Already suffering from the ills brought on by the coronavirus pandemic, Oregonians could soon endure rounds of teacher layoffs, diminished resources to fight wildfires, and fewer resources to protect foster children and vulnerable seniors. There is a serious risk of these and other harms coming to pass, as the state grapples with deep revenue shortfalls caused by the coronavirus economic crisis. In the blink of an eye, $1.9 billion vanished from the state budget (the Oregon General Fund). Even bigger revenue shortfalls are projected for the next two budget periods.
Oregon’s troubles are far from unique; every state faces a similar challenge. Congress has the power to prevent fiscal crises from erupting all across the nation, but so far, the Senate appears content to sit idle and watch the disaster unfold.
If Congress leaves states to fend for themselves, it’s imperative to minimize the damage to Oregonians. Protecting essential services, especially those that support the most vulnerable, is the right thing to do. It is also the right strategy for stabilizing the state economy. One of the lessons of the Great Recession is that state spending cuts prolong an economic downturn.
Instead of balancing the budget by cutting services all Oregonians depend on, lawmakers should cut spending on the rich and corporations. At a time of extreme income inequality, the state is subsidizing the rich and corporations through the tax code. The money flows through the many tax credits, deductions, and subtractions that corporate lobbyists get paid to procure. The official name for these subsidies is “tax expenditures,” reflecting that they are a form of spending that takes place through the tax code.
The following are tax expenditures that primarily benefit the richest Oregonians and corporations, including a crop of brand new tax breaks that exacerbate Oregon’s revenue shortfall. These should be first in line for cuts, long before the legislature considers reducing funding for services that create opportunity and improve the quality of life for all Oregonians.
[Note: the savings figures below are rough estimates for the second half of the 2019-21 biennium and are intended to give a sense of scale. Some of them overlap and the total savings should not be simply added together.]
Reject the batch of new tax breaks created by Congress, including the giveaway to millionaires (savings: $225 million)
In late March, Congress passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act — vital legislation that also included new tax loopholes that weaken Oregon’s revenue collections at the worst possible time. Oregon mostly connects to the federal tax code, so tax changes made by Congress can become part of Oregon law automatically. It takes an affirmative vote of the Oregon legislature to “disconnect” from such tax breaks.
Several of the tax changes in the CARES Act subsidize rich business owners and corporations under the guise of the coronavirus emergency. The provision that has drawn the most attention is one that results in 82 percent of the tax benefits going to business owners making $1 million or more, many of whom are real estate developers and hedge fund managers. This loophole removes any limit on the ability of owners of “pass-through” businesses (businesses not subject to the corporate income tax) to offset business losses against non-business income, such as salary or investment income. These losses often exist only on paper, not in the real world. Prior to this change, a married couple could offset no more than $500,000 in nonbusiness income and a single filer could offset no more than $250,000. Eliminating these limits exclusively benefits the rich.
In addition to this giveaway to millionaires, two other tax changes in the CARES Act give businesses more opportunities to game the tax system. The first of these loosens the rules by which businesses can deduct operating losses incurred one year against profits made in prior years. The change, in part, allows corporations to use “losses” incurred in 2018 and 2019 to retroactively shrink their tax bills as far back as 2013 — an indication that this provision has little to do with shoring up businesses struggling right now under the coronavirus crisis. The second provision gives businesses greater flexibility to deduct interest owed on their loans. In effect, it incentivizes businesses to shrink their tax bill by taking on more debt.
These three tax loopholes created by Congress will cost Oregon $225 million in the current budget period. They exacerbate the revenue shortfall, putting at greater risk the public services that all Oregonians depend on.
Eliminate the preferential tax rates for rich business owners (savings: about $150 million)
Back in 2013, the Oregon legislature established a special tax break benefiting certain business owners — business owners who are also, by-and-large, very rich. This policy gives some owners of pass-through businesses (partnerships and limited liability companies, for example) a lower tax rate on their profits than they would otherwise pay. About 70 percent of the tax benefits go to business owners making more than half-a-million dollars a year. This tax break can result in business owners paying a lower tax rate than their employees, establishing a structural inequity in Oregon’s tax system.
The preferential tax rate for business owners is costing the state about $150 million per year.
