Facing major uncertainty over federal policies, Oregon lawmakers set aside nearly $500 million when they passed a budget in June.

It was money meant to offer stability amid economic turbulence. Now it might be as good as gone, after congressional Republicans passed a massive tax cut and spending bill last month.

Without legislative action — likely during the one-month session early next year — Oregon’s $473 million cushion could become a $373 million hole in the freshly passed budget.

President Donald Trump’s so-called One Big Beautiful Bill is expected to slash money flowing into the state’s general fund by more than $888 million during the current two-year budget, state economists told lawmakers Wednesday morning.

The hit, roughly 2% of the state’s $37.3 billion general fund budget, is anticipated because Oregon automatically adopts changes within the federal tax code when deciding what taxpayers owe the state. That means cuts within the federal bill are trickling down to state coffers.

“At the end of the session we thought that the ending balance was positive and a fairly decent cushion,” Michael Kennedy, a senior state economist, told reporters. “It’s now in the red.”

The news, hardly unexpected, was the central takeaway to emerge from the state’s latest quarterly revenue forecast. And it presents state policy makers with a stark choice.

Lawmakers could opt to cut state spending. Or they could move to disconnect from the new pieces of the federal tax code. That would close the budget hole, but it would effectively raise Oregonians’ tax bills at the same time Democrats are already pushing a multibillion-dollar tax increase to pay for roads.

Wednesday’s forecast marks the second time in three months that state economists have revised down their expectations for Oregon revenues largely because of actions by the Trump administration. It highlights just one piece of the problem Oregon leaders face.

Beyond the reduction in state income and business taxes that make up the general fund laid out in the report, Gov. Tina Kotek has said the state stands to lose billions more in federal funding in coming years because of the GOP bill — reductions likely to impact how many low-income Oregonians receive food assistance and health care.

If the reductions attributed to the federal bill are dramatic, the remainder of the forecast was fairly sanguine.

Even as Oregon sheds high-paying jobs from employers like Intel, and sees its unemployment rate rise, economists say they aren’t predicting an overall decrease in tax revenues for any reason aside from the federal bill.

The state will lose out on some income taxes because of a weakening job market, Oregon Chief Economist Carl Riccadonna told reporters. But booming financial markets are likely to make up the difference, as high earners cash in stocks that trigger capital gains taxes. Economists are actually expecting nearly $40 million more because of that dynamic.

“Before we turned the crank on the [forecasting] model, we thought, ‘Oh, we’ll probably get a lower outcome for revenue projections this time around,” Riccadonna said. “But actually that wasn’t the case because we basically saw capital gains offsetting that lost labor income.”

The state is also expecting a slightly smaller “kicker” refund, the payout to taxpayers that occurs whenever actual tax revenues in a budget cycle exceed expectations by 2% or more. The projected kicker has been reduced by almost $230 million, after tax receipts this year underperformed expectations.

Taxpayers can now expect a refund of about $1.4 billion when they file their taxes next year.

Oregon’s overall economic outlook has changed little since economists last briefed lawmakers three months ago. The May forecast came amid uncertainty over tariffs, immigration enforcement, and federal tax policy.

Now the picture has become clearer. As he did in May, Riccadonna said he expects Oregon to enter a so-called “growth recession,” where very modest economic growth is not enough to hold off rising unemployment and other negative impacts. Because of that, the economist says Oregon still has a roughly 25% chance of slipping into a full-on recession.

But the economic outlook could improve next year, as federal tax cuts take effect, and the Federal Reserve appears likely to lower interest rates, Riccadonna said.

“Moving beyond the kind of shock of tariffs, we do see the economy improving over the course of 2026 and then into 2027 as well,” he said.

An improving economy is unlikely to save state leaders from making difficult choices in the months and years to come.

Oregon’s Legislative Revenue Office set off alarm bells in July, when it released a report detailing the impact the federal tax and spending bill might have on state coffers. That report actually suggested the bill would have a greater impact than currently projected — $972 million in lost revenue in the current budget, compared to $888 million.

Riccadonna and Kennedy told reporters Tuesday that revenue analysts had simply updated their projections in light of new economic modeling. Provisions in the federal tax bill that include exemptions for overtime pay and expanded business deductions will reduce Oregonians’ taxable state income by hundreds of millions, the analysis shows.

If nothing changes, Kennedy said Oregon can expect to take in around $589 million less in personal income taxes, and nearly $300 million less in business taxes during the 2025-27 budget cycle.

Lawmakers can eliminate those losses with a vote if they decide to disconnect the state’s tax code from the new federal provisions, as progressive budget types are already advocating.

But regardless of that decision, more budget pain is almost assured. The state expects to lose out on nearly $15 billion in federal funding in coming years because of changes made in the federal bill.

News Source : https://www.opb.org/article/2025/08/27/tax-cuts-oregon-budget/