Every month, the Salem Business Journal gives NFIB the opportunity to write about small business. The following is NFIB Oregon State Director Anthony K. Smith’s column for the June 2018 issue.
Last April, Gov. Kate Brown signed a bill into law that is estimated to generate more than $1 billion in revenue for the state over the next six years by “disconnecting” our state income tax code from the new 20 percent deduction for qualifying pass-through business income – a key feature of the federal Tax Cuts & Jobs Act of 2017.
Normally, when changes occur in the federal tax code, Oregon automatically connects to those changes. A new federal deduction would typically mean that Oregon would also honor the deduction for the purposes of determining a taxpayer’s state income tax liability.
During the 2018 legislative session, this quickly became one of the most talked-about and controversial issues. Senate Bill 1528 ended up passing with bi-partisan opposition in both chambers. Nevertheless, the bill made its way to the governor’s desk, and after weeks of deliberation, she signed it.
The enactment of SB 1528 negated state-level tax relief for every pass-through entity in the state – every S corporation, partnership, limited liability company, and sole proprietorship – hundreds of thousands of Oregon’s small businesses.
When Governor Brown announced her intention to sign the bill, she surprised many by also calling for a special legislative session. It would be Oregon’s first since 2013, when, coincidentally, the subject of small-business taxes was also front-and-center.
The 2013 special session included a new tax policy for pass-through businesses – the Small Business Tax Cut. Because small businesses are overwhelmingly structured as pass-through entities, their business income “passes through” the business to owners as personal income, for which they are taxed by the state using Oregon’s regular individual income tax rates. The Small Business Tax Cut created a structure of lower rates for individual business owners meeting certain requirements.
This Oregon-specific policy is important to keep in mind for several reasons. Most notably, it was a key factor leading to the governor’s decision to sign SB 1528. In a letter dated April 6, 2018, to Oregon’s secretary of state, Governor Brown describes a scenario in which an Oregon business could benefit from both the Oregon Small Business Tax Cut policy and the new 20 percent deduction (had she vetoed SB 1528.) She describes this as “inherently unfair to all other taxpayers.”
The Oregon Small Business Tax Cut policy was also, ultimately, her reason for convening the special session, which occurred May 21. The governor opined that the policy, “which is relatively new, is not perfect and has some inequities in it.” Since under the original legislation, only S corps and partnerships could qualify for the lower tax rates, her solution was to add an estimated 12,000 sole proprietorships to the policy, out of more than 300,000 statewide that are expected to file a 2018 Oregon income tax return.
Unlike the bill that denied tax savings to hundreds of thousands of small businesses in Oregon, House Bill 4301 passed in both chambers with bi-partisan support during the one-day special session, but not without its own controversy.
Several legislators questioned the timing of the governor’s bill – and the “emergency” special session conducted for the sole purpose of reducing taxes for a relatively small number of businesses by $60 million over the next several budget cycles, right after the Legislature and the governor supported an unpopular bill that will cost small businesses over $1 billion during that same period of time.
Other lawmakers pointed out the fact that just a year ago, the Oregon House of Representatives attempted to exclude the smallest of small business – those with fewer than 10 employees – from the participating in the Small Business Tax Cut policy. And yet many of those same representatives voted in favor of HB 4301.
After the governor’s bill passed, she stated, “Small businesses are the backbone of a strong Oregon economy, and will now be able to invest more growing their business and hiring more employees.”
This is a common chorus that curiously becomes popular every two years. Oregon’s elected leaders will need our help remembering this when “raising revenue” becomes the focus of lawmakers again after they return to Salem in 2019.