Democratic tax plan could trigger a showdown in the Oregon Legislature

AP photo

By Hillary Borrud

The Oregonian/OregonLive

The Oregon Senate could vote as soon as Tuesday on new state tax rules in response to the federal tax overhaul.

Because the plan would reconfigure a controversial state business tax break, it could turn into the first major showdown between Democrats and Republicans in the short 35-day session.

Altogether, the changes could bring in $220 million for the current budget, according to economists for the Legislature. Under the plan, some of that money would be socked away in the state rainy day fund rather than spent.

The proposed tax changes, contained in two bills, would ensure Oregon taxes multinational corporations' offshore cash, help higher net worth taxpayers get around a new federal cap on the deduction for state taxes and prevent certain businesses from getting a double tax break in Oregon as a result of the federal changes.

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Stephanie Yao Long

The proposals passed out of committee on Friday, in party line votes with only Democratic support. Still, Republicans on the committee did not immediately take a hard stand against the bills.

Sen. Brian Boquist, a Republican from Dallas, said he had yet to gauge whether other Senate Republicans would support the bill to tax multinational companies’ foreign earnings, but he supported the concept. As for the second bill, which deals with pass-through businesses and Oregon’s response to the new federal deduction limit for state taxes, Boquist called it a mixed bag.

By Friday afternoon, Senate Republicans came out against that second bill, describing it in a press release as “a sweeping $1.3 billion tax increase for local small businesses” over a period of six years.

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Not surprisingly, Democrats see it differently. Sen. Mark Hass of Beaverton helped develop both bills and will carry the one dealing with small businesses, Senate Bill 1528, on the floor next week.

He said the goal was not to raise money but rather prevent a loss in revenue for the state.

That’s because the new federal tax law added a deduction for people who draw personal income from businesses such as partnerships, limited liability corporations and S-Corporations. Oregon generally mirrors federal tax code, which would mean Oregon would add the same deduction to state returns.

But in 2013, Oregon passed its own tax break for so-called “pass-through” businesses. It allows people who earn money that way to pay a lower tax rate on that income than ordinary wage earners pay. Hass said that inserting the federal break into Oregon’s tax system would be unfair.

“The first thing that occurred to me was two tax breaks?” Hass said. “They shouldn’t get a second until everyone has gone through the line.”

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Democrats want to do more than avoid doubling the business tax break, however. They also want to scale back the original Oregon tax cut for pass-through businesses because they say it has helped wealthy doctors and lawyers instead of the manufacturing and other export businesses it was supposed to help grow. House Democrats passed a bill to trim the break last year, but it died in the Senate.

Senate Bill 1528 would limit the tax break to the first $250,000 in income and eliminate it for two industry sectors that include doctors, lawyers and some other professionals. It would also expand the pass-through tax break to make it available to people who get income from sole proprietorships. And it would grant most Oregonians a small tax break by increasing the personal tax exemption by $50 for low- and middle-income filers.

"It needs trimming up, and I think this is a responsible way to do it," Hass said.

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Jamie Francis/The Oregonian

The bill also contains Oregon's attempt to help people who will take a hit from the federal tax law's $10,000 cap on state tax deductions. Under the plan, Oregon would sell up to $14 million in tax credits annually and use the proceeds to pay for need-based college scholarships it already awards to students who study in-state. Since Congress did not limit the deductibility of most charitable contributions, the theory is those taxpayers could claim a deduction equal to the tax credit purchase on their federal returns.

The other part of Democrats’ plan, Senate Bill 1529, would make sure Oregon assesses taxes when multinational companies bring money back to the United States that was stashed overseas. Due to a quirk in state law, those companies would not pay Oregon taxes without a change in the law.

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Hillary Borrud | The Oregonian/OregonLive

Currently, the bill calls for the projected $145 million windfall to go into the state’s rainy day fund. But lawmakers said Friday they might also consider using it to pay down Oregon’s long-term deficit in the public pension fund. It would also scrap an Oregon law aimed at curtailing companies’ use of foreign tax havens and provide a credit to companies that paid taxes under the law in recent years.

Sen. Herman Baertschiger, a Republican from Grants Pass, said this bill is also moving too quickly and needs more analysis.

“I don’t think anyone can honestly say they know the implications of the new federal tax policy,” Baertschiger said.

-- Hillary Borrud

hborrud@oregonian.com

503-294-4034; @hborrud

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