State economist reflects on 14 years on the job

For Mark McMullen, who just wrapped up more than 13 years as Oregon’s state economist, coming to Oregon was both difficult and easy.

The hard part was his career path after he earned a bachelor’s degree in economics from Pomona College and a master’s degree in public economics from the University of Pennsylvania. His first job was as a researcher for the Congressional Budget Office, which Congress created almost two decades earlier to provide information and analyses independent of the White House Office of Management and Budget.

“It got me hooked,” McMullen said in an interview on his final day as state economist.

“I was in the Macroeconomics Analysis Division, so our big thing was the forecast, supporting the senior economists in our group, running the models, pulling the data. If I could have done it all differently, I would have been a biologist or an artist — but it’s too late now,” he added with a laugh.

The easy part about coming to Oregon came almost two decades later, when he was at Moody’s Analytics for about a decade and was its director of consulting.

“I had a child, and both sides of my family are from Oregon,” McMullen said, one involved in logging and the other in farming. “I wanted to move back and have babysitters.”

Moody’s arranged for him to come to Oregon to work with Tom Potiowsky, then the state economist in the Oregon Office of Economic Analysis. McMullen also spoke about that work at various gatherings around the state — and then Potiowsky announced his departure after a decade to lead the economics department at Portland State University.

McMullen became the interim state economist in November 2010, and Gov. John Kitzhaber appointed him to the permanent post in early 2012. He is succeeded in the interim by Josh Lehner, now the senior economist, who has worked in that office since he earned a master’s degree from Portland State University in 2008.

McMullen, 55, now is vice president for policy and research at Common Sense Institute Oregon, a business think tank where his job will intertwine economic research with public policy. It is based in Colorado and also operates in Arizona and Indiana.

“I will not be a total stranger to this building,” he said. “While it will be a nonpartisan shop, I will be able to talk a little more about policy than in my current role.”

He did say: “I am bullish about Oregon’s economic outlook,” given the state, federal and private-sector money being spent on alternative energy, public works projects and semiconductor manufacturing and research.

Oregon’s unique kicker

Most state governments have economists. Oregon has had one since 1980, when Chang Mook Sohn moved from the Department of Revenue to the Executive Department, the predecessor to today’s Department of Administrative Services.

At more than 13 years, McMullen has held the job the longest.

Although every state is different, Oregon poses two specific challenges for economic and revenue forecasting, which the Office of Economic Analysis presents every quarter.

One is the reliance of state government on personal and corporate income taxes, which account for more than 90% of the general fund, the most flexible source for state spending. Oregon spends far more than its two-year general fund budget of $32 billion, but most of the rest comes from federal grants or earmarked sources, such as fuel taxes.

Income taxes, particularly those collected from higher-income households, are more volatile than other sources of money.

The other is Oregon’s unique kicker law, first enacted in 1979 and written into the Oregon Constitution by voters in 2000. If actual collections of personal income taxes at the end of the state’s two-year budget cycle exceed projected amounts at the start of the cycle by 2% or more, the entire excess is rebated to taxpayers the following year (or “kicked”) in the form of credits against taxes owed on prior-year returns.

As Oregon’s economy emerged from the Great Recession, when the statewide unemployment rate peaked at 10%, there were no kickers during McMullen’s first two budget cycles. During the next two, in 2015 and 2017, the kicker rebates were around $400 million in each cycle.

But the kicker rebates ballooned to $1.7 billion in 2019, $1.9 billion in 2021 — and a record $5.6 billion last year, amounting to about 45% of tax liability.

“I would say no state economist in Oregon has been a huge fan of the kicker law,” McMullen said. “But it’s not unequivocally bad. There are positives from where I sit. It might not look like it from the past couple of years, but it does drive a more accurate revenue forecast than in other states.

“For my counterparts in other states, it’s a lot easier to show up in front of the legislature and say there’s more money, instead of there’s not enough money, which is a lot more painful. So frankly, they low-ball the numbers because they look better over time that way,” he added.

“With our kicker law, we cannot really do that. While we are not always accurate, we try to make our best guess at what is coming out.”

Hazardous predictions

President Harry Truman once pleaded for “a one-handed economist,” given the propensity of economists to qualify their comments by saying “on one hand, on the other hand.” McMullen said the second quote was so ingrained on the staff of the nonpartisan Congressional Budget Office that it was displayed on office coffee mugs.

But even with the help of an outside vendor (currently S&P Global) and an in-state advisory council, Oregon’s state economists have always found it tough to forecast what will happen with the state’s economy and revenues.

McMullen was not in Oregon when the dot-com downturn resulted in a 25% reduction in personal income tax collections, far deeper than the resulting recession in 2001 and 2002. He did spend his first few years as state economist when Oregon was recovering from the Great Recession, triggered by a downturn in housing and the collapse of financial markets in 2008.

“I saw my two predecessors get beaten up by the recessions, the tech bust and the housing bust,” he said. “When the recessions came, they would go through rounds of forecasts that were lower and lower — and the policymakers would blow up.”

The 2001-02 downturn required five special sessions of the Legislature to rebalance the state budget — six if you count what lawmakers had to do in 2003 to avert a late-term shortfall at the end of the budget cycle. (They borrowed against Oregon’s share of the 1998 national tobacco settlement, a loan finally repaid in 2012.)

Federal aid kept the state budget afloat in 2009. But repeated shortfalls in tax collections forced the governor and lawmakers to make cuts to school aid and state services in 2010 and 2011.

Post-pandemic surprise

When the onset of the coronavirus pandemic happened in spring 2020 — as Oregon’s statewide unemployment rate shot up to a record one-month high of 13.2% in April — McMullen said those prior downturns influenced the next state forecast he prepared in June 2020.

“I told myself I was going to learn from the past,” he said.

“I was going to put in a real recession in the forecast, not fold it in over many quarters and turn it into the slow water torture that my predecessors had in the past. In hindsight, I would not have been so aggressive. But I was trying to learn from the past couple of recessions.”

Instead of Oregon tax collections nosediving, as in typical economic downturns, they went up after the initial shock of business closures and curtailments. Three massive infusions of federal aid in 2020 and 2021, including the American Rescue Plan Act that President Joe Biden signed after just 50 days in office, kept individuals and businesses — and tax collections — afloat.

The other factor: Many high-income households anticipated that Biden and slender Democratic majorities in both chambers of Congress would raise taxes, so many sold assets such as stock to avoid potentially higher federal taxes on capital gains. (Oregon does not give tax breaks on capital gains, and many households with capital gains pay at the top state income tax rate of 9.9%.)

But in the end, Congress did not pass most of Biden’s tax proposals — and the result was a record state kicker rebate of $5.6 billion in 2023 and paid out this year. McMullen said that because of adjustments, no future kicker is likely to reach that record.

On the other hand, the state’s current forecast, presented May 29, says there’s a 50-50 chance of another kicker by the close of the two-year budget next June.

“You can forecast the economy perfectly right,” McMullen said. “But then the behavior of taxpayers can blow up your revenue outlook.”

pwong@pamplinmedia.com

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