Legislative Report for Friday, September 28
Lawmakers convened in Salem this week for the last round of interim hearings before the election. It was clear the election, not the session, was front on their minds. Absent this week in committee hearings was the highly partisan substance typically used as fuel for the campaigns. With an ambitious policy agenda coming into the next legislative session, Democratic leadership left many committees’ dockets with benign updates on agency programs and implementation of previously passed legislation. We suspect the reason for this is not a lack of issues coming down the pipeline, but rather the closeness of several highly contested races.
The gubernatorial campaign is quickly becoming the most competitive race in decades. Together, Gov. Kate Brown (D) and Rep. Knute Buehler (R) have fundraised $18.7 million to-date. This exceeds the $17.7 million raised during the 2010 gubernatorial campaign featuring former Gov. John Kitzhaber (D) and Chris Dudley (R), making it the most expensive gubernatorial election in state history. We are seeing the margin in this race narrow as Election Day nears, with national polls suggesting the race is well within the margin of error.
Besides the contested gubernatorial race, Democrats in the legislature are wise to hold the controversial conversations for after the election. Democrats are pursuing an ambitious policy agenda in 2019 that includes a carbon tax or cap-and-trade program, new and expanded health care taxes to pay for the state Medicaid program, and a host of individual and business tax increases to retire longstanding debt and pay for new programs.
We expect 2019 to be one of the most contested sessions in recent memory. The legislature will need to address an escalating spending deficit and a pension liability that continues to grow year after year. Then there are the other partisan fights that are bound to stoke the flames and frustrations of legislators and interest groups. While there are a lot of threats looming for the next session, many of them are likely to serve as leverage or bargaining chips for the matters needing the immediate attention of the legislature.
Port of Portland reports on partnership with BNSF Railroad to move product
On Wednesday, September 26, the House Interim Committee on Transportation Policy heard updates from the Port of Portland given by Scott Drumm, Director of Research and Strategic Analysis.
In his report regarding Terminal 6, Director Drumm reported to Chair Susan McClain (D-Hillsboro) and the committee that the Port still has full management of the terminal since the agreement ended with ICTSI in 2016. He added that as the terminal operator, they are working to rebuild business that has been lost and their reputation within the industry.
Director Drumm reported that currently there is only one dedicated container vessel at T6 and that vessel is specifically for Daimler trucks manufactured on Swan Island and being shipped to Australia and New Zealand.
Director Drumm went on to tell the transportation policy committee that the Port of Portland is currently operating nine ladder tracks for the BNSF railroad moving containers from T6 to Tacoma and Seattle. He said that using the rail to get goods to a direct vehicle port is a cost-effective option. Going forward, Director Drumm told the committee that the Port is working to restore the barge container service that will run from the Port of Morrow to T6 and feed directly into the BNSF intermodal operation.
Legislative Report for August 3
Election Season is Heating Up
There is so much at stake this election cycle, including a competitive gubernatorial race, potential supermajorities in the legislature, and multiple high profile ballot measures in play, that attention levels have already started to pick up.
The gubernatorial campaign has gained national attention as, potentially, one of the most contested in the country. But unlike the hyper-partisan battles we have become accustomed to in national elections, both gubernatorial candidates have taken criticism from within their own parties for being perceived as too moderate. Brown has been criticized by the far left and Buehler by the far right. Oregon has a reputation for electing candidates for statewide office who are moderates in their political views, or at least present themselves that way. Historically, the more conservative candidates have tended to advance from Republican primaries—this is good for rallying the base, but bad for persuading swing voters. In the Democratic Primary, we see the opposite. Liberals tend to lose to those who present themselves as moderates. However, for many elections now, gubernatorial races have featured a Democrat running as a moderate against a staunchly conservative Republican.
