On May 20, state economists provided lawmakers with the quarterly revenue and economic forecast. Given the outbreak of the coronavirus and the impact the crisis has had on our economy, the presentation was of high interest. Below are some of the most notable takeaways:
- Revenues for the current budget cycle are expected to fall by $2.7 billion;
- Revenues are expected to decrease by $4.3 billion in the next biennium;
- The state has two well-funded budget reserves, the Education Stability Fund ($708 million) and the Rainy Day Fund ($878 million), which will provide some budget relief in the short term.
- The budget will also be buoyed by a $1.2 billion ending fund balance, as well as federal relief money.
- The economists forecasted the state’s unemployment rate will eclipse 22% in this quarter and remain in the double digits for the foreseeable future, with employment rates not returning to February 2020 levels until 2024.
Notably, Corporate Activity Tax revenues are expected to decline by $414 million in the current budget cycle, $600 million in the 2021-2023 biennium and $488 million 2023-2025. This decline, combined with the overall decline in general fund revenues, will be particularly painful for state leaders. It is highly likely lawmakers will look for opportunities to shore up this decrease by making adjustments to the Corporate Activity Tax. Potential changes include reducing or eliminating the 35% cost of inputs/labor deduction, lowering the $1 million sales threshold that triggers the tax or increasing the .57% tax rate. OMC will strenuously oppose any such proposals and will be extremely active in educating legislators on the perils of further tax increases during this extremely vulnerable time for our economy. We will remain in frequent communication with OMC members as these policy debates begin to play out.
Finally, Governor Brown and legislative leaders have for weeks said they planned to call a special session after today’s forecast was released. State leaders have not yet announced a date for the session, though we anticipate that announcement could come at any moment. We believe the most likely time for the special session to convene is in June.
Please feel free to contact OMC staff with any questions regarding the forecast, the Corporate Activity Tax or the upcoming special session.