SALEM — Oregon lawmakers are set to decide Thursday evening whether to keep, trim or scrap the state’s version of a controversial tax break for investors that one state official has described as “domestic tax havens.”

Under the opportunity zone program, investors who plow their capital gains realized from selling stocks or real estate into qualified development projects can trim the tax on those gains by 10 to 15%.

And they can reduce to zero their tax bills on capital gains earned on the opportunity zone projects, if they stay invested for 10 years. That prompted Nick Batz, policy and government affairs director for Business Oregon, to refer to them as domestic tax havens.

A proposal currently before the House Committee on Revenue would end the state tax break. But committee Chair Rep. Nancy Nathanson, D-Eugene, who sought House Bill 4010 has suggested it might be scaled back under proposed amendments up for consideration Thursday evening.

If all the amendments are adopted, Nathanson said during a Wednesday morning hearing, Oregon would keep the tax break but “we reduce the Oregon tax benefit, we do a study and we add transparency.”

Specifically, investors would only be able to wipe out 50 percent of their Oregon income tax bill on opportunity zone profits, not 100 percent, and the state would track which projects receive the subsidy. Currently, neither the federal government nor the state tracks which projects are taking advantage of the break nor the amount of their tax savings.

Oregon legislators never actually reviewed or approved the opportunity zone tax break and the state’s economists have done little analysis of it. That’s because it was created in President Donald Trump’s 2017 tax overhaul and inserted into Oregon statute only because the state automatically copies federal tax law.

Democratic Gov. Kate Brown’s administration recognized two years ago that it did not know how much the tax breaks would stimulate investment or present a drain on tax revenues, according to The Oregonian/OregonLive’s review of 1,000 pages of public records. But they never followed through and sought answers to those questions.

The proposal to kill off the state’s opportunity zone break has the support of a coalition of Oregon’s powerful public employee unions, the League of Women Voters of Oregon and liberal groups including Tax Fairness Oregon and the Oregon Center for Public Policy.

They have argued in testimony at the Capitol that the tax break will overwhelmingly benefit wealthy individuals, while reducing tax revenue the state relies upon to fund services for all Oregonians, and that most investors and fund managers are focused on the federal tax savings. They also point to opportunity zone projects that had started before Trump’s tax law passed, such as the Ritz-Carlton hotel planned in downtown Portland, as evidence the tax benefit is benefitting investors in projects that would happen regardless of the program.

State economists have predicted Oregon might collected $15.9 million less in the current two-year budget, due to the initial 10 to 15 percent capital gains discount. Leaders have no idea how much capital gains tax the state might lose if it retains the complete zeroing out of taxes on opportunity zone profits.

Bennett Minton, a former federal tax legislative analyst who testified on behalf of Tax Fairness Oregon, pointed out that in the months since state economists prepared that estimate, Congress’ Joint Committee on Taxation has roughly doubled its estimate of the short-term federal tax revenue loss due to opportunity zones.

Josie Koehne of the League of Women Voters of Oregon pointed out only accredited investors — people with $1 million in net assets excluding the value of a primary home or $300,000 in annual income for a couple — can invest in the zones. “Oregon will lose a valuable source of revenue to support its public services, even on investments Oregon investors make outside of Oregon,” Koehne said.

Supporters of the state opportunity zone tax break say it encourages investment in blighted areas that would otherwise be unlikely to occur, regardless of the fact investors can reap the same tax benefits from projects in Portland’s hottest areas. As Bloomberg Businessweek pointed out in an article calling the state “Tax Breaklandia,” Brown’s administration designated the entirety of downtown Portland as an opportunity zone.

Chambers of Commerce and many economic development agencies around the state have come together to push back against curtailing the break. Cadence Petros, development division manager for the city of Beaverton, said the city needs the state tax break in order to attract investors in its planned arts and innovation district project.

“We believe this bill will add uncertainty to the opportunity zone program, which may discourage Oregon taxpayers from making the kind of transformative investments that are happening in central Beaverton,” Petros told lawmakers earlier this month.

Sarah Zahn, director of development for Urban Development+ Partners which is managing the Beaverton project, said more than 90 percent of the $40 million they’re raising for the project will come from such investors seeking the opportunity zone break.

“More than 50 percent of them live in Oregon and the average individual investment is less than $500,000,” Zahn said. “They are small business owners, physicians, technology entrepreneurs, solar energy innovators and even farmers.”

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

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