Buehler’s fundraising has kept in relative pace with Governor Brown, trailing by only $700K in terms of dollars raised. Buehler’s strategy seems to be spending his money early in an effort to boost his name identification in the polls. This may increase the perception of viability to potential donors and prompt more givers. In terms of that early spending and boosting his poll numbers, the strategy seems to be working. There could be a downside in that he may deplete his money early if new donors aren’t convinced. It is a tough gamble counting on dead heat numbers impressing donors enough to replenish the funds he invested early. He is not the first candidate to employ this tactic and it relies on many factors coming together in order to be successful. In reality, those close poll numbers only exist in the context of Buehler spending a lot of money at the same time the Governor is spending little. For Buehler, the questions remain as to whether he will have money at the time ballots are in hand and voting is taking place. Kate Brown has largely hoarded her money. In terms of cash on hand, Brown has $4.7 million to Buehler’s $800K.
On the Cusp of a Republican Super-Minority
State House: The balance of power in the House is 35 Democrats to 25 Republicans, which would lead the lay observer to believe the Democrats have more to potentially lose in the election just from the greater number of seats they have to defend. While this is technically true, many times in politics, the story is a little different when you look beneath the surface—that is certainly the case here.
In truth, it is the House Republicans who have the rougher road ahead of them this cycle, but not for the reason you might suspect. It’s not about a “blue wave” and it’s not about a backlash to President Trump—it’s a matter of sheer numbers. Four seats held by Republicans are upsidedown in terms of voter registration, with the most vulnerable seat in Bend at -11 percent, while the most vulnerable seat held by Democrats is +2 percent.
The saving grace for Republicans may be that Democrats have had some difficulty recruiting viable candidates in the races for at least a couple of the most vulnerable Republican-held seats.
(Names in italics denote candidates who earned the Democratic and Republican nominations.)
State Senate: In the Senate, there is a similar dynamic taking place as is described in the House. Democrats hold 17 seats to 13 seats held by Republicans, but much like the dynamic in the House, Republicans find themselves on defense. The most vulnerable Democratic seat facing a Republican challenger is +10 percent registration advantage for the incumbent, while the most vulnerable Republican seat facing a Democratic challenger is -2 percent.
Interest groups are beginning to increasingly rely on the ballot measure process to advance their political and policy agendas. In recent years, we have seen liberal interest groups adopt a strategy of relying on ballot measures to advance policies too liberal for the legislature. Examples of this include the legalization of marijuana (Measure 91, 2014) a labeling requirement for GMO foods (Measure 92, 2014) and a gross receipts tax (Measure 97, 2016). This year, the ballot measures have been driven by conservative interest groups. The slate of ballot measures for the fall is comprised of an abortion ban, a repeal of Oregon’s several-decades-old sanctuary state law, new limits on tax votes in the legislature, and a constitutional ban on taxing grocery sales. These are issues proponents believe the legislature would never adopt, but are also an effort to turn out conservative voters for the gubernatorial vote. However, these measures also run the risk of backfiring and riling up liberal turnout at the same time, which makes them a very high-risk turnout strategy. If proponents are unsuccessful in their efforts, liberal groups will perceive the rejection as a mandate for the legislature to increase access to abortion, further protect undocumented immigrants and raise taxes.
You should be ready for the pundits to start talking about the outcome of the election as if it were a foregone conclusion, but it is anything but that, which underscores why your involvement in the process is so important.
Legislative Report for May 25, 2018
The legislative interim in Oregon is often marked by a mad dash of committee hearings for three days only four times each year. These hearings are often packed with briefings on recently enacted legislation, program updates from state agencies, and previews of some of the larger issues coming further down the road. While these activities are typical for legislative activity during the interim, they more or less took a side seat this week because of the one-day special session and the revenue forecast.
It is fair to say now the legislature has finally departed from the 2018 session, especially since the last remaining issue with any amount of life (the special session tax issue) has finally come to an end for now. With that said, the activity is not expected to slow down by any stretch of the imagination. Lawmakers and candidates are now shifting gears to their election bids for the fall, and the blitz of campaign attacks will soon be in full force. Simultaneously, lawmakers are beginning to plan for the next legislative session beginning in January and have a laundry list of issues they wish to bring up. The list of issues already spans far and wide. The most controversial include: gun control, imposing a tax on carbon emissions, medical malpractice reform, tax reform and, of course, the budget.
