Senate committee to take another pass at tax plan

The Senate Finance and Revenue committee is expected to consider significant edits to Senate Bill 1528, which would tweak state taxes on “pass-through” businesses. The bill is one of two pieces of legislation aimed at tempering the effects of federal tax reform on Oregon's budget.

SALEM — A slimmed-down version of one of the short session’s key tax bills is up for a committee vote Tuesday.

The Senate Finance and Revenue committee is expected to consider significant edits to Senate Bill 1528, which would tweak state taxes on “pass-through” businesses. The bill is one of two pieces of legislation aimed at tempering the effects of federal tax reform on Oregon’s budget.

Since 2013, the state has had six tax brackets for owners of certain businesses — such as LLCs and S-corporations — whose business income “passes through” to their personal income taxes.

The latest amendment to the bill would do away with provisions to reduce the number of brackets to two, but would still disconnect Oregon from a new deduction in the federal Tax Cuts and Jobs Act signed into law by the president on Dec. 22.

For the most part, Oregon income tax law is based on federal code. Tax breaks offered in the federal reform bill would be available on state tax returns unless those previsions are specifically disconnected from Oregon law.

Under the federal reform, pass-through entities can deduct 20 percent of their earnings from their federal taxable income. The state bill prevents owners of pass-through businesses taking the same 20 percent deduction from their state taxes. Allowing the state deduction would reduce state tax collections.

The amended bill also keeps a provision creating a tax credit for contributions to an Oregon Opportunity Grant Fund, which would provide need-based financial aid to Oregon college students.

State Sen. Mark Hass, D-Beaverton, the chair of the Senate Finance and Revenue Committee, has previously said that the Opportunity Grant tax credit provision provides some relief to the state’s higher-income taxpayers, who typically itemize their deductions rather than taking the standard deduction.

Those taxpayers have been hit by limits in the Tax Cuts and Jobs Act beginning in 2018 on how much of their state and local taxes they may deduct from their federal taxable income. Using this tax credit mechanism could also support qualifying college students, who have seen tuition prices climb in recent years.

Although an earlier version of the bill was approved by the Senate Finance and Revenue Committee and was sent to the Senate Floor last week, it did not go up for a vote. Senate President Peter Courtney, D-Salem, sent the bill back to committee.

Hass said Monday that the newest amendment is an effort to simplify the bill in response to “general” dissatisfaction” with the original proposal.

“It just got too complicated,” Hass said.

Small business groups and Republicans voiced opposition to that earlier version, as did the governor.

On Friday, shortly after the public release of the quarterly revenue forecast, Democratic Gov. Kate Brown said she had “concerns” about the bill and didn’t support that version.

“I believe we must protect small businesses, the engine of our economic growth, and not add state spending that increases our budget deficit in the long term,” Brown said.

However, the Governor’s Office has not provided specific criticisms of the bill.

“The Trump Administration pushed a new tax policy that largely benefits the wealthy very quickly through Congress and the effects on Oregon are yet to be fully known,” a spokesman for Brown said in an email Monday. “The governor wants to make sure that any changes to Oregon’s tax policy does the opposite and benefits our small businesses and encourages entrepreneurship.”

Senate Republicans, meanwhile, blasted the amendment to the bill late Monday, claiming it would “burden” business owners with $1.3 billion in taxes over the next six years.

“This measure appears to be designed by Democrats to hurt Main Street mom-and-pop shops, start-ups and young entrepreneurs, and favor big corporations,” said Sen. Herman Baertschiger, Jr., R-Grants Pass, a member of the Senate Finance and Revenue Committee.

Some lawmakers are worried about the state’s financial cushion since state economists said last week that it’s slightly more likely that Oregon’s booming economy could encounter a downturn.

Eliminating the pass-through deduction on the state level could help the state boost that safety net, which is available in the event of a slowdown that isn’t severe enough for the state to access its Rainy Day Fund.

Hass maintained Monday that the bill would make up revenue lost to federal tax reform to pay for important state services.

“If anybody came into this short session proposing a $200 million a year tax break for a group of individuals, they wouldn’t get anywhere,” Hass said. “So the federal government is essentially doing the same thing. We’re not going to shrug our shoulders and say, ‘That’s OK, we can cut schools or cut corrections or state police.’ We have to respond.”

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