Eliminate “Opportunity Zones,” a tax break for wealthy investors (savings: $8 million)
Congress created the so-called “Opportunity Zones” tax break as part of the massive 2017 tax overhaul, a law heavily tilted in favor of the rich and corporations. “Opportunity Zones” are tax cuts for capital gains income — the profits from selling stocks, real estate, and other such assets. To benefit, investors shift previously-earned capital gains income into “Opportunity Funds,” which are then invested in places designated as “Opportunity Zones.” This allows investors to shrink their tax bill on capital gains income. Because capital gains income mostly accrues to the rich, it is they who are the big winners of this tax break.
“Opportunity Zones” is another tax break foisted on Oregon by Congress. A bill that would have pared back this tax break died when a walkout by Republicans prematurely ended the 2020 Oregon legislative session.
There is not yet a robust estimate of how much revenue the state would forego to Opportunity Zones, as the impact will last for many years into the future and the cost will depend on how heavily investors take advantage of this “domestic tax haven.”. The Oregon Department of Revenue estimates that the cost in the current, two-year budget period is $16 million. However, the tab for the most expensive part of this subsidy won’t arrive until several years from now.
Phase out the housing subsidy for well-off homeowners (savings: $70 million)
The mortgage interest deduction is, by far, Oregon’s largest housing subsidy and it mainly benefits well-off homeowners. In the midst of a housing crisis made worse by the coronavirus economic crash, this tax deduction is structured to give the most help to those with higher incomes and bigger mortgages (i.e., more expensive homes).
The mortgage interest deduction is also a key driver of the racial wealth gap. By definition, the deduction offers no help to renters, who are disproportionately low income and people of color. The lower homeownership rates among people of color is no accident, but rather the legacy of racist public policies that promoted white homeownership while excluding people of color, as well as present-day discriminatory practices.
Oregon could eliminate much of the inequity and waste associated with this policy simply by phasing out the deduction for the richest 5 percent of homeowners and by no longer subsidizing vacation homes. This would yield about $160 million in savings in the next budget period. These funds could help ensure Oregonians stay housed in these difficult times, and could increase access to safe and stable housing in the long-term.
Limit itemized deductions (savings: at least $140 million)
The advantage of being able to itemize tax deductions, as opposed to using the standard deduction available to everyone, mainly accrues to higher-income taxpayers. Itemized deductions reflect the cost of transactions and behaviors specific to the taxpayer — the payment of interest on a mortgage, medical expenses, and charitable giving, for instance. By itemizing tax deductions, taxpayers have the potential to shrink their tax bill by more than they would if they took the standard deduction. Less than half of taxpayers itemize their deductions on their Oregon income taxes. In 2017, nearly every member of Oregon’s top 1 percent used itemized deductions, with an average deduction of more than $90,000. At the same time, only one in three middle-income Oregonians itemized their deductions, for an average deduction of $11,000. By contrast, married taxpayers who filed jointly that year and took the standard deduction were able to deduct $4,350.
If Oregon were to limit itemized deductions to $50,000 for single or joint filers, it would save about $140 million in 2021 alone. But lawmakers should go further and cap itemized deductions at even lower levels. Setting the limit at $20,000, for example, would still leave the vast majority of taxpayers unaffected, while bringing in substantially more revenue to protect the services that all Oregonians depend on.
Eliminate the “like-kind” exchange tax loophole (savings: about $40 million)
Another artifact of Oregon’s connection to federal tax law is the ability of taxpayers to defer paying taxes on gains when they exchange one piece of real property for another similar property. This tax loophole goes by the name “like-kind exchanges.” For example, if a real estate developer bought a property for $100,000 twenty years ago and sells it today for $1 million, normally they would pay capital gains taxes on the $900,000 increase in the value of that property. However, if the developer exchanges the property for a different property also worth $1 million, they postpone paying the capital gains taxes. This contrasts sharply with the experience of working people, who have to pay taxes on income earned every year.
When this unlimited ability to keep trading properties without paying taxes is combined with other loopholes in the tax code, such as the ability of heirs to avoid paying taxes on the gains of property they inherit (called stepped-up basis), the result can be complete avoidance of taxes on millions in capital gains. Oregon is expected to lose nearly $85 million in the current budget period as a result of this policy.
Fairness and common sense should guide lawmakers on how to bring Oregon’s budget into balance during this time of crisis. Protecting services that help Oregonians survive and thrive must be priority number one. Instead of cutting spending on services Oregonians depend on, lawmakers should cut the spending lavished on the rich and corporations.