The budget is anticipated to remain the underpinning of every policy debate. Oregon’s structural budget deficit is continuing to grow larger as the amount previous legislatures have committed to spend outweighs the amount of revenue coming into the state. This is despite a strong economy and revenue growth for the state. In fact, the revenue forecast on Wednesday suggests there will be $2.01 billion in additional revenue in the state’s general fund—a 10.3 percent increase—from the previous budget cycle. Despite this growth, it still will not be enough without recalibrating the state’s spending priorities or revenue reform (i.e., tax increases). Adding stress to the budget situation is the projected personal income tax “kicker” being triggered from tax returns coming in very strong. It is too soon to tell if the 2019 session will be any different from previous sessions in deferring the difficult decisions for future years. Make no mistake, the budget and the road to fixing it will be the target of Democrats and Republicans alike throughout the campaign season, and the outcome of the election will determine who holds the keys.
Cap and Trade discussed in new special committee
On Tuesday, May 22, the Joint Committee on Carbon Reduction met for the first of seven meetings. This committee comes from work by Sen. Michael Dembrow (D-Portland) and Rep. Ken Helm (D-Washington County) during the previous sessions and was created after a failed attempt in the 2018 short session to pass what was dubbed the “Clean Energy Jobs Bill.”
Oregon began working on a package to reduce greenhouse gases after the passage of HB 3293 in 1997. Over the last decade, there have been many failed attempts to pass a cap and trade program. Democratic leaders and environmental groups believe that 2019 will be the year to pass a complete cap and trade package.
The committee heard informational testimony from three invited guests. The first was Dr. Phil Mote, director of the Oregon Climate Change Research Institute, which is part of the National Oceanic and Atmospheric Administration. Dr. Mote presented on global warming from fossil fuels using climate models. He emphasized that warming is responsible for many of Oregon’s recent wildfires, including the Eagle Creek Fire last year that came close to impacting the Columbia River watershed. He also touched on climate change in relationship to agriculture and the effects on water, diseases, and pests. When asked by Rep. Karin Power (D-Milwaukie) what the overall cost to the U.S. economy was, Director Mote said he has not seen any studies quantifying the overall economic costs. He said one can look at the overall effects of hurricanes, storms, and tourism, but those tend to be more assumptions than fact.
Next, Richard Whitman, director of the Oregon Department of Environmental Quality (DEQ), spoke about the history, trends, and what Oregon is currently doing to reduce greenhouse gases. It is noteworthy that if it passes, DEQ would be the regulating agency for the cap and trade program.
Director Whitman explained that most of the carbon reporting began in Oregon after 2010. Oregon had seen a per capita reduction of greenhouse gases, as well as a reduction during the recession from 2007 – 2009. It has remained flat since 2010, outside of a small 2015 increase. Director Whitman explained that the reporting to the state is done by sector, and all sectors have remained even despite increased transportation. Rep. Rich Vial (R-Scholls) and Sen. Alan Olsen (R-Canby) held his feet to the fire, asking pointed questions on how the assessments are given in relationship to the California standards. Sen. Michael Dembrow (D-Portland) said we need to be sure that the state is not double counted. Director Whitman replied that the DEQ uses a sectoral and consumption-based inventory, so when the state is making policy decisions, it needs to be decided to what degree the state is responsible for the greenhouse emissions that come from the goods that Oregonians consume.
Director Whitman testified that although Oregonians are driving less, the population has grown in the Portland metro region. Given this population growth, the emissions per capita will need to fall substantially to make a difference. Director Whitman said the goal would be to improve mileage, reduce miles traveled, and reduce carbon intensity.
Opponents of a cap and trade system argue that the price of gas at the pump, natural gas in homes, and products shipped to rural areas will place the burden on low-income families in rural areas where there is not public transportation and where consumers rely on trucking to bring them goods. They argue it will be an unfair tax unless the revenues go to programs that will ease the responsibility of rural and low-income Oregonians. In the previous Clean Energy Jobs bill, the revenues were earmarked to go to the State Highway Fund and the Climate Investment Fund.
Dallas Burtraw with Resources for the Future in Washington, D.C. concluded the hearing with information on carbon reducing options for the future. He told the committee that all eyes are on Oregon and added that most economists agree that carbon pricing is the most effective way to go. He said cap and trade is a predominant approach that reaches climate goals, is cost effective, and will expand the size of the market. He said cap and trade can be regressive if you do not have a set plan for the generated revenues.
