BY HILLARY BORRUD

SALEM -- Democratic leaders conceded on Thursday that they've given up on making major changes to Oregon's business tax system until at least 2019.

Gov. Kate Brown said that also means the state will not move ahead with any significant effort to rein in public pension costs this session. Oregon's pension fund has a $22 billion long-term deficit, but Democrats had said they would only pass meaningful changes to tackle that issue if Republicans and businesses supported a corporate tax increase.

"It is very clear it was tied to revenue reform," Brown said of a bill to curb pension costs, acknowledging it is now dead.

Brown, Senate President Peter Courtney, and House Speaker Tina Kotek said in a statement that a health care tax bill passed Wednesday and a plan to curb state government costs will allow the Legislature to balance the 2017-2019 budget. A healthy economy that's yielded revenue above state forecasts also helped. But they'll go home without the long-term tax overhaul they'd hoped for, and potentially without additional money to boost the $8.2 billion K-12 schools budget.

Democrats' failure to achieve two of their most important policy goals after five months in the Capitol was soon followed attempts to assign blame for the situation. The party controls the governor's office and both chambers of the Legislature, but still needs one Republican vote in each chamber to pass any tax increase.

"I'm outraged that Republicans would play games with Oregon's future," House Majority Leader Jennifer Williamson, D-Portland, said in a statement.

House Minority Leader Mike McLane, R-Powell Butte, responded that Republicans "have been working in good faith for months to chart the best course forward for the state of Oregon" and were "open to raising revenue if Democrats were willing to engage in a serious effort to grow the economy and control costs. The Democrats were not willing to do that."

Indeed, Democrats had different ideas on a tax strategy during much of the session. Kotek and Sen. Mark Hass, D-Beaverton, had disagreed on how large of a tax increase they should pursue, until they came forward with a $900 million compromise two weeks ago.

Hass, who led the effort over the last year to craft a business tax plan that could win support from Republicans and business groups, said earlier this week he would be willing to support a simple increase in the existing corporate income tax if it meant more money for schools. But House Democrats held out for major long-term changes to the way Oregon taxes businesses. Brown told reporters on Thursday that the corporate income tax hike Hass proposed earlier this week – which would have raised $500 million per biennium – didn't have enough Democratic support in the House.

In a speech on the Senate floor Thursday, Hass warned that ignoring Oregon's need for changes in both corporate taxes and the public pension system could put the state on track to replicating Illinois' pension crisis.

"If we do pretend this is not an issue, it will eventually wreck our schools and swallow our state, just like it is doing in Illinois," Hass said.

Still, Democratic leaders said they remain committed to a future overhaul of the state's corporate taxes, which they argue have slackened as companies find new ways to reduce their tax bills.



"Recognizing that imbalance, we have worked for months with legislators in both parties, business leaders, and labor leaders, to identify ways to reduce state spending, contain costs going forward, and finally reform our revenue system," the three Democrats said. "While we are moving forward on several major cost containment measures, it has become clear that the Legislature will not have the necessary support to achieve structural revenue reforms this session."

Officials with school boards and the state teachers union took lawmakers to task for failing to raise revenue.

"This state has had a revenue problem for decades, and it's acknowledged by both parties," said Jim Green, executive director of the Oregon School Boards Association, in a statement. "Now there will be a lot of finger-pointing on both sides, but ultimately this is a failure by our elected state leaders to put aside their differences and do what is needed."

Oregon Education Association President Hanna Vaandering went after Republicans, saying not a single member of the GOP "was willing to defy the business lobby and stand up for our students."

"With nearly three weeks left in the session, there is ample time to raise the revenue needed to invest in our schools," Vaandering said. "Students have suffered from packed class sizes, short school years, and cuts to programs year after year. Students need the legislature to act now, but if they don't, we plan to take this issue directly to the voters in 2018."

The union has already started the process to get two measures on the ballot in 2018 that would charge companies a so-called gross receipts tax calculated on their annual sales in Oregon, and make it easier for lawmakers to raise taxes to fund education. The union was among the groups behind Measure 97, the $6 billion corporate tax measure voters rejected in November.

Brown, Courtney and Kotek said that as the Legislature finishes its work this session, they will "start planning the next steps to lead to success in the 2019 session."

In the meantime, House Democrats on Wednesday advanced a plan to raise taxes on certain businesses -- by scaling back a tax break the Legislature approved in 2013. The plan would raise approximately $200 million over the next two years. House Democrats also appear ready to pass the plan without any Republican support, pointing out they can legally reduce the tax break without the three-fifths supermajority vote that is Constitutionally required to raise taxes. Republicans dispute that claim.

That revenue would be on top of $550 million in new tax revenue from the health care tax package on its way to the governor's desk, and cost trimming measures that would save approximately $270 million in state general and lottery funds over the next two years. Those and other budget maneuvers will allow the Legislature to close a $1.4 billion shortfall in the upcoming two-year budget.



Brown, Courtney and Kotek called for everyone who has been working on corporate tax changes to continue that work.

"To achieve resolution for our state, all parties will need to stay at the table, focus on structural reform rather than short-term patches that merely shore up the next two-year budget, and be ready to compromise for the good of the state," they said.

-- Hillary Borrud

503-294-4034; @hborrud