Oregon Dems propose partial split from federal tax code, preserving $291 million for state

To prevent the state’s budget from hemorrhaging nearly $1 billion in revenue under federal tax changes during the next two years, Oregon Democrats in the state Legislature are proposing a strategy to selectively disconnect parts of the state’s tax code from its full, automatic connection to the federal code.

The proposal, Senate Bill 1507, would disconnect Oregon’s state tax code from three of the 115 federal tax code changes that Congressional Republicans passed last summer in their tax and spending cut megalaw. Oregon is one of a handful of states that automatically ties its state tax code to the federal tax code when it changes, rather than selectively connecting to changes later.

The Democratic plan also includes new state-level tax credits for businesses that boost in-state hiring, and for low- and moderate-income Oregonians. The plan would preserve a net $291 million in tax revenue for the state during the next 18 months that would otherwise have gone uncollected under the federal changes.

Democratic chairs of the state House and Senate Revenue committees — Rep. Nancy Nathanson, of Eugene, and Sen. Anthony Broadman, of Bend — characterized the strategy Monday as closing tax loopholes that would disproportionately benefit wealthy Oregonians and corporations at the expense of public services and everyday residents.

“I think both Chair Nathanson and I believe that this is a plan that focuses both on affordability — working to preserve the services that Oregonians rely on: healthcare, education, public safety — and then, in a moment of scarcity in our country, of scarcity in our state given the impacts of the federal government on our budget, this is an opportunity to invest in Oregonians living more safe and more affordable lives,” Broadman said.

The plan is likely to go over poorly with state Republicans, who have called on their colleagues to keep the federal tax changes and instead focus on reducing spending.

It doesn’t go as far as many of the state’s largest unions would have liked. A coalition of unions ramped up an ad and pressure campaign on moderate Democrats in the lead-up to the session, hoping to get them to completely disconnect state tax code from the federal tax code and to selectively reconnect.

Selective cuts

Federal tax code changes leave Oregon’s state budget with $888 million less than anticipated over the next 18 months, according to the state’s chief economist and the Legislative Revenue Office. The bulk of that is from new federal changes that end income taxes on overtime pay and tips, and that allow individuals and businesses to immediately deduct from their taxes 100% of the cost of “depreciating assets,” such as real estate and equipment, as well as research and development costs.

The income tax cuts on overtime and tips, research and development and business properties as depreciating assets would stay under the Democratic proposal. But businesses would not be allowed to take the premium deduction on the purchase of new equipment, helping the state keep about $267 million in tax revenue it would otherwise have gone without during the next 18 months, the revenue chairs said.

Oregon’s tax code under the plan would also disallow a new federal deduction for auto loan interest, preserving $36 million in state revenue, and it would disconnect the state from the “Qualified Small Business Stock Exemption,” which would preserve about $39 million in tax revenue for the state.

The stock exemption is meant to encourage investment in smaller, sometimes riskier startup businesses, by allowing individuals to avoid paying capital gains taxes on the sale of qualified small business corporation stocks, which are different from publicly traded stocks.

But, Broadman said, though it’s framed as helping small businesses, there are large corporations benefiting and investors avoiding taxes on tens of millions of dollars in passive earnings. He said it is part of the Republican changes to the federal tax code that many other states have disconnected from, including California, Pennsylvania and Alabama.

Combined, if Oregon disconnects from the three federal provisions, the state could claw back about $342 million in tax revenue that it would otherwise not be able to collect during the next 18 months.

New incentives

The bill would direct $25 million of the preserved tax revenue to a new state tax credit for businesses that create new jobs in Oregon, as long as they pay above minimum wage. The credit would grow if those businesses show they’ve also retained new employees.

Another $26 million of preserved revenue would go to boosting the Earned Income Tax Credit for low- and moderate-income Oregonians by 5 percentage points, allowing individuals and households to claim a credit for up to 17% of their earnings depending on income and family size if they make less than $68,675.

More than 212,000 taxpayers in Oregon qualified for the earned income tax credit in 2023 — about 11% of all taxpayers — according to the state’s most recent data, receiving an average of $222 each.

Growing calls to end completely the state’s automatic connection and instead selectively connect, as most states do, is not on the table this session, Nathanson said, but is something lawmakers could take up during the long, six-month session in 2027.

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