With this being a new committee, it was obvious that many members are facing a learning curve on a complex subject that is dry by nature and that has a long history in Oregon. This decades-long debate might culminate in a cap and trade package 2019. Stay tuned.
Additional meetings will be held:
June 26, 2018, 1:00 – 4:00 p.m.
July 24, 2018, 1:00 – 4:00 p.m.
August 28, 2018, 1:00 – 4:00 p.m.
September 24 – 26, 2018 (date and time TBA)
November 8, 2018, 1:00 – 4:00 p.m.
December 12 – 14, 2018 (date and time TBA)
Economic Growth, Tax Reform Contribute to Booming State Revenues; Kicker Expected
State economists released their latest economic forecast on Wednesday 5/23/18, and the forecast came in strong—really strong. The combination of a strong economy, booming financial markets, and the state impact of the new federal tax law are contributing to more than a billion dollars in new revenues coming into the state that were not anticipated at the end of the last long session a year ago. The large increase in state tax collections means there will almost certainly be an income tax kicker refund issued to personal income taxpayers in 2019. We will not know the exact amount until the budget cycle reaches its end, but the current forecast estimates the state will return $555 million to taxpayers. This will be the first time in recent history the state experiences three consecutive refunds.
Much of the growth in state tax collections can be attributed to the recently enacted federal tax law. The overhaul of the tax code lowered federal income tax rates but offset some of the costs of the rate reduction by eliminating deductions and exemptions. Many states, including Oregon, rely on the federal tax code for the rules and definitions for the starting point of their own tax codes but use their own rates. Since states use the rules, but not he rates, many states will automatically see an increase in state tax collections without a vote of the legislature.
Earlier this year, the legislature decided to accept many of the changes made in federal tax law but also went a step further in denying some of the new federal tax rules that provide tax relief to targeted groups. The legislature proactively denied a new deduction made available for owners of businesses who file their taxes on their owner’s personal income tax return (often referred to as “pass-through” businesses). Additionally, the legislature modified state tax law to require multinational corporations to pay a new one-time tax on foreign profits previously withheld from taxes. Since this tax only occurs once, the legislature rightly set this money aside from the normal pool of money in the budget and will instead use the money to pay down the pension liability. Despite all the recent tax activity in Oregon regarding the new federal tax law, the legislature deferred much of its decisions for the 2019 tax year until the 2019 session.
Economists see a very low probability for a recession in the near future. However, the national economy is now nearly a decade into an economic expansion, and historical trends suggest the economy is nearing a shift in the business cycle. The economic indicators show no signs of the shift coming during the current or upcoming budget cycle, for that matter, but remains a cautionary reminder. Oregon is seeing growth in nearly all sectors and geographic areas, and rural communities have finally regained employment losses from the recession. With that said, Oregon is continuing to experience a declining birth rate and has reached the point that deaths are surpassing births. This means Oregon is relying on migration into the state to maintain its labor force and tax base and must continue enticing outsiders to move and work in Oregon to maintain economic conditions and money coming into the state.
The state budget will continue to be a dividing factor in Oregon politics as we approach the 2019 session. The state is predicting a structural budget shortfall exceeding $2 billion for the 2019-21 budget cycle. It is a structural budget shortfall because much of the deficit can be attributed to short-term Medicaid taxes approved in 2017 that expire in 2019. The legislature opted for a short-term package as a bridge to finding a permanent funding solution during the 2019 session. Assuming the legislature enacts either similar taxes or makes them permanent, or some combination of both, much of the budget deficit will be dissolved because of both these actions and continued increases in collections coming into the state. However, the state is still anticipating a deficit if it maintains its current level of government services.
The recent attention on taxes, both locally and nationally, appears to be driving more robust conversations in the legislature regarding changes that can be made to the state tax system. The governor and legislature have expressed interest in opening up Oregon’s property tax system and income tax system for potential reforms. The specific details of these policies remain to be seen, but they will likely exacerbate some of the tension that has become all too familiar in our politics these days.
