Oregon taxpayers will receive an astounding $1.6 billion “kicker” tax rebate next year, up from the already record-shattering $1.4 billion rebate economists had predicted just three months ago.

The state depends heavily on personal income taxes and an unexpected surge in those payments in recent months pushed up the rebate figure.

State economists delivered the stunning news Wednesday morning to House and Senate lawmakers during a meeting in Salem.

“We’re trying to get our heads around this,” state economist Mark McMullen said.

The outsized kicker reflects an unexpected jump in state revenue. At the same time, though, the economists warned Wednesday that Oregon’s long-term outlook is showing “cracks” as growth slows and the trade war introduces new uncertainty into the economy.

Economists attribute some of the increase in tax payments to taxpayers changing their behavior in response to President Donald Trump’s 2017 federal tax law, but they don’t yet know whether the change is temporary or potentially permanent. They also haven’t ruled out other factors, such as taxpayers receiving additional retirement income.

The August revenue and economic forecast is the final word on the size of next year’s kicker. Under Oregon’s unique rebate system, the kicker is triggered when tax revenues for a two-year budget cycle come in more than 2% above economists’ forecast made at the start of the cycle. The state must return the full amount above the forecast to taxpayers.

Earlier this year, Democrats including Gov. Kate Brown toyed with proposals to change the kicker rebate or divert some of the windfall to policy proposals or the state’s financial liabilities, such as the $27 billion shortfall in the state’s public pension fund. However, they didn’t move forward with any such changes.

The size of a taxpayer’s kicker depends on the amount of tax she or he pays, and the state’s highest earners will receive the largest kicker rebates: Around $15,000 for taxpayers in the top 1 percent. The median taxpayer, with an income of $37,000 to $38,000, will receive a $346 kicker, according to state economists.

Estimated kicker amount by income level.

Oregon paid out its last record kicker on the eve of the Great Recession, and the latest record rebate is now locked in at a time when there are concerns about a slowdown in the state’s economy -- and therefore the funding stream for state programs and services.

While Oregon’s economic expansion is now the longest on record, state economists warned Wednesday that the outlook is cloudier than it has been in many years.

Oregon’s jobless rate remains at 4%, a historic low, wages are rising and private sector employment continues to grow. But the labor market is expanding at an annual rate of just 1.6% – about half the rate it grew at the start of 2018. And while the state’s broad economic indicators remain strong, state economists said “cracks may be forming.”

They pointed to a drop in the number of manufacturing hours worked in Oregon, which are falling more than twice as fast as the national rate. The state’s chip industry remains robust, with outputs surging, but other markets are considerably weaker.

A downturn in shipments to China, Oregon’s largest export market, has helped pull down manufacturing, agriculture and timber exports.

“Bad behavior and policy mistakes” mean that the risk of recession has been rising in recent months, the state economists wrote, with new economic data showing the recent growth wasn’t as robust as analysts originally thought.

“The trade war escalation is spilling over and weighing on the economy to a larger degree as well,” the report found. “Businesses are wary as they delay investments and slow their pace of hiring.”

— Hillary Borrud | hborrud@oregonian.com | 503-294-4034 | @hborrud

— Mike Rogoway; twitter: @rogoway; 503-294-7699

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