In This Issue
By Chris Vogel, Revenue and Tax Reform
The Joint Interim Committee On Sole Proprietors will meet on 5/16/2018 1:00 PM, HR A to hear testimony from The Honorable Kate Brown, Governor of Oregon and to accept Public Testimony on LC 1. A special session of the legislative assembly will convene May 21, 2018 at 8 a.m. Please know that interim committees cannot introduce bills to the special session. The only committee that will hear legislation for the special session is the Joint Committee on Sole Proprietors. Its work will be limited to two bills: the Governor’s proposal LC 1 and the sine die resolution (LC 2).
Governor Brown has called on the legislature to hold a special session to address the fact that Oregon’s current reduced tax rates for pass-through businesses exclude sole proprietors. (Pass-through businesses file their profits and losses on their individual tax returns—passing through those amounts to that return.) This evolved from discussion of SB 1528 disconnecting from the new federal Business Pass Through created as part of the December 2017 Congressional action where profits from all pass-throughs are reduced for the first 20% of revenue. This new federal tax break is not affected by any changes to Oregon’s tax system, but if SB 1528 had not disconnected Oregon’s system from this generous federal tax benefit the impact on Oregon’s revenues would have required budget reductions for basic services and education. All eligible pass-through businesses will still be able to take advantage of the federal benefit on their federal tax returns. The Governor received pressure from business entities to veto the bill. (LWVOR supported SB 1528.) The Legislative Revenue Office estimated the benefits would go primarily to high income business owners if Oregon did not disconnect from this section of the federal tax code. Tax benefits would have flowed 61% to the top 5% of Oregon tax payers, but only 16% to the bottom 80% of earners. The LRO also estimated that, without passage of SB 1528, the current state budget would need to be reduced by about $240 million and up to a billion in future biennia. The Governor’s current proposal would reduce it by about $9 million.
LWVOR Action supports, in concept, Governor Brown’s proposal to address a tax inequity for the smallest of Oregon’s sole proprietors since they were not covered by an earlier Oregon 2013 bill giving tax breaks to some other pass-through businesses.
As always, the League will weigh in on the actual bill language and amendments during prior work sessions when a special pre-session legislative committee crafts the bill. The “one day” nature of this session means that the Legislature will not convene until agreement and votes are evident for passage. Much work will take place prior to that session, there is discussion of a pre-session public meeting.
LWV Positions on tax and revenue fiscal policy say in evaluating specific tax preferences, the following criteria should apply: whether the tax preference promotes equity and progressivity; and whether the revenue loss from the tax preference is justifiable. The League of Women Voters of Oregon believes any tax proposal should be evaluated with regard to its effect on the entire tax structure and the tax system should recognize responsibility for government services by providing for broad sharing of the tax burden.
We have been working with coalition partners that have agreed to principles very similar to the above League Positions. Those principles address these three areas:
- Fairness: The current structure is unfair, it gives owners of S-corporations, partnerships, and LLCs a tax advantage over sole proprietors.
- Revenue neutrality: Extending this tax break to sole proprietors will pull money out of Oregon’s essential services, such as schools, affordable housing, and senior services. These services benefiting all Oregonians are already underfunded. At a minimum, any action during the special session should not substantially reduce revenues available to fund public services in the current or future budget periods.
- Progressivity: Improving Oregon’s reduced tax rate on pass-through business profits should be done in a progressive manner. In the 2016 tax year, Oregonians making over half-a-million dollars a year captured 69 percent of the benefits from this tax break. We would prefer that any extension of the reduced tax rate on pass-through business profits to sole proprietors be paid for by reducing this tax break for the highest-earning business owners.
If the legislature chooses to expand the tax break to certain sole proprietors, the expansion should be revenue neutral. The best way to pay for extending the tax break to sole proprietors would be to scale back the entire tax break for higher-earning business owners. More than two-thirds of the benefits of the existing tax break are flowing to people making more than half-a-million dollars a year. The legislature could pay for extending the tax break to low-income sole proprietors by recovering the revenue from the most profitable business owners.
The State of Oregon has insufficient income to support its current responsibilities in education, human services, the environment, the criminal justice system, and health care without significant tax reform resulting in stable increases in Oregon’s revenue. League will continue to advocate for more comprehensive tax reform in the 2019 session, as we have since Measure 5 in 1990 changed property tax laws. The modest change in Oregon’s tax law proposed by the Governor, in this special session, should not prevent this broader discussion around equity, progressivity and adequacy of our tax system.
We invite LWVOR members and others to contact your individual legislators with this message: Support the tax break for sole proprietors with at least one employee; keep the tax break revenue neutral by reducing the tax break for higher earning pass-through businesses.
LWVOR will be submitting testimony.
If you have questions or want to help with LWVOR efforts to prepare for the 2019 session bills on tax reform, fiscal policy, and revenue contact Chris Vogel, firstname.lastname@example.org