Unexpected increase in business income tax leads to a surplus of $ 10.9 million, but the risks of inflation and recession remain

June 2, 2022

Multnomah County budget experts said Wednesday that an unexpected jump in business income tax revenues has raised the budget forecast for 2022 by $ 10.9 million. But uncertainty about staff costs and the growing risk of recession may offset these gains in future budgets.

Last year, the increase in the tax rate and the unexpected force in the economy from the COVID era caused a big jump in collection. In fact, US companies reported record profits in 2021, even in the midst of rising inflation and supply chain disruptions.

“This is another year in which every jurisdiction in the country that receives either business income or personal income tax was surprised by the amount of revenue they received,” said Jeff Renfro, a county economist.

Inflation threatens to eat up the surplus

As revenues are higher than expected, the district budget office predicts a return to normal, as record profits return to the ground and the federal government ends direct support from the pandemic era. However, inflation has serious implications for the county’s financial prospects.

The word dominates the news: inflation. Inflation is currently at its highest level in 30 or 40 years. The key question is: how much can the Fed do to bring inflation back to normal without causing a recession? The Fed (Federal Reserve) is the nation’s central bank, pursuing a monetary policy to promote employment, stable prices and moderate interest rates. When inflation is too high, the Fed can raise interest rates to slow the economy – and inflation – down.

Currently, the district budget service forecasts inflation to remain high in fiscal 2024 before returning to normal. However, food and energy price uncertainty combined with global supply chain problems have implications for inflation.

“By the end of summer or the beginning of autumn, we need inflation to move in the right direction,” Renfro said. “Every month that passes if inflation does not move in the right direction, it will increase our assumption about the risk of recession.

Inflation is linked to the adjustment of the cost of living of employees in the county (COLA), which is dictated by employment contracts. Higher inflation means that county staff costs – the main driver of the county’s total costs – will be higher.

Given the uncertainty surrounding inflation, the Budget Office is simulating two scenarios that predict how an increase in staff costs will affect the forecast. Scenarios suggest that staff cost growth is 1% to 2% higher than currently expected.

Taking into account an additional 1% increase in staff costs each year, the Budget Office forecasts a deficit of $ 3 million in fiscal year 2024. By fiscal year 2027, the budget surplus will be about $ 3 million – significantly less than projected before inflation rose.

If staff costs rise 2% higher each year than expected, the county will face a $ 7 million deficit in fiscal year 24. This will lead to a shortfall of $ 13.4 million by fiscal year 27.

The current forecast assumes that employment contracts are governed by the status quo. In this scenario, if inflation returns to normal by 2025, the county may see a much different picture. Instead of a deficit in fiscal year 27, the county will see a surplus of $ 20.6 million.

Commissioner Jessica Vega Pederson asked if a market supply system would affect prospects differently.

At the national level, many jurisdictions have changed the way taxable net income is distributed. Currently, Multnomah County Business Income Tax (BIT) requires most companies to allocate taxable net income based on where they bear the costs of providing services.

With a market-based source, taxable net income will be distributed based on where the customer benefits from the services.

“At a very high level, I think the impact would be negligible,” Renfro said, adding that the city of Portland had looked at what had happened in other jurisdictions that had made the change. “In any case, there was very little impact.”

It is too early now to see which scenario will develop. By November, the Budget Office expects to have a clearer picture of the county’s financial prospects. Although it is too early to predict a recession, Renfro said it was time to think about what it would mean for the county if that happened.

“Obviously, this is the big question,” said Commissioner Lori Stegman. “The risk of a recession.”

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