As the legislative session winds down, the Oregon Senate has an opportunity to correct a serious tax injustice from a few years back, while also helping preserve services that protect the most vulnerable Oregonians. With a simple majority vote, the Senate can and should cut the tax break for “suits and scrubs.”
In 2013, the legislature approved a tax code change that reduced the tax rate some business owners pay on profits passed through to their personal income tax. Back then, the Oregon Center for Public Policy warned this tax giveaway would disproportionately benefit wealthy business owners, not the archetypical small business owner.
Our prediction came to pass. Analysis by the Oregon Legislative Revenue Office shows over two-thirds of the tax cut went to taxpayers who earned more than half-a-million dollars in 2015.
Senator Mark Hass — who voted for it back in 2013 but has, commendably, come around to recognizing its flaws — has aptly dubbed it the “suits and scrubs” tax break. It’s the doctors, accountants, and lawyers, not the coffee shop owner or the barber down the street, who are reaping the benefits of the tax cut. Think of it this way: as a result of the suits and scrubs tax break, a well-heeled lawyer pays a lower tax rate than his paralegal.
While the better approach would be — as Governor Kate Brown proposed in her budget plan — to scrap the tax break all together and save $282 million in the upcoming budget period, the House Revenue Committee chose instead to scale it back. As amended, House Bill 2060 would limit the tax break to seven economic sectors and businesses with 10 or more employees. The bill would exclude accountants, lawyers, and doctors. It saves almost $200 million in the upcoming budget period. Those funds would fill in some of the remaining budget gap and thus avoid deeper cuts to essential services.
Now Oregonians await action in the Oregon Senate, where HB 2060 appears stalled.
If leaders of the Oregon Senate are concerned whether a simple majority suffices to enact this bill, they can put aside those concerns. An Oregon Supreme Court case in 2015 set the stage for a simple majority of the legislature to pare back the suits and scrubs giveaway. Recently, when House Speaker Tina Kotek asked the legislature’s lawyers whether HB 2060 is a bill for raising revenue requiring a supermajority, Legislative Counsel unequivocally said “no.” If that’s not enough to alleviate their concerns, they should amend the bill to provide a short timeframe for filing a lawsuit challenging the lack of a supermajority and to provide for expedited review by the Oregon Supreme Court if such a suit is filed.
In short, there is no procedural hurdle preventing a majority of the Oregon Senate from ending this tax giveaway.
For the many Oregonians who hoped to see our state finally make a serious investment in our schools and essential services, this legislative session is coming to a bitter end. Instead of seeing a game-changing revenue package, Oregonians are left with insufficient revenue, an inadequately funded education system, and painful cuts to essential services for the most vulnerable in society.
While scaling back the suits and scrubs tax giveaway won’t deliver game-changing revenue, it would, in small but important ways, mitigate the pain many Oregonians who rely on essential services will feel. It doesn’t require a supermajority, as a tax reform package would have.
The Senate majority needs to get on with it and cut the suits and scrubs giveaway and enact HB 2060.
This post was originally published on www.blueoregon.com on June 29, 2017. The original post can be found at http://www.blueoregon.com/2017/06/pass-through-income-tax-break-suits-and-scrubs-giveaway/.