SALEM, Ore. (AP) - After a three-hour debate that capped a contentious week in Salem, the Oregon House approved a partial repeal of a 2013 "Grand Bargain" business tax credit in a 31-28 vote with three Democrats joining Republicans' opposition.
House Bill 2060 may face a legal challenge, opponents say, if it passes its final hurdle in the Senate.
The measure passed by the House Friday would raise an extra $200 million for the 2017-19 biennium - an amount some lawmakers have been trying to cobble together for the record-$8.2 billion K-12 education budget that's up for a final vote Tuesday in the House.
That's less than half the extra revenue they could've raised, about $500 million, by boosting the existing corporate income tax.
News release from Oregon House Democrats:
House Votes to Rein in Runaway “Pass-Through” Tax Break
HB 2060 will ensure that the small business incentive is actually going to small businesses
After a lengthy debate, the Oregon House of Representatives voted to rein in the “pass-through” tax break that was originally meant to help boost small business job growth but is instead being claimed primarily by wealthy individuals, like lawyers and doctors.
After it became clear that the “pass-through” tax break would explode into the hundreds of millions of dollars, largely to the wealthy, legislators began looking at ways to reform the policy and save taxpayer dollars. House Bill 2060 puts in place new safeguards to ensure that the incentive is going to its intended purpose: Helping traded sector businesses that face stiff competition from out of state.
Background: In the whirlwind 2013 special session, legislators passed a tax break on “pass-through” income that was billed as a way to help small businesses create jobs. Owners of certain kinds of businesses can choose to receive this incentive, but there were no sideboards in place to make sure the tax break is achieving its purpose.
Under HB 2060, the pass-through tax break will be targeted to support businesses in the following sectors: agriculture, mining, manufacturing, wholesale trade, transportation and warehousing, information, and accommodation & food services. It will require businesses taking the tax break to employ at least 10 employees—encouraging job creation.
“The projections are that this tax break could end up costing $300 million soon—much more later—if left unchecked,” says Rep. Phil Barnhart (D-Eugene), chair of the House Revenue Committee. “We know from the research that much of this incentive is not going to the kinds of small businesses we intended to help. We should make smart, sensible reforms to this policy now, before it spirals out of control.”
Research by the nonpartisan Legislative Revenue Office revealed that the tax break is going almost entirely to the very rich:
· 72% of the money from the tax break is going to individuals who make more than $500,000 a year
· 94% of the benefit is going to individuals who make more than $200,000 per year
· Much of the benefit is going to industry sectors that include doctors, lawyers, and hedge fund managers
This special tax break is expected to cost the state $239 million in this biennium, with no assurances that even a single job will be created. By narrowing the incentive to targeted industries and businesses that are producing jobs, HB 2060 will cut this expenditure by $196 million.
“Oregonians expect efficiency and prudence in how we spend taxpayer dollars through the budgeting process,” says Rep. Rob Nosse (D-Portland). “They deserve the same level of efficiency in how we spend taxpayer dollars through tax breaks. HB 2060 will rein in this tax break and focus it on where it needs to go.”
HB 2060 passed 31-28 and now will be considered in the Senate.
News release from Oregon House Republican Office:
House Democrats adopt $667 million tax hike that will hit smallest of Oregon small businesses
Measure adopted with less than supermajority needed for revenue raising measures
Salem, Ore. - House Democrats today passed a $667 million tax increase that will be exclusively leveled on Oregon small businesses with fewer than 10 employees and those in certain industries. Proponents of the measure, relying on a controversial and yet-to-be court-tested legal theory, passed the tax increase without the supermajority support required by the Oregon Constitution to pass revenue raising bills. Several Democrats crossed party lines to join Republicans in opposing the bill.
“The Oregon Constitution is clear, a bill for raising revenue must pass each chamber of the Legislature with at least a supermajority of the membership voting yes,” said House Republican Leader Mike McLane (R-Powell Butte). “I find it deeply disturbing that House Democrats are willing to violate the letter and the spirit of the Constitution to raise $667 million in new taxes over the next six years on the backs of the smallest of Oregon small businesses. I challenge anyone who suggests HB 2060 A is not a tax increase to go talk to the employers who will see their tax bills dramatically increase if this bill is signed into law.”
