SALEM — Two bills that comprise Oregon’s response to recent changes in the federal tax code are inching closer to passage, having passed out of the House Revenue Committee on a party-line vote Wednesday.
They are scheduled to go next to the full House of Representatives for debate.
Oregon’s income tax code is largely based on the federal code. Tax deductions created by federal tax law are available on state tax returns unless those provisions are specifically disconnected from Oregon law.
Senate Bill 1528, passed by the Senate last week, disconnects Oregon law from a federal deduction for owners of so-called “pass-through” businesses, whose business income “passes through” to be claimed on their personal income taxes.
Federal law will allow owners of those businesses — such as LLCs and S-corporations — to deduct up to 20 percent of their income from their 2018 tax return. The bill eliminates that deduction from Oregon income taxes.
Supporters say the deduction would have cost the state $244 million in lost revenue.
State Rep. Lynn Findley, R-Ontario, said during Wednesday’s committee hearing that he was voting against the bill because it placed an “undue hardship” on small business.
State Rep. Pam Marsh, D-Ashland, disagreed. She argued that the state wasn’t increasing taxes by disallowing the 20 percent deduction from state taxes.
“To simply accept what the federal government has handed to us and to take a tremendous decline in revenues that would otherwise come to us is a mistake,” Marsh said.
Despite support from most members of the Democratic majority, it faces opposition from small business groups and Republicans in the Legislature and is likely to be the subject of partisan rancor before the session adjourns.
The threat of legal action was raised last week by State Sen. Brian Boquist, R-Dallas, who claims that the process has not adhered to the state’s Constitution.
Boquist maintains that because the bill raises revenue, the Constitution requires that it originate in the House and pass each chamber by a three-fifths majority.
As currently written, the bill could also be referred to voters.
State Rep. Julie Parrish, R-Tualatin/West Linn is fresh off a January initiative petition defeat.
While she testified against the bill in the House Revenue Committee Wednesday, Parrish says she is not interested in filing a referral at the moment, though “its certainly an appealing thought.”
One of the bill’s sponsor in the Senate discarded the potential for a referral.
“I’m not going to respond to hypotheticals,” State Sen. Mark Hass, D-Beaverton, said Wednesday evening when asked about the possibility that the issue could go before voters. “Every measure is subject to referral, so we have to try and find the best policy for Oregon. . .”
Provisions of the federal tax reform signed into law by the president in December was intended to encourage companies to repatriate income held overseas for tax purposes.
Senate Bill 1529, which will allow Oregon to tax those repatriated earnings, also passed out of committee Wednesday. It is expected to bring in $140 million in one-time revenue.
A partisan disagreement over where to put the money erupted in committee Wednesday.
Rep. Knute Buehler, R-Bend, argued that the one-time revenues should go toward shoring up staff in the state’s foster care system, which has long struggled to provide adequate services for foster kids.
However, the committee adopted a different amendment that would put the money in a fund intended to incentivize public employers to pay down their share of the public pension system’s unfunded liability.