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Oregon's rare loss from US tax law sets off political fight (copy)

This Jan. 11, 2018, file photo shows dark clouds hovering over the Capitol in Salem.

Andrew Selsky

Gov. Kate Brown is facing an interesting choice that likely will end up playing a role in this year's gubernatorial race: whether to veto a tax bill that could allow the state to collect an additional $244.4 million in revenue.

As recently as last week, the governor said she was undecided on the measure, and was encouraging both proponents and opponents of the measure to lobby her. 

She is facing a deadline: She has until Friday, April 6, to make a decision. (State law gives her until April 13 to officially veto or sign the bill, but she needs to announce her intention a week before that. Brown also could just decide not to sign the bill, which would allow it to become law without her signature.)

The measure, Senate Bill 1528, passed in the closing moments of this year's short session and triggered a considerable amount of partisan wrangling. The wrangling has continued even after the end of the session, with business advocates urging Brown to veto the bill while other groups, desirous of the services the additional tax revenue will buy, are urging her to approve it. 

Oregon tax law and the state's tax code are connected, so any tax reform enacted at the federal level, such as the measure passed last year by Congress, generally is duplicated in the state tax system. Senate Bill 1528 disconnects the state tax code from federal tax law for certain types of businesses (generally sole proprietorships, partnerships, limited liability corporations and S corporations).

The tax reform Congress approved last month allows owners of those types of businesses to deduct as much as 20 percent of their business income on their federal tax returns. If the state did nothing, those business owners would be able to claim the same deduction on their state returns.

That's why opponents of the measure argue that it represents a de facto tax increase; after all, they say, if the state had taken no action, their state tax payments would be reduced. Instead, they note, the Legislature  passed a bill, on a party-line vote, that has the end result of having business owners pay more taxes than they otherwise would have.

Proponents of the measure say that many of the affected business already pay lower taxes, thanks to a 2013 tax law.

They also say (and stop us if you're heard this before) that the state needs the extra revenue. To that end, it's worth noting that House Speaker Tina Kotek's office predicts that the state will need $1.2 billion in new money to prevent cuts to the current level of state spending. In addition, many governmental entities also will be facing sharply higher payments for the state's troubled public pension system. 

But let's take note of this as well: State budget writers have more revenue than ever before at their disposal, and that seems likely to be the case again in 2019. Even with this record amount of tax money on hand, however, it never seems to be enough. At some point, state officials need to take serious steps to rein in the explosive growth of state spending.

Brown is facing pressure from the state's business community to veto the bill, arguing that the tax cut would be a real benefit to small businesses. State Rep. Knute Buehler, her likely Republican opponent in the November general election, also has urged her to reject the measure. 

A veto here may be a politically savvy move for Brown, giving her the chance to cast herself as an advocate for Oregon's small businesses and taking away a potential line of attack in the campaign.

As it turns out, vetoing the bill also would be the right thing to do, not just as a step toward fiscal restraint but also as a sign that the governor recognizes the value of small businesses to the state's economy. (mm)

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