The Takeaway

Oregon lawmakers are two months into their five-month session and still without a clear issue anchoring the session’s politics. Countless topics are claiming the legislature’s attention in the building, such as unemployment insurance for striking union workers and liability protections for recreational businesses and utilities. It is almost as if there is a new topic “flooding the zone” of the building’s politics on a weekly, if not daily, basis that is far more emblematic of national politics than anyone would like to admit. However, the legislature is without a feature issue that is normally common during its long sessions.

Although state budget-writing always plays an outsize role during the long session, it is usually on a parallel track with the legislature’s policy priorities — this session, however, the state budget seems to be the only major game in town. On Thursday, the Co-Chairs of the Ways & Means Committee released their budget framework, a starting point for lawmakers to hash out $39 billion in state spending over the next biennium. Unlike any other session, the amount of money the state can spend over the course of the budget timeline is being called into question as federal spending, monetary, and trade policy create uncertainty for the state economy.

While Democrats have supermajorities in both legislative chambers, tax policy and controversy have been slow to materialize this session — at least in a way that is easily digestible in news bites or social media posts. That should not be mistaken for a slow or even simple state of tax politics, with the session’s first major tax debate slated for Monday.

Democrats Press Delinking State from Federal Income Tax

Like all other states with an income tax, Oregon’s tax is closely linked to federal income tax law. Since 1997, the starting point for Oregon’s income tax return is the amount reported to the federal government as taxable income. This “connection” greatly simplifies the amount of work taxpayers and practitioners must do to file and pay their taxes because they can rely on federal tax forms, rules, and audits. Without it, the state would need to effectively administer its own income tax from scratch, leading to confusion for taxpayers as well as administrative and cash flow issues for the state. California, which uses a similar link between state and federal income taxes, still relies on federal tax law as it was printed in 2015 — and is notoriously difficult for taxpayers to navigate.

Oregon’s rolling (automatic) connection to federal income tax law quietly delivered a massive windfall to state revenues in recent years. Although the Tax Cuts & Jobs Act of 2017 is most known for lowering federal income tax rates, Congress also created new taxes and curtailed many deductions to meet its budget target. Since Oregon relies on federal tax law, these limitations flowed directly into the state’s tax base, increasing revenues without any adjustments to the rates.

Now, however, the state legislature is advancing a measure that would delink the state from any tax code changes in the next year. HB 2092 would replace Oregon’s rolling conformity with static (point-in-time) conformity for the taxes people and businesses will pay next year. Democrats and the state’s public employee unions pushing the measure cite uncertainty over federal spending and potential congressional tax law changes as the reason for the need for splitting the state away from its connection to federal tax law. More importantly, they are concerned that if Congress fails to reach an agreement on another tax bill, Oregon would see its revenues sharply decline. If the legislature disconnects the state from federal tax law, it will enshrine those 2017 tax increases into state law, regardless of federal action.

According to the Legislative Revenue Office, the Tax Cuts & Jobs Act contained 115 provisions interacting with Oregon’s income tax. Yet, despite efforts by Republicans on the House Revenue Committee, the legislature has yet to entertain a discussion about the policy and practical ramifications of delinking the state from federal tax law. This year’s process is unlike the traditional deliberations of the legislature’s tax-writing committees, which often dwell into the nitty-gritty details of tax systems — something only the brave or exceptionally nerdy volunteer themselves to endure.

Let’s pause for a minute. If it is only for a single year, why all the fuss? Although Oregon received a windfall from the Tax Cuts & Jobs Act, it was not without some political pains. As part of that federal law, Congress created a new policy allowing owners of pass-through businesses, such as s-corporations and partnerships, to deduct 20 percent of qualifying income from a trade or business. In 2018, the legislature acted to disconnect from that one provision, denying a state tax benefit for those businesses. Democrats were criticized for voting to effectively raise taxes on small businesses, sparking a broader skepticism toward the rolling connection that has persisted in efforts to unravel it.

If Oregon breaks its connection to federal tax law, even on a temporary basis, and Congress passes a new tax law, it fundamentally reshapes the political discourse around the state income tax. Instead of deciding which federal tax provisions the state would reject, the legislature would likely consider extending the break from federal tax law, only picking up provisions raising revenue. While the current discourse is over a “temporary” pause, the policy seems highly unlikely to remain that way.

Last Thursday, the House Revenue Committee passed the bill delinking the state from the federal tax code on a party-line vote. It is currently slated for a vote on the House floor on Monday morning. 

Legislature Reaches First Mile Marker 

Today marks the first major deadline of the session — the chamber of origin scheduling deadline. By the end of the day, policy committees must schedule work sessions (votes) on bills in their first chamber and advance them before April 9 — or otherwise set them aside for the session. The deadline does not apply to the budget, revenue, rules, or special committees, which will start receiving bills not ready for primetime. Oregon lawmakers introduced more measures than any other session; so, in some ways, the deadline marks the first opportunity to shrink the long list of bills considered for the session. Surely, there will be no shortage of contested issues in the weeks and months to come. If this session has a defining issue, it has yet to emerge.