SALEM — A plan to raise billions of dollars in new business taxes to fund improvements to Oregon’s public schools and early childhood programs cleared a key hurdle Monday night, when it passed out of committee on a party line vote.

Democrats’ top priority this legislative session is now scheduled to receive a House floor vote on Wednesday, just one day later than the timeline set by party leaders in recent weeks. Lawmakers on the panel characterized the package as a game-changer for the state and its children.

Key legislators reached a surprise last-minute deal with the state’s biggest business group to grant a higher deduction for the cost of labor or materials, which could help manufacturers or other businesses with high input costs. The deal also calls for a slightly higher tax rate so the total taxes raised would still add up to $2 billion every two years.

The influential business group in turn signaled it won’t pursue or fund an effort to refer the tax and school funding question to voters.

“We feel comfortable with the direction that this conversation is going and we will be neutral on the tax proposal,” Oregon Business & Industry President Sandra McDonough told the committee Monday night.

In response, Democratic Sen. Mark Hass of Beaverton said McDonough has “an impossible job.”

“The business community in this state is so diverse,” said Hass, who has worked for years to pass a similar business tax. “I just didn’t think it was possible to coalesce or get anyone to unify around one thing. But I think maybe education can be that unifying force.”

The new tax The bill approved in committee Monday night aims to raise $2 billion in new business taxes for schools in each two-year budget cycle. The tax won’t kick in immediately, though, and so would raise a little less than half that in the next two years. Here’s how it works: • Businesses pay a tax of 0.57% on sales inside Oregon above $1 million. Groceries, gas, hospitals and long-term care businesses would be exempt. • Businesses can subtract 35% of their labor or capital costs from total sales. • To offset anticipated increase in consumer prices, the plan cuts personal income tax rates by 0.25 percentage points for the lowest three of the state’s four tax brackets.

The plan approved by a joint House-Senate committee Monday night sets aside about half the money for substantial grants to local districts. The rest would be divided among programs for toddlers and preschoolers, full funding for a voter-approved measure to expand career-technical offerings and anti-dropout programs and initiatives to improve schools’ performance statewide.

At this point, it is unclear if the bill will get through both chambers of the Legislature, let alone to Gov. Kate Brown’s desk for her signature, before a statewide teacher walkout planned for May 8. House Republicans also signaled their willingness to slow the pace of work on Monday, when they started to use delay tactics.

The Oregon teachers’ union indicated after the vote Monday that the walkout will still take place as planned to urge support for the bill. And at least one district is looking to the one-day shut down as an opportunity to cut costs in a budget crunch. Some school districts experienced cuts in 2017 and some are projecting more this fall despite lawmakers approving big budget increases in recent years, primarily due to escalating pension and other personnel costs.

Even if lawmakers enact the tax in May, schools and early childhood programs won’t receive significant amounts of money until the 2020-21 school year because the first business tax payments are expected in April 2020. So the coming school year could be a tough one financially for some districts. Beaverton, for example, has said it must cut 250 teaching positions to balance its budget.

To ease that situation, lawmakers on the Joint Committee on Student Success agreed to peel off $200 million that would otherwise go to improvement initiatives to give schools money they could use as they wish, including to cover rising salary and pension costs.

Since the bill would raise taxes, it needs a supermajority vote of three-fifths of lawmakers in the House and Senate to pass.

Although heavy-weight Oregon Business & Industry has signaled it would stay out of any efforts to overturn the plan by referring it to voters, other business interests formed a political action committee last Wednesday called Defeat the Tax on Oregon Sales Now, with the stated purpose of opposing such taxes.

Referring to voters’ rejection in 2016 of a similar but larger business receipts tax proposed under Measure 97, Shaun Jillions, Executive Director of Oregon Manufacturers and Commerce said, “Oregonians have spoken. They don’t want a tax on Oregon sales.”

Still, Democrats expressed both elation and a sense that the funding bill could prove to be a historic moment for improving Oregon schools. Sen. Lew Frederick, a Portland Democrat, reminisced about marching through the city streets in a crowd of more than 40,000 two decades ago calling for the state to “save Oregon schools.”

Republicans were similarly emotional, with some saying they were torn between a desire to make needed investments in education and their conviction that the tax is too large or would hurt specific businesses. Rep. Cheri Helt, a Bend Republican who served on the local school board, said the plan is an “unfair tax (on) small businesses.”

“I don’t think people see my face when they say they want corporations to pay more,” said Helt, who along with her husband owns a pair of Bend restaurants.

Under House Bill 3427, businesses with at least $1 million in sales in Oregon would have to pay a so-called gross receipts tax equal to equal to 0.57 percent of their sales. However, the first $1 million in sales would be exempt from the tax. It would not apply to groceries or gas, and hospitals and long-term care businesses that pay a tax to fund Oregon’s Medicaid program would be exempt.

