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May 2018

Reduced Tax Rates for Pass-Through Businesses Should Be Eliminated – Any Expansion Must Be Paid For

by Daniel Hauser

Co-Chairs Kotek and Courtney, Vice-Chairs, members of the Committee:

My name is Daniel Hauser, tax policy analyst for the Oregon Center for Public Policy, and I respectfully submit this testimony on LC 1.

The Governor was right to call on the legislature to fix an inequity in the existing reduced tax rates for pass-through business owners – but this bill is targeting the wrong inequity. The most egregious inequity in this tax scheme is that it creates two sets of tax rates in Oregon: lower tax rates on the profits for certain business owners, and higher tax rates for wage-earners and everyone else.

The reduced tax rates for owners of pass-through businesses shift a hundred million dollars each year away from important public services, like our schools or affordable housing, and sends the vast majority of it to high-income business owners. Oregon’s working families and the services they rely on should be higher priorities than these already very profitable business owners. You all, and your colleagues in the House and Senate, have a wonderful opportunity to eliminate this policy and the serious inequity embedded in it.

Governor Brown, however, emphasized a different inequity — that sole proprietors are excluded from the benefit of these reduced rates. It is inadvisable to provide a tax benefit to one type of pass-through business and not another, and the Governor was right to call this an inequity. However, if you choose to only address this issue, and not the more fundamental problem, you should do so guided by these two policy principles:

  • Revenue neutrality: The legislature should not further cut funding for education, affordable housing, senior services, or any number of other public services to extend this tax scheme. By extending these reduced tax rates without some way of paying for it, you would be making it clear to Oregonians that profitable business owners are a higher priority than the schools their children attend – or the services their parents need.

  • Progressivity: The best way to pay for expanding these reduced tax rates is to make this policy more progressive, to ask more from the Oregonians with the most. The existing policy has reduced rates all the way up to $5 million in annual profits. Therefore, it should surprise no one that the policy sends 69 percent of the benefits to business owners with incomes over half-a-million dollars each year, and the extension to sole proprietors would also disproportionately help high-income Oregonians. The thoughtful way to pay for the expansion to sole proprietors would be to bring those rates down to the point where they cover that cost.
LC 1 should be amended to adhere to these principles and include a sunset. By putting an expiration date on this policy, it would prompt the legislature to assess the effectiveness of this costly tax break every few years, a common provision for many other tax policies. In closing, I urge this committee to end the entire tax scheme and restore fairness between workers and business owners. If this is not an option – at least ensure any policy expansion to include sole proprietors be paid for in a progressive manner.
Posted in State tax, Taxes.

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