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The Associated Press A view of the Oregon Capitol in Salem.

Tax break for small businesses passed in special session

SALEM — Lawmakers on Monday passed a tax break aimed at small businesses in Oregon during a one-day special legislative session convened by Gov. Kate Brown.

The Democrat Brown and legislative leaders in the majority party emphasized keeping the session focused only on passing the new break, which targets small businesses known as sole proprietorships, and limiting it to a single day. The tax plan passed 51-8 in the House and 18-12 in the Senate. Both votes included Democrats who broke from their party to vote against the measure.

Republicans objected to the scope of the plan as early numbers showed it benefiting established businesses more than struggling entrepreneurs. The plan specifically blocks more than 100,000 of the smallest businesses in the state from benefiting, or about 90 percent of sole proprietorships, from taking advantage of the tax break.

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 balked, and when Brown OK’d the block she promised to call the special session to create another, separate break for small businesses.

House Republican Minority Leader Mike McLane said Monday the process was forced through 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. McLane said his main request in negotiations had been to broaden who qualified for the bill, but that it had been denied.

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

Passing the plan in a single day represented a success for Democrats, especially Brown, who first declared the ambitious timeline. Normal legislative rules require a days-long process of passing bills back-and-forth between committees.

Voting to suspend the rules required Republican cooperation: McLane said that despite objections, his caucus had agreed that holding up the process would only delay the inevitable, since Democrats control the Legislature.

The controversy surrounding the plan traces back to the Trump overhaul, which 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 benefit some business owners twice: once on their federal taxes, and once when it reduced their state bill.

The first Democratic plan, passed earlier this year as Senate Bill 1528, allowed people to keep 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.

The plan has a key limit: only businesses with at least one employee qualify, eliminating single-person operations.

About 12,000 businesses appear to be eligible, at an initial cost to the state of around $12 million per year, according to documents from legislative economists.

But the single-employee limit disqualifies about 90 percent of sole proprietorships, or just over 100,000 single-person businesses, said Chris Allanach, head of the nonpartisan legislative revenue office.

Early numbers also showed more than 40 percent of the benefit flowing to business owners already making more than $500,000 per year.

“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.

Sen. Mark Hass, a Democrat, said in the same hearing that broadening the break without study was hasty. Hass later voted against the bill.

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