Oregon taxpayers could receive a record-shattering $1.4 billion “kicker” tax rebate next year, state economists told lawmakers during a revenue forecast in Salem on Wednesday morning.

But Democratic leaders immediately suggested that at least some of the windfall be used to help hedge against a future economic downturn and expand government programs rather than be directed back to taxpayers. Gov. Kate Brown named paying down the state’s public employee pension debt as one avenue to build a brighter future for Oregon.

Economists said Wednesday they expect state revenues will come in a full $1.4 billion higher than they projected in May 2017 even after lawmakers and Brown decided to shave $108 million off the kicker under a new law passed earlier this year.

The governor said in a press release that she expects a "substantial portion of these funds to be directed towards paying down our (Public Employees Retirement System) unfunded liability, and further investments to be made in housing, foster care, our state police force, and towards college affordability so that our state’s prosperity is spread across every corner of the state.”

Taxpayers would receive the personal income tax rebate as a credit on their 2019 taxes when they file next year. Economists predicted Wednesday that the median wage earner making approximately $36,000 will receive a $338 credit next year if their revenue predictions hold true and lawmakers allow a full rebate for middle-income taxpayers. The top 1 percent of earners in Oregon making at least $401,000 a year could receive rebates as large as $14,000.

Kicker amounts will not be settled until the August forecast.

Courtesy of Oregon Office of Economic Analysis

Although Oregon’s kicker rebate is locked into the state Constitution, lawmakers can hold back some or all of the rebate on a one-time basis by passing a law retroactively adjusting the revenue forecast on which the kicker is based. Such a change would need support from two-thirds of lawmakers in each chamber to pass, meaning Democrats would need Republican support to do so.

Corporate income taxes are also on track to exceed forecasts by $616 million. Under a measure voters approved in 2012, those funds will be spent on K-12 schools.

The May revenue and economic forecast is pivotal for state lawmakers, because they will use the information to build budgets for the next two-year cycle that begins in July. Lawmakers have until the end of June to pass state budget bills.

Oregon’s current two-year state budget is $22.5 billion. According to the latest forecast, lawmakers will likely end that cycle with nearly $876 million more in the general fund than economists had predicted just a couple months ago. And they will have an unprecedented $3.5 billion in a rainy day fund and other reserve accounts, McMullen said.

Economists predicted Wednesday that the state treasury will receive $108 million less in taxes and other general fund revenue than previously expected in the 2019-2021 budget cycle. Coincidentally however, lawmakers squirreled away the same amount in various accounts under a maneuver that had the effect of holding back $108 million that otherwise would have been counted toward next year’s kicker. They could tap that money as needed in the next budget.

The state’s unique kicker rebate is triggered when tax revenues for a two-year budget cycle come in more than 2 percent above economists’ forecast made at the start of the cycle.

On Wednesday, state economist Mark McMullen described the change in the forecast — which was based in part on the amount of taxes the state received so far this year — as "very humbling for us as forecasters and truly ... a seismic event.”

“This is going to be the largest kicker on record,” McMullen said.

Democrats have expressed interest for at least a year in diverting the kicker to the state’s rainy day fund or to pay down Oregon’s public pension shortfall. With economists predicting a possible recession in 2020, they raised the idea again on Wednesday.

“This is a historic windfall,” said Sen. Mark Hass, D-Beaverton. The public funds should be socked away in the rainy day fund or other savings accounts so the state can draw on them when the budget is tight, Hass said. He called on fellow lawmakers “not to spend it because ... it is a temporary phenomenon.”

It’s unclear whether Democrats could line up the Republican support necessary to hold onto some or all of the kicker. They would need two Republican votes in the House and two Republican votes in the Senate to achieve the two-thirds majority necessary to modify the kicker.

Senate Republican Leader Herman Baertschiger Jr., of Grants Pass, said in a press release that the state government has “revenue coming out of our ears” and taxpayers deserve to get the kicker back “in full.”

Similarly, House Republican Leader Carl Wilson, also of Grants Pass, said in a press release that “every penny of the kicker belongs to the people, not to (Democrats).”

“This constitutionally mandated check on excessive taxation must be honored and not raided for pet projects or to grow the bureaucracy in Salem,” Wilson said.

Oregon’s previous record kicker was $1.1 billion on the eve of the Great Recession in 2007, when the state still sent out rebate checks.

This story has been updated to reflect the following clarification: House Speaker Tina Kotek said she would like the Legislature to spend additional tax revenue the state is projected to take in during 2019-21 to pay down state public employee pension debt.

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

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