Oregon lawmakers convene a special session of the Legislature Monday to take up a proposal to extend tax breaks to certain small businesses, but it’s unclear exactly what the session will accomplish or how long it will last. The only certainty is, the sweeping overhaul of the tax system that Oregon has needed for decades won’t be on the table.
Gov. Kate Brown announced she would call the special session when she reluctantly signed a bill into law that disconnects Oregon’s tax code from the portion of the federal tax law that applies to “pass-through” income from S corporations, LLCs and various business partnerships. That bill had the effect of taking away an extra 20 percent tax break the businesses would have enjoyed as a result of the tax reform measure adopted by Congress. Because Oregon relies heavily on the income tax and usually mirrors the federal code, changes in federal tax rates can cost the state significant money.
Democrats in the Legislature argued that Oregonians who earn pass-through income are already getting a break on their federal taxes, as well as a tax break lawmakers gave them in 2013, and the state can’t afford to lose the $120 million in revenue in the current budget the federal break would cost.
Brown agonized over whether to sign the bill, and was under considerable pressure to veto it. She is running for re-election, and her Republican challenger, Rep. Knute Buehler of Bend, has hammered her over the state’s refusal to follow the federal tax break for pass-through businesses.
In the end, the governor signed the bill, but announced the special session at the same time. The 2013 state tax break on pass-through businesses didn’t include sole proprietorships — one-person businesses such as doctors and lawyers who earn pass-through income but have no employees. There has been considerable support for including them as a matter of fairness, and an early version of this year’s bill would have done that, but the provision was dropped from the final version in the interest of simplifying the measure.
Brown’s plan was for a one-day special session that would extend the state tax break to sole proprietorships, but that would have required buy-in from minority Republicans, who are in no mood to make things easy for the Democratic governor in an election year. So the session could last as long as a week.
Exactly how many sole proprietorships would be helped by the governor’s proposal is a bit murky, but some analyses have suggested only about 9,000 of the state’s 264,000 sole proprietorships would qualify.
Passing such a bill would allow Brown to say she is looking out for small businesses, but it wouldn’t address any of the pressing problems facing the state, from the housing crisis to the opioid epidemic to the unfunded public employee pension liability. Those issues require more time than a special session lasting a few days.
So does real tax reform — addressing the state’s boom-and-bust reliance on the income tax — which lawmakers are fond of talking about but not so keen on actually solving.