Pass-through tax bill could be test case
Now that Gov. Kate Brown has announced she plans to sign a bill that tempers state losses from last year's federal tax cut championed by Republicans, the constitutionality of the new law could be tested in Oregon courts.
The Legislature passed Senate Bill 1528 earlier this year to preserve $244 million in biennial state tax revenue that otherwise would have been given as tax breaks to businesses, if the state automatically adopted the federal tax plan.
District 12 State Sen. Brian Boquist (R-Dallas), who represents Dundee and much of rural Yamhill County, is vice chairman of the Senate Finance and Revenue Committee and said last week he plans to challenge the bill in court because he believes the way it was passed was unconstitutional.
Under the Oregon Constitution, bills to raise tax revenue must originate in the House of Representatives and receive a three-fifths majority vote from both chambers. Senate Bill 1528 started in the Senate and passed with a simple majority, with all Republicans voting against it.
The bill presents an opportunity for the courts to clarify what constitutes a tax revenue increase, Boquist said.
"SB 1528 is the best bill since 2005 to test the definition of a 'revenue' bill under Article IX" of the Oregon Constitution, Boquist wrote in a March 25 email to the governor's office. "Taking this to regular tax court, then the Supreme Court, will resolve the debate on Article IX for better or worse."
Boquist added he will have to wait until after June 15 — the next quarterly tax filing deadline — to ensure he has legal standing in the case. He would name the governor, House Speaker Tina Kotek (D-Portland) and Senate President Peter Courtney (D-Salem) as defendants in the case.
The governor's office did not respond to a request for comment on the governor's plans for the bill and Boquist's threat to sue.
But in 2015, the Oregon Supreme Court issued an opinion in City of Seattle v. the Oregon Department of Revenue in which the justices ruled that eliminating a tax exemption did not constitute levying a tax. Based on that opinion, Legislation Counsel Dexter Johnson concluded that Senate Bill 1528 was not a "revenue-raising" bill, according to a Feb. 26 letter to Boquist.
Boquist said his small businesses would be among many that would be affected by the legislation. Among them, two farms he owns in Polk and Yamhill counties are under sole proprietorship. He has a Wallowa timber property and cartridge and training company that are limited liability corporations and a pinyon nut operation that is an S-corporation.
Oregon automatically conforms to the federal tax code unless state lawmakers pass legislation specifically to modify it, as they did in passing SB 1528. The legislation prevented so-called pass-through businesses — sole proprietorships, partnerships, limited liability corporations and S-corporations — from deducting up to 20 percent of their business income from their 2018 tax return. The businesses may still claim the deduction on their federal taxes but not on their state taxes.
Rep. Julie Parrish (R-West Linn) has said the bill will negatively affect hundreds of thousands of Oregonians who own small businesses.
Last month, Brown expressed reservations about earlier versions of the bill and said her office was still analyzing how the revised bill would affect small businesses, but then said would sign the legislation.
In response, the Small Business Association has filed an initiative petition for the 2020 ballot that would require that all "tax rates, calculations and loopholes afforded to the largest publicly-traded companies be provided to small and family-owned businesses."