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The Capitol building in Salem. (File photo)

Special session on tax breaks begins in Salem

SALEM — The Oregon Legislature convened for a special session Monday, as Democrats sought to put meat on the bones of a tax break promised by Gov. Kate Brown.

Legislative leaders and the governor have said the session will focus only on passing the new break, which targets small businesses known as sole proprietorships, and that they hope to limit it to a single day. But objections focused on the scope of the plan as early numbers showed it benefiting established businesses more than struggling entrepreneurs.

The move is the latest reverberation from President Donald Trump's 2017 federal tax overhaul. Democratic legislators blocked part of that plan after finding it would benefit some Oregon businesses twice - and cost the state $217 million in its first two years. But Republican legislators objected, and when Brown OK'd the block she promised to call a special session to create another, separate break for small businesses.

Objections from Republican legislators continued after Brown's remarks. House Republican Minority Leader Mike McLane said Monday the process was rushed by the majority party.

"This is the governor's bill - any attempt to by the Republicans to shape it or modify its language were rejected by the Democrats," McLane said.

House Speaker Tina Kotek, a Democrat, said legislators from her party had negotiated in good faith.

The Trump overhaul created a flat 20 percent deduction for pass-through income — business income claimed as personal income by a business owner. The Trump deduction affects only federal taxes, but because Oregon's personal income taxes are calculated using numbers from Oregonians' federal tax returns, the deduction was set to reduce some business owners' tax bills twice: once when it reduced their federal tax bill, and once when it reduced their state bill.

The first Democratic plan, passed earlier this year as Senate Bill 1528, allowed people to take the federal deduction, but required it to be added back before calculating state taxes.

The new plan, called HB 4301, targets business owners who would have been eligible for the Trump deduction, but by expanding a state deduction instead - with a much smaller price tag.

Current state law gives a tax break on pass-through incomes to some types of businesses, but not sole proprietorships, which are often the smallest independent businesses, and include many independent contractors: The new Democratic plan expands that to include sole proprietorships.

But as it stood early Monday the plan had a key limit: only businesses with at least one employee qualify, eliminating single-person operations.

About 12,000 businesses would be eligible, at an initial cost to the state of around $12 million per year.

Objections from lawmakers Monday focused on the scope of the break: early numbers showed more than 40 percent of the benefit flowing to business owners already making more than $500,000 per year. Businesses owners making less than $70,000 per year would get less than 7 percent of the benefit.

"Those sole proprietors who are just trying to get off the ground... get the least amount of benefit," said Rep. Greg Smith, a Republican, during the bill's first hearing of the day.

In remarks before the hearing, Kotek rebuffed the notion of a broader tax break as too ambitious for a session lawmakers are trying to limit to a single day.

McLane said that despite their objections, House Republicans won't use procedural roadblocks or other last-ditch maneuvers to block the plan in its current form.

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