery Revenues, 2003-05. The $3.4 million in resources is mostly related to stronger video sales. The $67 million limitation is not a limitation on how much will be transferred to the state school fund.

Page 18, slide 2: Slot (Line) Games and VLT Sales. Assumed long-run sales impact of 12%.

 

034

Chair Deckert

Asks for an estimate on the percentage of retailers who will take advantage of the slot games.

 

037

Kennedy

The big ones. The ones that matter.

 

047

Kennedy

Page 19, slide 1: Lottery Revenues, 2005-07

Page 19, slide 2: Extended Lottery Forecast

 

054

Sen. Carter

Asks if online video gaming will result in a decrease in overall lottery revenues.

 

056

Kennedy

It still remains to be seen what the outcomes will be. That just becomes another risk factor on the downside of this forecast. This year it appears sales will grow 8%, although we don’t assume that in the future.

 

075

Kennedy

Page 20, slide 1: Lottery Resource Available to the State

Slide 2: For more information …

 

087

Chair Deckert

Adjourns meeting at 10:00 a.m.

 

 

 

 

 

 

Tape Log Submitted by,

 

 

 

Barbara Guardino, Committee Assistant                                                      

 

Exhibit Summary:

1.      INFORMATIONAL, Oregon’s Economic and Revenue Outlook slide presentation, Potiowsky/Kennedy, 20 pp.

2.      INFORMATIONAL, Oregon Economic and Revenue Forecast, Summary, May 2005, Volume XXV No. 2, Potiowsky/Kennedy, 16 pp.

3.      INFORMATIONAL, LRO Forecast Summary, May 2005, New Facts Since the Last Forecast, Warner, 6 pp.