Most Democratic Oregon lawmakers voted to disconnect some of the state’s tax code from the federal tax code to keep hundreds of millions of dollars in revenue the state otherwise would lose by replicating federal tax cuts. Republicans in turn threatened to send it to Oregon voters in November via a ballot referral.
The Oregon House of Representatives voted along party lines 34-21 to pass Senate Bill 1507 Wednesday, selectively removing two federal tax cuts on businesses and one on auto loan interest paid on the purchase of brand new cars from applying to Oregonians’ state tax burden. Oregon is one of a handful of states that automatically ties its state tax code to the federal tax code when it changes, rather than selectively connecting to changes later.
The measure, which passed the Senate on a party-line 17-13 vote on Feb. 16, with one moderate Democrat, Sen. Mark Meek of Gladstone, voting against it. The bill now goes to Gov. Tina Kotek, who is expected to sign it.
Rep. Ed Diehl, a Republican from Scio who is running for governor, said that Republicans would send the proposed disconnections from the federal tax code to voters in a ballot measure by November.
Diehl recently led the successful campaign to refer to voters increases to the state gas tax and vehicle fees. That measure will either be on May or November ballots, depending on the outcome of another contentious bill, led by Democrats, who want the question on May primary ballots as opposed to the November general election.
The federal disconnect bill would preserve a net $291 million in tax revenue for the state during the next 18 months that would otherwise have gone uncollected had the state stayed married to the federal tax changes. It also includes new state-level tax credits for businesses that boost in-state hiring, and for low- and moderate-income Oregonians. More than 1,000 written testimonies were submitted about the bill during the month-long session, with more than 70% in support.
“These straightforward policies protect funding for schools, health care and community based services, while allowing us to lower taxes for working families and support jobs, with an eye on supporting job growth,” said bill sponsor Rep. Nancy Nathanson, D-Eugene.
Republicans opposed to the bill had encouraged Democrats at the beginning of the session to keep the state tied to the federal tax cuts and focus instead on reducing spending.
Rep. Mark Owens, a Republican from Crane who farms, said the bill’s disconnection from the new bonus depreciation allowed under federal code — wherein 100% of new equipment purchases can be immediately written off the buyers’ taxes — is important for family farmers who struggle to purchase costly equipment.
“Colleagues, I’m confused, I’m frustrated, because well over 90% of farms are run by working families in the state of Oregon, and a ‘yes’ vote’ today takes away one of the tools that we depend on, and it would not have made a difference in the total budget amount of this bill,” he said.
To get the disconnect proposal to voters, Republicans would have 90 days after the Legislature adjourns to gather the 78,116 signatures needed — 4% of the total ballots cast in the most recent gubernatorial election. But, they can’t start circulating petitions until the bill officially becomes a law, when the governor signs it or allows it to take effect without signing.
The bill doesn’t go as far as many of the state’s largest unions would have liked, however. A coalition of unions ramped up an ad and pressure campaign on moderate Democrats in the lead-up to the session, hoping to get them to completely disconnect state tax code from the federal tax code and to selectively reconnect.
Ending the state’s automatic connection to the federal code and instead selectively connecting is not on the table this session.
Selective cuts
The bulk of Oregon’s revenue losses are expected to come from two federal tax code changes: ending income taxes on overtime pay and tips and allowing individuals and businesses to immediately deduct from their taxes 100% of the cost of “depreciating assets,” such as real estate and equipment, as well as research and development costs.
The income tax cuts on overtime and tips, research and development and business properties as depreciating assets would be kept under the bill passed Wednesday. But businesses would not be allowed to take the immediate, premium deduction on the purchase of new equipment. The deduction would instead be spread incrementally over a fixed number of years, as it typically has been, helping the state keep about $267 million in tax revenue it would otherwise have gone without during the next 18 months.
Oregon’s tax code would also disallow the new federal deduction for auto loan interest paid on the purchase of new cars, preserving an estimated $36 million in state revenue. And it would disconnect the state from the “Qualified Small Business Stock Exemption,” which is expected to preserve about $39 million in tax revenue for the state.
The stock exemption is meant to encourage investment in smaller, sometimes riskier, startup businesses by allowing individuals to avoid paying capital gains taxes on the sale of qualified small business corporation stocks, which are different from publicly traded stocks.
Combined, disconnecting state tax code from federal code deductions on auto loan interest, the sale of qualified business stocks and the purchase of new equipment, the state would claw back about $342 million in tax revenue that it would otherwise not be able to collect during the next 18 months.
New incentives
The bill also directs $25 million of the preserved tax revenue over the next 18 months to a new state tax credit for businesses that create new jobs in Oregon, as long as they pay at least 150% of Oregon’s minimum wage, or at least $22.58 per hour. Those businesses would receive a $1,000 tax credit per new employee they hire in the tax year, for hiring up to 10 new employees.
Another $26 million of preserved revenue would go to boosting the Earned Income Tax Credit for low- and moderate-income Oregonians by 5 percentage points, allowing individuals and households to claim a credit for up to 17% of their earnings depending on income and family size if they make less than $68,675.
More than 212,000 taxpayers in Oregon qualified for the earned income tax credit in 2023 — about 11% of all taxpayers — according to the state’s most recent data. They received an average of $222 each.