Senate works to reverse budget impact of federal tax bill
SALEM — Two business tax proposals aimed at tempering the effects of federal tax reform on Oregon's budget appear to be moving forward.
Both proposals would change state tax policy in response to the sweeping changes to personal and business taxes in the federal Tax Cuts and Jobs Act, signed into law Dec. 22 by President Donald Trump.
Legislative economists project that the changes in the Tax Cuts and Jobs Act — if Oregon law is static — could mean a $220 million hit to state revenues in the current two-year budget, a scenario that some lawmakers are trying to prevent during the 35-day session, which began last week.
The first of those bills easily passed the Oregon Senate on Tuesday, and the second is expected to go before the Senate for a vote Wednesday.
Part of the federal law was aimed at incentivizing multinational corporations to bring back, or repatriate, income held overseas for tax purposes.
The Senate passed passed a bill Tuesday allowing the Beaver State to collect taxes on those overseas earnings. That means $140 million in additional one-time tax revenue, according to the Senate Democratic caucus. That sum would be put into the state's Rainy Day Fund.
Some Senate Republicans unsuccessfully proposed an amendment that would have sent the windfall to a proposed fund to help pay down the unfunded liability of the state's public pension system. The unamended bill was passed unanimously.
The second bill before Senators this week concerns how certain businesses are taxed. The Senate is scheduled to vote on whether to depart from federal changes on that issue on Wednesday.
Owners of "pass-through" businesses — such as partnerships, S-corporations, LLCs and sole proprietorships — pay taxes on business income on their personal taxes, rather than the business itself paying taxes.
The Tax Cuts and Jobs Act allows owners of pass-through businesses to deduct 20 percent of that income on their federal tax form.
While Oregon pass-through businesses would still be able to claim the 20 percent deduction on their federal taxes, the bill before the Oregon Legislature would eliminate that deduction from state income taxes.
Anthony Smith, a lobbyist for the Oregon chapter of the National Federation of Independent Business, says that the bill will mean that the state's small businesses will pay $212 million more in taxes in 2018 than they would if the Legislature did nothing.
The bill also allows sole proprietorships to qualify for the state's lower rates — if they also met certain other qualifications — and increases the state personal exemption credit, which is money a taxpayer can deduct for themselves and any dependents.
But Smith maintains that the increase in taxes due to the loss of the deduction is greater than the benefits for small businesses.
"I can't find a scenario where we have more winners than losers on this," Smith said Tuesday.
State Sen. Mark Hass, D-Beaverton, says the move will keep the state's coffers in balance and more fairly taxes businesses.
"It feels like a very responsible move for our state in light of these changes," Hass, the chairman of the Senate Finance and Revenue Committee, said in a committee hearing last week.
Jared Walczak, a senior policy analyst at the Tax Policy Foundation, said in written testimony to the Senate Finance and Revenue Committee last week that the case for eliminating the 20 percent pass-through deduction was "particularly strong" in Oregon, "where pass-through businesses already receive the advantage of a separate rate schedule."
In 2013, the Legislature passed a so-called "Grand Bargain" that included lower tax rates for certain pass-through businesses. Some of those changes would be repealed in the bill up for a vote Wednesday — for example, the bill would disqualify certain industries, including health care and professional services.
Last week, Republicans on the Senate Finance and Revenue committee expressed concern about moving on the bill before the quarterly revenue forecast Friday, Feb. 16.