Oregon Budget Crisis -- 2008 meets 2002

Tom Potiowsky, the official Oregon state economist whose "Chinese water torture" method of estimating the declining state revenues six years ago were a staple feature of that crisis, is at it again. Tom is probably a good husband and kind to animals, but his inability to see the big picture meant that the legislature didn't grasp the magnitude of the previous crisis until it was upon them, and that the low-ball estimate of revenues led to a great flushing out of the state's coffers last fall (due to Oregon's kicker law, for those of you from out-of-state). Just as the country was starting to head downhill.

Oregon's economist is required to make public estimates of revenues every couple months or so. As the housing crisis was unfolding, Tom figured late last year that the effect on Oregon would be essentially nothing, despite the large role that forest products plays in the state economy. Now he's estimating that the state will take in $183 million (1.2%)less than expected between now and the end of the biennium on June 30, 2009.

State tax revenues in Oregon are overwhelmingly dependent on income taxes, which in turn are quite volatile. Property taxes are quite stable, sales taxes fairly stable, but income taxes depend on growth in a more leveraged fashion. The current estimate seems in line with the national consensus drop in estimates of GDP. Since income tax receipts are going to be much more volatile than that, this projection is probably still optimistic.

Here's my prediction. In six months, the estimate will be for a 3% fall in the 2007-2009 biennium. There will be some modest belt-tightening but tax receipts had a good head of steam at the outset and the shortfall will be manageable in this biennium.

I don't know when the estimate for 2009-2011 will be first released, but I'm going to guess it will be 5% below what the legislature had pencilled in at the end of the last session. The state's reserves, having been rebuilt modestly since the last recession, will have been wiped out by the shortfall in 2007-2009, and the legislature will again have the job of making serious cuts in services.

Of course, I'm the same guy who said the Republicans would have a contested convention in Minneapolis. I haven't given up hope, but it's a lot less likely than it was two weeks ago. So maybe I'm wrong again.