Legislature concludes one-day special session with minimal flare
The Oregon Legislature convened in special session today to consider a legislative proposal introduced by Gov. Kate Brown. During the regular session earlier this year, the governor and legislative leadership struggled to find a political balance between public employee interest groups and the business community over the state’s use of a new federal tax deduction for pass-through businesses. These are businesses who file their taxes on their owners’ or shareholders’ personal returns rather than separately as a corporation. Oregon relies on federal tax law as the starting point for the state tax code, and, if the legislature had allowed it, the new deduction would have applied to state taxes in addition to federal taxes. Eventually, the legislature voted mostly along party lines to disallow the deduction. Despite the general agreement from others in her party, Gov. Brown struggled in her decision but ultimately signed it into law.
The story of this tax deduction is about much more than simply taxes. It is about the politics of taxes, which are completely different arenas. Complicating these deliberations further is the timing of the election cycle and the wave of progressive politics that has been arriving in states for the primary elections. These political factors are applying even more pressure on Democratic politicians in blue states to do “something.” The legislature’s response was the denial of that new deduction, but the governor has found herself in need of positioning herself for the general election against an opponent who has spent nearly all of his political career preparing for this campaign.
Rather than letting the progressive wave decide her own political fate, the governor decided to call the legislature into special session to consider a different deduction benefitting small businesses in the state. The proposal was to allow sole proprietors, businesses who are not organized as a limited liability company, to be eligible for Oregon’s reduced tax rates for pass-through businesses. The reduced rates were created as part of a compromise among legislators in a special session in 2013 but have long been criticized by the liberal factions of the Democratic Party as too favorable to business. In fact, the legislature has gone to considerable length to repeal the rates in previous sessions.
The proposal to include sole proprietors in the reduced rates had been resisted by legislators in both political parties. Democrats continued to argue the rates were a mistake made by the legislature and advocated for using the special session as a vehicle to finally abolish them. Republicans argued the legislature was called into special session for political purposes rather than an emergency, which the Oregon Constitution requires. Members of both parties introduced their own counterproposals, including a repeal of the bill passed earlier this year and various proposals to eliminate the tax benefit of the lower rates for most businesses.
A special committee of the legislature convened today for a hearing on the governor’s legislation. In an unusual flare of special session politics, both parties questioned the merits of the bill and espoused deep frustration. After a long debate over the bill, the committee passed the governor’s legislation without any amendments and the chambers convened in the afternoon to approve the legislation. Despite all the partisan theater, the legislature approved the measure with bipartisan support, but the vote is not indicative of the tempers in the building. In the end, the vote reflects the difficulty of Democrats voting against their party’s leader and Republicans not willing to vote against tax cuts, no matter their size.
In reality, the special session legislation will have an insignificant effect on most Oregonians. An analysis prepared by legislative economists suggests no more than 12,000 taxpayers will benefit from the legislation, and the cost is projected to be only $11.3 million in 2018. Compared to the state’s General Fund, the cost of the legislation is not even a rounding error on the balance sheets of the state’s $20 billion General Fund budget. The cost of the legislation does little to change the budget negotiations for the 2019 session and will likely be forgotten in the annals of legislative history.
Politically, the special session has been an interesting case of bully pulpit politics. Republicans have long criticized the governor as failing to lead the state and the legislative process. These criticisms may be tuned out because of the special session. Republicans had the opportunity to rely on procedural motions and rules to delay the special session and force it to run several days, which would have exposed the dysfunction they frequently talk about. Instead, however, they elected to a quick special session that prevented a political bloodbath. Will Republicans be rewarded by the governor not gaining favor from headlines day-after-day, or will the governor be seen as a leader capable of navigating the legislative process against the partisan wishes of both sides of the political aisle? Nobody knows the answers to these questions, but the voters and both gubernatorial candidates will certainly be on the campaign trail trying to use the special session as a talking point proving their point against the other.
Now, with the special session done and over, the attention of the political community will finally shift to the future. Lawmakers and candidates will begin to focus on their election bids. In the few truly contested races, candidates will likely focus not on the policy of the special session but the politics the session tried to work around. That is, tax increases or reform. The attention on the state budget and tax issues is only expected to intensify moving forward. These issues are among the most potent in state politics and will continue to become more potent in the days, weeks, and months ahead.