Tax disconnect bill passes Senate, governor's office discussing new plan

A bill determining the Oregon tax rate for some small businesses was the subject of the first explosive Senate floor debate this legislative session, with Republicans accusing Democrats of hurting those businesses, and Democrats insisting this was a fix in the name of fairness and supporting current programs.

After more than an hour of debate Friday, Senate Bill 1528 passed 16-13, with all Republicans voting "no" and Sen. Betsy Johnson, D-Scappoose, joining them. It now heads to the House.

Sen. Brian Boquist, R-Dallas, reiterated on the floor his intention to sue the state over this bill because he believes it should be considered a revenue-raising measure and require at least 18 votes to pass.

He also warned that the extra revenue brought in would exceed 2 percent more than forecast and get sent back to taxpayers, per the state's "kicker" law. This perspective is supported by state economists in the building.

Meanwhile, staff members from the governor's office have met this week with lawmakers, business leaders and the labor community about tweaking the bill to appeal to a broader consensus.

A separate proposal has been passed around the Capitol this week, seen by legislators and staff on both sides and by members of the governor's office. It's unclear where the plan originated, but it proposes changes to pass-through tax rates, places lower deduction rate caps for doctors and lawyers and broadens who is eligible for deductions.

Previous coverage: Tax bill faces lawsuit threat and displeased governor

Brown said several days ago she wanted more work done on the bill and earlier indicated that she would have vetoed the original version.

As currently constructed, the bill would disconnect Oregon from a new federal tax provision granting pass-through entities — including S corporations, LLCs and various business partnerships — an additional 20 percent deduction on state income taxes.

Republicans say this amounts to a 20 percent increase in taxes for those businesses.

Sen. Herman Baertschiger Jr., R-Grants Pass, said the bill had the chance of killing small businesses just starting out. When Baertschiger started his business, he said, he had to put everything he had into it, and a few thousand dollars is a big deal.

"That could be the tipping point, whether you stay in business or not," he said.

The Democrats' position is that businesses have yet to take advantage of this provision and the tax rate for these businesses will be the same as last year, so it can't be considered a tax increase.

Sen. Mark Hass, D-Beaverton, said pass-through businesses already received a reduced rate several years ago. Giving them another deduction on top of that would be unfair.

"Nobody gets seconds until everybody gets through the line," he said, repeating his frequent refrain from the last couple weeks.

People making more than $455,000 would receive nearly half of the benefit of this provision, he said.

"Of all of the issues facing our state today, from housing to struggling schools, that the fact that we're on the floor debating whether to lower taxes for people making $450,000 and above is the most absurd moment of my legislative career," Hass said.

Plus, Hass said, the revenue hit that would happen if the Legislature did nothing would force them to later cut programs, probably in education because of the large percentage of the budget it makes up.

Baertschiger didn't agree.

"Every time somebody doesn't have a good argument in this chamber, it's about the kids, it's about the schools, 'oh we can't fund the schools,'" Baertschiger said. "Let me tell you something, we can't fund the schools if we don't have an economy."

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But underneath the debate about the potential impacts of action, or inaction, was a fundamental disagreement over whether a problem actually exists.

Hass and Boquist, chair and vice-chair, respectively, on the normally congenial Senate Finance and Revenue Committee, don't seem to agree whether the state is facing a revenue shortfall or increase in this and future bienniums.

Numbers from the state economist's office indicate the state should expect a revenue increase of a couple hundred million dollars per biennium going forward, taking into account dynamic effects of the federal and state tax law changes.

But initial projections from the Legislative Revenue Office, which looks at just statutory impact, indicated the state could lose a couple hundred million dollars through the pass-through provision alone.

Contact the reporter at cradnovich@statesmanjournal.com or 503-399-6864, or follow him on Twitter at @CDRadnovich