More tinkering with Pass-Through Entity tax rates also proving hard to resist
State Director Anthony Smith reports from Salem on the small-business agenda for the legislative and political week ending June 4
It’s Day 137 of the 160-day Oregon Legislative Session and the work of the Legislature has shifted from policy committees to budget subcommittees, long floor sessions, and a few remaining controversial issues in each chambers’ Rules and Revenue committees, including some unwelcome conversations about small business taxes.
Here are the quick highlights of what’s been going on and what’s coming up, with more information below on each topic:
- Taxing PPP Loans in Oregon: After a shockingly impressive May Revenue Forecast from state economists estimating a $1.4 billion Kicker refund for Oregonians and over $1 billion in new revenue each budget cycle for the next few years, it was even more stunning that the Senate Finance and Revenue Committee held a public hearing on a bill that would treat forgiven Paycheck Protection Program (PPP) loans as Oregon taxable income.
- Update on Bills Impacting Small Business: At the beginning of the session, NFIB was tracking more than 350 bills that would (or could) have a positive or negative impact on Oregon’s small businesses. As we head into the final three weeks of the session, we’re now tracking just 150 bills. Read more below about some of the more significant ones – and where they currently sit in the legislative process.
- Oregon’s Pass-Through Entity Tax Rates: As is the case every session since Oregon’s pass-through entity (PTE) tax rates went into effect in 2015, lawmakers are considering changes to this policy that annually impacts around 25,000 small businesses in the state, saving them over $100 million per year on income taxes.
Taxing PPP Loans in Oregon
It was déjà vu all over again – a late-breaking amendment to SB 137 was posted after 5 p.m. on the evening of May 24 in advance of a public hearing on the measure in the Senate Finance and Revenue Committee the following afternoon. With less than 24 hours to prepare, NFIB and our many allies rallied to oppose this amendment, which would have treated forgiven PPP loan amounts in excess of $100,000 as taxable income in Oregon.
If this all sounds familiar, it’s because the House Committee on Revenue did the exact same thing back in March. Then, the bill was scheduled for a work-session only, and there wasn’t an opportunity to testify. As you’ll recall, the amendment was never considered after the Committee chair pulled the bill from the day’s agenda. This time, the hearing happened – and the public was allowed to testify.
The opposition was strong – several of us in the business lobby provided live testimony and many, many Oregonians submitted written testimony for the record. Not one of the bill’s proponents signed up to testify in support.
NFIB’s testimony can be read here. Hopefully, this is the last we’ve seen of this concept, but it’s not likely to be the last effort to raise taxes this year (see more below – Oregon’s Pass-Through Entity Tax Rates).
Update on Bills Impacting Small Business
In addition to the income related tax bills highlighted here and in prior newsletters, NFIB has weighed in on a number of legislative proposals over the last several months with serious implications for small businesses. Here’s a list of a few of those bills – some are likely to pass, a few more might pass, and others are barely hanging on to life. NFIB’s position on each measure is noted, as well as where the bill currently sits in the process.
*HB 3389 – Unemployment Insurance Tax Relief
NFIB Position: Support
Status: Passed in the House, passed out of Senate Labor & Business Committee, referred to the Joint Committee on Ways & Means
Read more about HB 3389 here
*SB 483 – Presumption of Retaliation: OSHA Complaints
NFIB Position: Oppose
Status: Passed in the Senate, up for a vote in the House on June 7
Read more about SB 483 here
*SB 193 – Repeal of $500,000 Noneconomic Damages Cap
NFIB Position: Oppose
Status: Passed in the Senate, passed out of House Rules Committee, heading to House Floor
Read more about SB 193 here
*HB 2021 – 100% Carbon-free Electricity by 2040
NFIB Position: Oppose
Status: Passed out of House Committee on Energy & Environment, passed out of House Revenue Committee, referred to the Joint Committee on Ways & Means
Read more about HB 2021 here
*HB 2814 – Regulation of Indirect Sources of Emissions
NFIB Position: Oppose
Status: Passed out of House Committee on Energy & Environment, referred to Joint Committee on Ways & Means
Read more about HB 2814 here
*HB 2358 – Agricultural Overtime Pay
NFIB Position: Oppose
Status: Passed out of House Business & Labor Committee, referred to House Rules Committee
Read more about HB 2358 here
These are just a few of the many bills we’re still tracking. If you are interested in another bill not on this list, please don’t hesitate to reach out to us for more information.
