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House passes bill blocking state deduction for business owners

The measure faces a potential Constitutional challenge and an initiative petition from the Oregon Small Business Association.

CAPITAL BUREAU - The Oregon House on Friday narrowly passed a Senate bill aimed at blunting the impact of federal tax reforms on state coffers. It faces a possible Constitutional challenge and is the target of a potential initiative petition.SALEM — After significant debate, the Oregon House Friday narrowly passed a measure aimed at blunting the impact of federal tax reforms on state coffers.

Though the bill now goes to the governor for her signature, it faces a potential Constitutional challenge and an initiative petition from the Oregon Small Business Association.

Oregon's income tax code is largely based on the federal code. Tax deductions created by federal tax law are available on state tax returns unless those provisions are specifically disconnected from Oregon law.

Senate Bill 1528 disconnects Oregon law from a federal deduction for owners of so-called "pass-through" businesses, whose business income "passes through" to be claimed on their personal income taxes.

Federal reforms passed in December will allow owners of those businesses — such as sole proprietorships, partnerships, LLCs and S-corporations — to deduct up to 20 percent of their income from their 2018 tax return.

The bill eliminates that deduction from Oregon income taxes, and is expected to result in $244 million more in tax dollars in the current two-year budget than if Oregon allowed the new deduction on state income taxes.

A Republican lawmaker in the state senate, Sen. Brian Boquist of Dallas, has raised questions about the constitutionality of the process used to pass the measure, which passed the Senate Feb. 23.

Boquist argues that the bill qualifies under the Oregon Constitution as a bill for "raising revenue." If so, it should have originated in the House of Representatives and required a three-fifths majority in each chamber to pass.

Boquist has also raised a question about whether Oregon's unusual "kicker" law would be triggered by the additional revenue from the bill.

The "kicker" requires that if actual personal income tax revenues exceed the amount predicted at the close of the long legislative session by 2 percent, then taxpayers get back the difference.

The passage of SB 1528 "would take us close but not quite over that threshold," state economist Josh Lehner wrote in an email to Boquist last month. The email was shared by Boquist with the EO/Pamplin Capital Bureau last week. "It would effectively eliminate any wiggle room in terms of forecast accuracy and the kicker."

That determination, though, wouldn't officially be made until September 2019, after the close of the two-year budget cycle, and after other new laws passed in the short session have been incorporated into the revenue projections.

The bill passed, 32-28.

Three House Democrats voted against the bill Friday, but the rest of the caucus has framed the bill as a way to prevent a revenue loss by not instituting a giveaway to the wealthy. They say that 61 percent of the deduction's benefit would go to taxpayers who are in the top 5 percent of income earners.

"I support (the bill) because it will allow us to protect those critical investments in Oregon schools, health care and other critical services for families and communities across the state," said State Rep. Pam Marsh, D-Ashland, who said she wanted the legislature to move forward on meaningful tax reforms next year, when legislators convene for a long session, during the floor debate over the bill. "...But to simply accept what the federal government has handed to us without consideration of the impact that an additional tax change for business would have on the kids in Oregon schools or seniors who are counting on critical services would be a huge mistake."

Oregon's chapter of the National Federation of Independent Business called on Gov. Kate Brown to veto the bill.

"...These sole proprietorships, partnerships, LLCs and S-corps are losing out on tax savings that they would otherwise have to invest in their businesses and their employees," the group said in a statement after the vote.

A spokesman for Brown said in a text message Friday that "as with any other bill, the Governor's Office will review the legislation for legal sufficiency before the Governor considers signing."

And on Thursday, in what it said was a direct response to the legislation, the state's Small Business Association filed an initiative petition called the "Tax Parity Initiative."

The association wants to require that all "tax rates, calculations and loopholes afforded to the largest publicly-traded companies" be available to small and family-owned businesses.

However, should it get the required number of voter signatures, the measure would not be on the ballot until November 2020.