Federal tax cuts push Oregon into projected budget deficit

As Oregon lawmakers head into a special session Friday in an effort to prevent drastic cuts to the Oregon Department of Transportation, the state received bad news from its economists.

The $472.8 million the state set aside when it approved the 2025-27 biennium budget on June 30 is being transformed into a $372.7 million deficit as a result of the Trump administration’s tax and spending policies, according to the Oregon Economic Forecast published Wednesday.

The revenue drop comes from an estimated loss of $888 million in revenue Oregon’s economists expect as a result of H.R. 1, the One Big Beautiful Bill act signed by President Donald Trump on July 4.

“More Oregon families are experiencing tougher financial situations — not by chance, but because of the economic uncertainty coming straight from the Trump administration,” Gov. Tina Kotek said in a statement. “All of us need to be nimble and look for ways to make our state dollars go further when delivering for Oregonians.”

Kotek’s administration also published estimates that said the state will lose $15 billion in federal funding for health insurance coverage, food benefits and other programs as a result of the passage of H.R.1.

Oregon’s chief economist, Carl Riccadonna, and senior economist, Michael Kennedy, presented the state’s quarterly economic forecast Wednesday to a joint House and Senate revenue committee.

The revenue decline, which represents 2% of the state’s $37.3 billion general fund budget, is expected because the state’s tax structure is pegged to the federal government and it automatically adopts changes within the federal tax code.

“At the end of the session we thought that the ending balance was positive and a fairly decent cushion,” said Kennedy, but “it’s now in the red.”

Oregon’s income tax law conforms with federal tax code, which is the primary driver of reduced revenue projections.

Lawmakers could cut spending or make changes to decouple the state from the federal tax code revisions coming from H.R. 1. The latter would close the budget hole, but it would increase taxes on Oregonians just as Democrats are proposing tax increases to pay for the state’s transportation needs.

Republicans, who were also expected to oppose tax increases to support ODOT, disagreed with the state’s economists and Democratic leaders attributing the economic swing — 25,000 fewer jobs this year for Oregonians, compared to an equal increase last year — to Trump administration policies including the OBBBA and the uncertainty wrought by tariff increases.

“Today’s forecast made one thing clear: Oregon is falling behind the rest of the nation, and Democrats have no plans to turn it around,” said Sen. Republican leader Daniel Bonham, R-The Dalles.

“This isn’t a new trend,” Bonham said.

In addition to having a Democrat as governor, Democrats have majorities in both the state Senate and the House.

Office of the Governor

ODOT announced on July 7 it would lay off 483 employees and leave 500 positions unfilled after lawmakers failed to pass a transportation budget that would cover the cost of basic operations and maintenance for the department.

Kotek called a special session earlier this month with the aim of drafting a short-term solution that would provide funding for ODOT to avoid layoffs and reopen 12 ODOT maintenance facilities spread throughout the state.

The governor has since released a bill, LC2, that would raise the gas tax six cents to 46 cents per gallon, increase car registration to $85, a$42 increase, raise title fees to $216 through a $139 increase, increase payroll tax to 2% from 1% and impose an additional $30 fee for electric vehicles.

The bill also includes accountability measures including a performance audit to be conducted every two years by the Division of Audits. It would also allow the governor to appoint the director of the Department of Transportation, a position now appointed by a commission.

Oregonians weighed in on Kotek’s bill – intended to provide the $354 million in funding needed to avoid layoffs and service cuts – during a hearing held by the Joint Interim Committee on Transportation on Monday.

While some residents see the need to raise taxes to pay for road services, others are balking at paying more for gas, registration and other fees.

“I am deeply concerned about the financial burdens that new taxes would place on our community, especially during these challenging economic times,” Nancie Ryan, a Redmond resident, said in written testimony.

“Many families and small businesses are already struggling to make ends meet, and additional taxes would exacerbate these difficulties, potentially stifling economic recovery and growth,” Ryan said.

“Instead, I encourage you to prioritize fiscal responsibility by exploring alternative solutions, such as reducing wasteful spending or reallocating existing resources, to address the state’s needs without increasing the tax burden,” she said.

During a press conference ahead of the hearing, the governor said there has been a bipartisan dialogue going on regarding the best way to meet the state’s near-term transportation needs.

“I do think there is a lot of support for this across the state and I think we will get it done,” Kotek said. “What it will do is make sure your roads and bridges are safe and maintained no matter what time of year it is – and that is why this needs to pass.”

Oregon lawmakers spent the fall considering a 10-year transportation plan. It would have raised $14.6 billion from tax and fee increases to fund anchor projects like replacing the Interstate 5 bridge over the Columbia River, added transit in rural areas and restored funding cuts made to ODOT over the past several years.

But the proposed House Bill 2025 — introduced early this year after what Rep. Susan McLain described in a prior interview as hundreds of community meetings and strategy sessions with lawmakers over a two-year period — wasn’t approved by lawmakers before session adjourned on June 30.

The session is just intended to close the gap in the current-year transportation budget.

Lawmakers will resume efforts on a longer-range plan when they return for their “short-session,” on Feb. 1, 2026.