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Some question necessity of special session

Brown says she wants to help small businesses, but critics contend session has more to do with politics than policy.

JAIME VALDEZ/PORTLAND TRIBUNE - The 2018 Oregon Legislative Assembly at the Oregon State Capitol in Salem.  Gov. Brown says she wants to help small businesses, but critics contend her call for a special session has more to do with politics than policy.SALEM — Some observers say Gov. Kate Brown's call for a special legislative session has more to do with politics than making the Oregon tax code more equitable.

Brown, a Democrat running for reelection this year, said Friday she'll call a special session sometime before the end of June to extend to owners of sole proprietorships the special tax rates passed in 2013 for owners of other small businesses.

At the same time, she announced she'd sign Senate Bill 1528, a bill that prevents owners of certain businesses — sole proprietorships, LLCs, partnerships and S-corporations — whose business income "passes through" to their personal income taxes from taking a new federal tax deduction on their state taxes.

Supporters say that bill was necessary to plug a budget hole caused by federal tax reform. It's critics call the measure a $244 million tax hike.

Brown said it's not fair to give another break to LLCs, partnerships and S-corporations when sole proprietorships can't get the favorable tax rates passed by the state in 2013.

But Sen. Brian Boquist, R-Dallas, sees the special session as a political gambit.

"This is about politics not policy," Boquist wrote in an email to the EO/Pamplin Capital Bureau on Monday.

The lower tax rates were initially engineered in 2013 during a special session as part of a package referred to as the "Grand Bargain."

"Sole proprietors were kept out of the 2013 special session bill as the Democrats did not want to lose anymore revenue by adding them into the state (pass-through entity) law," Boquist wrote. "Since I was in the room, I know this as fact. Now after raising taxes $244 million this biennium, and placing the funds in the ending balance, they want to be able to campaign on 'tax cuts.'"

Boquist also says the Legislature could wait until the 2019 regular session to extend the lower rates to sole proprietorships. That would still allow those business owners to opt in to the rates for the 2018 tax year, Boquist says.

After efforts to make broader changes to the state's corporate tax system stalled last session, Democrats are poised to try for a broader revenue overhaul again in the 2019 session. Adding the sole proprietorship provision into the mix could complicate that agenda.

State Sen. Mark Hass, D-Beaverton, chairman of the Senate Finance and Revenue Committee, said he supports the governor's efforts.

In fact, the provision was initially a component of SB 1528, Hass said.

"It didn't seem to move them (Republicans)," Hass said Monday. "They just wanted to connect to the federal tax bill and didn't care what other things we did."

But Hass said that the top priority was to disconnect from the federal pass-through deduction, which was part of the Tax Cuts and Jobs Act signed into law by the President in December.

"(Senate President) Peter Courtney and I decided, let's just get the clean bill through and not try to save the world," Hass said.

Boquist maintains relatively few sole proprietorships would benefit from the proposed change.

The Legislative Revenue Office is working to figure out just how many Oregon taxpayers could be affected by that tweak to the state tax code.

Early estimates suggest there are about 250,000 sole proprietorships in Oregon, said Legislative Revenue Officer Chris Allanach.

It's not clear how many meet the qualifications for the lower tax rates, though, Allanach said.

In order to qualify an owner or partner of a pass-through business has to make "active" income, such as tangible sales, rather than "passive" income such as rental property, and employ at least one non-owner person who works 1,200 hours a year.

Jim Moore, director of the Tom McCall Center for Policy Innovation, noted that the budget doesn't require the immediate attention of a special session, which have been called in the past when the state has faced recessions or severe dips in revenues.

"This is not a special session that is really required because of the budget," Moore said. "This is clearly a special session that is more for political reasons."

The Governor's Office did not comment on the contention that the special session was a campaign or politically-oriented move.

The state's constitution doesn't allow the governor to limit the topic of a special session.

Historically, successful special sessions have stayed in their lane, and also benefit from plenty of advance planning, Moore said.

"Absolutely, they can do more than one topic," Moore said. "So it's up to the leadership of the Legislature to make sure they stay on track."