Oregonians understand the concept of a sneaker wave. It’s a wave that catches beachgoers by surprise. You’re walking along the shoreline, and, out of nowhere, the undercurrent of the wave pulls you out into the sea. If you’re lucky, you notice it’s coming and run back to shore. That was the case with Tuesday night’s election results.
For months, the conventional wisdom shared by both progressive and conservative insiders was that the election would be a red wave crashing Oregon’s liberal style of politics. Some in Democratic leadership spent the last several weeks contemplating a lame-duck special session to safeguard longtime environmental policies, anticipating the possibility of a Republican governor for the first time in 40 years. Meanwhile, Republicans were already talking about the committee gavels they would hold in their majority. At times, it seemed impossible for the election to be anything but a pendulum shift we haven’t seen in generations. Like the national election, however, those fears and dreams fell short. Democrats ran back to shore.
As of the most recent counts, Democrats appear likely to maintain control of all three branches of state government. On Thursday, former House Speaker Tina Kotek (D) declared victory in the state’s hotly contested gubernatorial race, with The Oregonian and Associated Press projecting her as the victor. Democrats held the line on their majorities in both chambers of the legislature and are waiting for the final vote counts to determine the composition of those majorities.
Republicans also had a significant victory on election night by breaking through the Democratic supermajority and ending their unfettered ability to raise tax rates. In the Senate, Republicans claimed at least one seat and possibly two, depending on final vote counts. While too many races remain too close to call in the House, Republicans also appear to have easily broken through the supermajority, despite some unexpectedly close races that both parties put in the Republican win column months ago. The Republican victories, while not as expansive as many expected, will fundamentally shape the course of our political debates in the next legislative session.
Oregonians also passed two ballot measures that will likely play a focal role in the 2023 session. Measure 113 amends the state constitution to prohibit lawmakers with ten or more unexcused absences from seeking reelection. Since “unexcused absences” are not defined in statute and, instead, left to the discretion of the presiding officers, there could be significant pressure on the legislature to statutorily define absences. Additionally, and equally as important, the legislature will need to negotiate and pass a bill implementing Measure 114, which establishes some of the strictest gun control laws in the country. These potent measures will be among the driving issues of the session.
Where does tax policy fall in this election and the next session?
For the first election cycle in years, Oregon was without a high-profile state or local tax measure on the ballot. In previous years, the public-employee unions or local funding groups drove initiatives seeking funds for new programs. Perhaps those advocates exhausted all the funding mechanisms available for their treasured priorities or, more likely, understood that this cycle’s economic and political climate was not conducive to new or expanded taxes.
Republicans taking away supermajority control from Democrats is the most significant tax storyline of this election cycle. The Oregon Constitution requires a three-fifths supermajority of both legislative chambers to enact “bills for raising revenue.” Without that supermajority, the party seeking to levy the tax must find bipartisan support, which creates political fodder for both sides seeking to negotiate their way through the session. Needless to say, the supermajority status (or lack thereof) has an outsize role in our politics.
For years, the legislature interpreted the constitutional rule to apply to any measure that raised taxes, whether directly or indirectly. In 2015, however, the Oregon Supreme Court flipped that understanding upside down. The Court ruled the constitutional term “bills for raising revenue” only applies to legislation creating a new tax with a rate or raising the rate of an existing tax. The ruling opened a door for a simple majority to bypass the constitutional requirement by eliminating deductions, credits, and other policies to raise revenue, which has become the primary target of revenue increases in recent years. In fact, during the last four years of the Democratic supermajority, the legislature only passed one partisan bill subject to the three-fifths vote requirement.
Breaking through the supermajority ends the political threat of unilateral tax rate increases, but it does not end the threat of tax policy changes intent on raising revenue. With tighter margins in the legislature and a state budget facing a slowing economy, the propensity for Oregon to come up with new and controversial ways to raise revenue likely increases.
Lame duck U.S. Congress may set stage for state tax debates
While we are already starting to think about the fiscal battles of the next legislative session, it’s also important to pay attention to the lame-duck session of Congress. Before swearing in the next Congress, federal lawmakers will negotiate their year-end appropriations bill attached to the defense budget. Historically, the measure features high-profile legislation, including tax policies that ultimately trickle down to state taxes.
One of the issues that Congress could, and arguably, should address is an extension of the federal deductions for research and development activity. For decades, federal tax law allowed a business to immediately deduct its research costs to encourage investments in innovation. Beginning this year, however, federal law requires a business to expense those costs over five years, eliminating the incentive for reinvesting in research. The national business community and a bipartisan group of lawmakers are rallying around an effort to restore the incentive and maintain a favorable policy encouraging investments in research and development.
If Congress acts and eliminates or delays the change in federal deduction policy, it would represent a significant victory for the business community. However, if federal lawmakers do not act in the lame-duck session, the issue could become prevalent in state legislatures seeking to enhance their incentive tools to lure new investments. Unfortunately, in Oregon, the legislature has abandoned research and development as a policy priority and, as a result, has lost notable investments in the state. If the legislature wants to stop the bleeding and reclaim a sense of competitiveness, it should seriously consider restoring its research credit and enacting a favorable deduction policy.