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Ditch the federal tax scheme — or blow a hole in Oregon’s budget

Blog post
February 15, 2018By Daniel Hauser

A crucial question facing Oregon lawmakers in the short legislative session is whether to sever ties with certain pieces of the mammoth tax package recently rushed through Congress. Unless Oregon lawmakers take action, the federal tax scheme will suck millions out of the Oregon state budget to pay for new giveaways to the rich and corporations.

By law, Oregon automatically adopts most changes to the federal definition of taxable income. If Congress changes that definition in a way that cuts taxes on special interests, as the federal tax scheme does, Oregon mirrors that policy, unless the Oregon legislature votes to disconnect from that provision.

The federal tax scheme has created significant uncertainty as to how all the provisions impact Oregon’s budget and taxes. Because Congress rushed through a dramatic reworking of the U.S. tax system, it will be years before all of the pieces, and Oregon’s connection to them, are fully understood.

While it will take time to fully sort things out, here are three clear steps Oregon lawmakers can take in the next few weeks to stop some of the worst provisions in the federal tax scheme:

Reject new tax deduction for pass-through income

The federal tax bill created a new and very complicated deduction for pass-through business income. That income is the profits passed through from certain types of businesses — S-corporations and partnerships, for example — to their owners, who pay the tax on that income on their personal income tax returns instead of corporate returns. Because pass-through income is concentrated at the top of the income ladder, the new deduction is in effect a tax cut for the rich. (Oregon, it should be noted, already gives its own tax break for pass-through income.)

This tax break is far too costly and poorly targeted to let it remain in Oregon’s tax structure. According to Oregon’s Legislative Revenue Office, the new federal deduction for pass-through income will cost Oregon between $182 million and $277 million in each of the next eight years. Here at the Center, we estimate that the highest-earning 5 percent of Oregon taxpayers will capture 69 percent of this benefit on their federal income taxes.

This is a costly giveaway, and Oregon needs to disconnect from this provision.

Status: Senate Bill 1528-A includes a provision that disconnects Oregon from this federal policy. As of February 15, the bill was in the Senate Finance committee.

Claim Oregon’s piece of corporate profits stashed offshore

Oregon lawmakers should take appropriate action to ensure that Oregon gets to tax its proper share of corporate profits that have been shielded in foreign countries for decades and are now being taxed. The federal tax scheme includes a substantial reworking of the U.S. system of taxing corporate profits worldwide. One of the things this new, complex tax regime does is to impose a one-time tax on past profits multinational corporations have been keeping in foreign countries.

Oregon will have to take action if it is to include these past multinational corporate profits in Oregon’s corporate tax base. Otherwise, these profits will never be taxed in Oregon.

Status: Senate Bill 1529-A has a provision that partially addresses the issue of repatriated corporate profits. On February 13, the Oregon Senate unanimously approved the bill; it now goes to the House.

Keep the Pease limitation

The new federal tax scheme opens the door for the very rich to lower their taxes by taking full advantage of itemized deductions. It does so by eliminating the Pease limitation, a provision in the federal tax code that reduces the scale of itemized deductions high-income Oregonians can take on their federal and state income taxes.

Oregon should keep a version of the Pease limitation to prevent yet one more giveaway to the very rich.

Status: No legislation has been proposed to address this problem.

The federal tax package is a travesty, mainly serving to pad the bank accounts of the well off. Oregon doesn’t need to go along with this scheme, at least when it comes to Oregon’s taxes. The Oregon legislature should immediately disconnect from bad provisions in the federal tax bill and take other steps to protect Oregonians.