Lawmakers will discuss their options for divorcing state tax policy from federal tax policy at a meeting of the Legislature in Salem at the end of September. (Photo by Julia Shumway/Oregon Capital Chronicle)
Oregon lawmakers have just a few months to decide if they’ll let state tax policy automatically couple with federal tax cuts passed in the July GOP megalaw that could reduce the state income tax burden on Oregonians and businesses but leave the state government without hundreds of millions of dollars in revenue for public services.
Democrats say they are discussing their options for temporarily or partially suspending the state’s “rolling reconnect” policy that has, since 1997, automatically rolled federal changes to income tax code into state income tax policy.
According to the state’s chief economist and the Legislative Revenue Office, if the Legislature does not decouple from federal tax changes by the end of the year, the state will miss out on roughly $400 million next year. That number would more than double to $888 million for the next two years if the Legislature does nothing.
The biggest revenue losses would come from new federal changes ending income taxes on overtime pay and tips and allowing individuals and businesses to immediately deduct from their taxes 100% of the cost of “depreciating assets,” such as real estate and equipment.
State Sen. Mark Meek, D-Gladstone, who chairs the Senate Committee on Finance and Revenue, said lawmakers will discuss their options during Legislative Days from Sept. 29 to Oct. 1. That’s when legislative committees meet at the Capitol in Salem every few weeks outside of scheduled legislative sessions for informational hearings on issues.
Their options include calling a special session before year’s end to convene the Legislature and deal with the issue immediately or waiting until the Legislature meets in February, which will come with costs. The governor generally calls special sessions, but the Legislature can call itself into a special session with written requests from the majority of members of both chambers – or at least 31 representatives and 16 senators.
“We’re going to be looking at and discussing the merits of a special session, if we have the votes to do a disconnect, and then also the repercussions or ramifications that could be caused by them, both positive and negative,” Meek said.
Waiting until February could ‘be too late,’ economist warns
If the Legislature waits to pass a bill disconnecting from the federal tax code in February rather than in the next couple months, it would be too late to spare revenue losses from 2025, according to Legislative Research Officer Chris Allanach. Most of the new GOP tax cuts went into effect immediately.
“Any disconnect enacted in February can’t become law until early June (91 days after sine die), which is past the filing deadline for 2025 returns,” Allanach wrote in an email. “Without making significant changes to the filing process, I’m not sure how that would work. That said, disconnecting for tax years 2026 and later are administratively feasible.”
A bill proposed earlier this year by Rep. Nancy Nathanson, D-Eugene, would have preemptively split Oregon from federal tax code changes before the federal law passed. But it ultimately died in Meek’s Senate committee after it passed the House on party lines because there were not enough votes in the Senate to pass it at the time, Meek said.
Future votes on a suspension from rolling reconnect would be unlikely to come from Republicans, according to House Minority Leader Christine Drazan, R-Canby, who said in a statement that decoupling the state from rolling reconnect would block tax cuts that benefit Oregonians and businesses.
“Oregon is becoming less affordable for families struggling with the rising cost of housing, gas, groceries, utilities and taxes.” she wrote. “Meanwhile, small businesses continue to close their doors.”
Gov. Tina Kotek is “analyzing the recent revenue forecast and will discuss next steps with legislative leaders,” according to press secretary Roxy Mayer. The Legislature is in the midst of a winding and messy special session to deal with transportation funding, during which many business owners and everyday Oregonians have raised concerns about tax increases and the cost of living.
Previous disconnect faced shorter timeline
If the Legislature votes to untangle Oregon’s state tax code from the federal changes, it would not be the first time.
Following the passage of Trump’s 2017 Tax Cuts and Jobs Act, Oregon lawmakers voted to disconnect the state’s tax law from some of the newly enacted federal changes to save the state from losing more than $258 million in revenue.
They didn’t disconnect the state from the full tax changes, but from deductions on qualified business income. No special session was needed because the decision to begin the disconnect happened in February 2018, two months after the federal tax cuts passed and before they were officially enacted, according to Allanach.
Meek said some provisions in the latest GOP tax law, such as ending income taxes on tips and overtime, might be too popular for lawmakers to give up at the state level.
“I think it’s going to be difficult. We have a lot of workers that would lose those benefits. While they’ll get the federal benefit, they won’t receive the state benefit for no tax on tips, and no tax on overtime,” he said. “We have to figure out what the temperature is.”
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