The grocery exemption, which also means soda won’t be taxed, would cost the state some potential tax revenue but could neutralize some deep-pocketed opposition if the bill is ultimately referred to voters. In 2016, grocers spent heavily to defeat Measure 97. Soda companies joined supermarkets in unsuccessfully pushing to pass a ban on grocery and soda taxes in 2018.

Oregon’s largest business group had steadfastly opposed a gross receipts tax, arguing that the tax would multiply through the supply chain. In response, lawmakers included a provision to allow businesses to subtract a portion of either their labor or capital costs from their total sales -- and that share was raised from 25 percent to 35 percent in Monday’s last-minute deal with business.

Since businesses would likely pass some of the cost of tax on to consumers, the plan also includes a 0.25 percentage point income tax cut for low and middle-income earners.

Spending the money Lawmakers plan to divide the money into three buckets to address specific education needs: · School districts: 50% for grants to districts based on student enrollment with extra funds going to districts with students below the poverty line. Districts would have broad discretion to use the money for more instructional time, student health and safety, broadened course offerings or smaller classes. · Early learning: 20% for early childhood special education, early intervention services, expanded preschool for low-income children and similar programs. · Statewide initiatives: 30% to improve high school graduation rates, career training, school meals and other programs.

Unless lawmakers find some way to insulate schools from the state’s pension crisis, soaring pension obligations will gobble up a quarter of the tax money once it does arrive – and more than half of it within a decade.

To protect the new school funding, Gov. Kate Brown has proposed drawing money from an anticipated bump in estate and capital gains taxes and from the state’s workers’ compensation program and requiring employees to contribute to their own pensions.

Businesses and public employee unions are adamantly opposed to aspects of the governor’s plan, though, and Democratic leaders in the Legislature are crafting a separate plan. None of the pension proposals have been formalized yet or appeared in a bill.

The bill enacting the business taxes for education envisions an additional $2 billion for schools in each two-year state budget cycle, increasing total school funding by roughly 15 percent.

It would take time for the new tax to kick in, though. That means that during the coming two-year budget cycle, forecasters estimate the tax would provide just $952 million for improvements.

In the future, though, it would probably provide more than $2 billion in each budget cycle as the state’s economy grows.

The bill would divide the money into three pools. The largest share, half of the total raised, would go directly to school districts. The rest would be split between programs for toddlers and preschoolers and for statewide initiatives to improve student performance.

While the bill suggests districts use the money to add days to the school year, reduce class sizes, add courses or take steps to improve student health, administrators would have a lot of latitude on what options they choose.

Districts would have to demonstrate that the money they spend is increasing graduation rates, reading levels, freshman success rates and student attendance and reducing achievement gaps in disadvantaged student populations.

If districts don’t meet their goals, they would be subject to one-year oversight by the Oregon Department of Education. The bill envisions hiring a team of veteran educators, some of them retired, to step in to coach underperforming districts. In all, the bill would add about 44 new state employees in the education department to administer the new programs, monitor schools’ spending and coach some schools to improve.

If the state concludes any district has failed to spent money appropriately, it could withhold money from future grants.

Charter schools could apply for the money with a sponsoring school district. If they seek money sson their own, they would be eligible only if at least 35 percent of their students are low-income, minority or special education students and a higher percentage of their students are in that particular category than in the school district in which the school is located.

The new tax would not kick in until January, six months into Oregon’s next budget cycle. Approximately 40,000 businesses would likely pay the tax, Legislative Revenue Officer Chris Allanach said at a recent hearing, although he noted that is based on data from 2016. That would be just under 9 percent of the 460,000 businesses active in Oregon.

It was unclear until the vote Monday night whether the plan would make it out of committee. In addition to business groups pushing for changes behind the scenes, city governments and a variety of interests including environmentalists have raised concerns about a provision in the plan to prevent local governments from passing their own gross receipts taxes on businesses in the future.

Although the city of Portland’s $30 million-a-year green energy gross receipts tax was grandfathered in under the bill, advocates are upset the legislation would prevent other cities from adopting similar taxes.

The bill appears to prohibit cities from passing some types of soda taxes, since it would bar them from taxing “receipts” from groceries and lawmakers relied on the federal food stamp definition of groceries that includes soda. But cities could impose a per-can or per-ounce tax on soda, as those are considered excise taxes based on quantity, not gross receipts taxes based on sales price.

“There are many other ways to accomplish a soda tax, through one of these other taxing mechanisms,” said Rep. Nancy Nathanson, a Eugene Democrat, who read off a list of other types of taxes cities could still use.

— Hillary Borrud | hborrud@oregonian.com | 503-294-4034 | @hborrud

-- Mike Rogoway | twitter: @rogoway | 503-294-7699