Oregon’s Pass-Through Entity Tax Rates
This just in – the Joint Committee on Tax Expenditures, which is a committee made up of all the members of both the House Revenue Committee and the Senate Finance and Revenue Committee, held an informational meeting this afternoon on Oregon’s Pass-Through Entity (PTE) Tax Rates.
By way of background, the small business PTE tax rates were part of the Grand Bargain from the 2013 special session. The package of bills passed during the special session included HB 3601, which among other provisions, increased the corporate tax rate from 6.6 percent to 7.6 percent on income between $1 million and $10 million and lowered rates for taxpayers with PTE business income meeting certain criteria, namely those with at least one full-time employee and those whose owners actively participate in the day-to-day operation of their businesses. The policy objective was to provide a more favorable rate structure for these business owners.
Back in December, Gov. Kate Brown released her Governor’s Recommended Budget (GRB) for the 2021-2023 biennium, a 500-page document that lays out the governor’s spending priorities for everything funded by taxpayer dollars. However, the GRB didn’t merely propose spending dollars expected to be collected under the state’s current tax structure – it also proposed a series of “revenue changes”.
The GRB proposed to completely eliminate the small business PTE tax rates – rates that were created in 2013, took effect in 2015, and were expanded in 2018. These tax rates help keep a level playing field between C corporations, which tend to be larger businesses, and pass-through businesses, which tend to be smaller (with exceptions, of course). Pass-through entities include S corporations, partnerships, LLC’s and sole proprietorships.
At the federal level, the Tax Cuts and Jobs Act (TCJA) of 2017 used the same tax parity lens to make sure that both C corps and pass-through entities benefited as equally as possible from the tax cuts. C corporations saw their corporate income tax rates reduced from 35% to 21% and pass through entities were able to apply a new 20% deduction (Sec. 199A) to reduce their federal tax liability.
During the 2018 regular session, Gov. Brown and legislative leaders called for Oregon to disconnect from this new federal deduction because Oregon already had a tax policy in place that benefited pass-through businesses. Overriding objections from Oregon’s business community, the 2018 Legislature passed SB 1528, requiring an add-back of that federal deduction on their Oregon income tax filings, which Gov. Brown signed into law.
Facing criticism, Gov. Brown then called a special session of the Legislature to expand the Oregon pass-through rates to sole proprietorships (and single-owner LLC’s), a group of businesses that were left out of the original legislation. The net result was that while the Oregon PTE policy now benefits around 25,000 businesses, hundreds of thousands of businesses missed out on the tax savings they would have received on their Oregon income taxes had the state remained connected to the federal 20% pass-through deduction.
During today’s informational meeting, the Legislature is once again attempting to tinker with the small business PTE tax rates – a policy that the Legislature has twice voted to support, and one that the governor thought was important enough to call a special session to expand three years ago when she was running for reelection.
We’re still analyzing the new proposal, but it looks like it would affect 3,500 to 4,500 taxpayers and raise $30 million to $40 million per year in revenue for the state. The concept broadens the lowest rate (7%) to income up to $500,000 and provides a slight rate decrease (from 7.6% to 7.5%) for income between $500,000 and $1 million. There would be no changes to the rates from businesses with $1 million to $5 million in income, but business with more than $5 million in income would be prohibited from opting into the program – this is where the majority of the $30-40 million comes from.
Additionally, a new requirement would be applied to S corporations and partnerships (sole proprietorships would be exempt – and we’re still waiting for clarity on how single-owner LLC’s would be treated). S corps and partnerships would need to meet one (or both) of the following:
1. Meet or exceed a new Oregon employee to Oregon owner ratio, adjusted based on income.
2. Reinvest at least 75% of business profits back into the business
It’s difficult to predict how much momentum this proposal might gain with so little time left in the session, but the likely bill number for this concept is SB 139, which has a broad relating-to clause (relating to taxation) and is scheduled for a public hearing on Monday, June 7. So if you like to track bills, that’s the one I’d bet on as the vehicle for this proposal.
Previous Reports and Related News
- April 27—Reaction to Latest Shutdown Order