Democrats and Republicans in the Legislature are locked in a typical war of words over what constitutes a tax increase — this time involving the tax reform bill passed by the U.S. Congress. Democrats are frequently guilty of embracing tax increases and coming up with creative ways to call them something else. But not this time.
This time, the fight is over Oregon's custom of having its state income tax rules mirror the federal income tax code. That makes it simpler for filers and for the Department of Revenue and generally causes few issues. But when Congress decides, as it did recently, to pass sweeping cuts in income taxes, that can cost Oregon significant money.
The Legislative Revenue Office has predicted that the federal tax-reform bill's cuts in taxes on so-called "pass through" income could cost the state $120 million in the current budget. If copied in state law, the federal tax cut would allow people who earn income through S corporations, LLCs and various business partnerships an extra 20 percent deduction from their state income taxes.
State lawmakers gave pass-through businesses a tax break a few years ago. Democrats say that tax reduction, plus the federal tax cut those businesses are receiving, is enough, and those taxpayers don't need an extra break on their state taxes. They point out state tax rates on pass-through income would not change from the amount those earners paid last year. They passed Senate Bill 1528 on Friday, which would disconnect Oregon from that part of the federal tax code.
Republicans, predictably, argue that amounts to a tax increase, which requires a three-fifths majority vote, but the Senate passed it with a simple majority. Sen. Brian Boquist, R-Dallas, is threatening to sue the state over that.
It's important to note that Oregon is not like most other states because it relies almost exclusively on the income tax. Linking its tax to the federal tax code is the simplest way to operate. But that means Oregon automatically adopts whatever changes the Republican-controlled U.S. Congress makes. Democrats in charge of the Oregon Legislature are unlikely to meekly go along with that, nor should they.
Whether Republicans like it or not, declining to copy a federal tax reduction is not the same as raising taxes.
This fight isn't over. SB 1528 moves to the House, where changes are possible, and a separate tax bill is reportedly in the works. Gov. Kate Brown indicated last week that she wanted changes in the bill and would have vetoed the original version. The Statesman Journal newspaper in Salem reports that members of the governor's staff are working on changing the bill to give it broader support.