HB 2060 A raises $667 million in new taxes over the next six years by increasing the tax rate paid by thousands of Oregon small businesses. Those small businesses currently pay a lower rate, which was approved by legislative leaders during the 2013 Special Session as part of the “Grand Bargain.” Legislative leaders agreed to the rate as part of a package of bills that included a tax increase for C-corporations, modifications to the senior medical deduction, GMO crop regulations and pension reforms. Though the pension reforms were eventually overturned by the Oregon Supreme Court, the other elements of the Grand Bargain have remained in place. The same four legislative leaders who negotiated the 2013 Grand Bargain are still in leadership positions today.
“The 2013 Grand Bargain showed that Republican and Democratic leaders could come together to solve difficult problems. The deal required all sides to make sacrifices, but we were willing to share that burden because we believed it was the right thing to do for the people of Oregon,” continued Rep. McLane. “HB 2060 A represents a stark betrayal of our work in 2013. Not only does it rollback a key element of the Grand Bargain, but it was also brought forward just this week and to the surprise of those who would be impacted the most by its passage.”
The $667 million tax hike comes just days after House Democrats passed a 1.5% tax on health insurance premiums, which will be paid by many of the same small businesses that would see their taxes increase under HB 2060 A.
“Oregonians want to see real, meaningful revenue and spending reform from their state government,” said Representative Mark Johnson (R-Hood River). “But HB 2060 A represents neither. It is nothing more than a desperate cash grab on the backs of the smallest of Oregon small businesses. This bill betrays months of bipartisan efforts to develop a long-term plan for providing budget stability.”
HB 2060 A passed the House on a 31-28 vote, with three Democrats joining Republicans in opposing the bill. The bill now heads to the Senate, where its fate is uncertain.
News release from the National Federation of Independent Business/Oregon:
Oregon House Passes 41-Percent Tax Increase on Small Business
House votes to dishonor tax compromise it made as part of ‘Grand Bargain’
SALEM, Ore., June 23, 2017—The Oregon House of Representatives voted 31-28 today to drastically restrict the number of small businesses eligible for the tax rates it agreed to during the 2013 special session as part of the so-called ‘Grand Bargain’ and which have only been in effect for two years.
“House Bill 2060 is a massive tax increase on Oregon small businesses,” said Anthony Smith, Oregon state director for the National Federation of Independent Business, the state’s and nation’s largest and leading small-business association. “A majority of small businesses paying at a rate of 7 percent today will see their rates increase to 9 percent or 9.9 percent under this bill. This could be up to a 41 percent tax increase for individual taxpayers and is projected to grab another $100 million per year from Oregon small businesses.”
The small business PTE (pass-through entity) tax rates were part of the ‘Grand Bargain’ from the 2013 special session. The package of bills passed during the special session included House Bill 3601, which among other provisions, increased the corporate tax rate from 6.6 percent to 7.6 percent on income between $1 million and $10 million and lowered rates (to between 7.0 percent and 9.9 percent) for taxpayers with business income meeting certain criteria with the policy objective being to provide a more favorable rate structure for business income earned by taxpayers who actively manage their own enterprises.
“The net effect 2013’s HB 3601 was an additional $189 million in revenue for the 2013-2015 biennium,” said Smith. “The tax increases went into effect immediately to balance the budget; however, the tax savings from the PTE tax rates did not take effect until tax year 2015.”
According to Smith, “Now after just two years of the Legislature honoring the compromises achieved in the Grand Bargain, HB 2060 seeks to restrict the future use of the PTE tax rates to businesses with 10 or more full-time employees – in each pay period for the entire year. Furthermore, only businesses in certain industry sectors will be able to keep their lower tax rates. Seventy percent of NFIB members in Oregon have fewer than 10 employees. It’s our members on the chopping block here.”
Under current law, only certain businesses structured as S-corporations or partnerships can use the PTE tax rates. “We should be talking about expanding this tax rate structure to include sole proprietors and all small, family businesses – not further restricting it by industry sector or employee count.”
HB 2060 now moves on to the Oregon Senate for consideration.