Oregon lawmakers in the Democratic-controlled Senate are set to vote as soon as this week on a proposal to trim a controversial business tax break that allows qualifying business owners to pay much lower tax rates than wage earners.
With less than two weeks left in the legislative session, the plan emerged from a seemingly unlikely collaboration between Sen. Ginny Burdick, D-Portland, and Sen. Brian Boquist, a former Republican from Dallas who is now a member of the Independent Party of Oregon.
In 2017, House Democrats passed a bill to pare back the tax break after state tax data showed it benefitted lawyers and doctors — “suits and scrubs,” Democrats complained — rather than the manufacturers and exporters touted as beneficiaries when lawmakers approved the provision in 2013.
The 2017 bill died in the Senate and qualifying taxpayers continue to use the break to cut their taxes by approximately $100 million a year, meaning the state misses out on an equivalent amount of revenue.
Boquist said in an interview Monday afternoon that it’s not surprising he and Burdick worked together to scale back the tax break for pass-through businesses, because eight years ago they were both part of the small group of lawmakers who worked with then-Gov.
John Kitzhaber, a Democrat, to craft the tax cut. “The only thing Burdick and I did is fine tune some issues we’d raised over those four months (writing the tax law) in 2013,” Boquist said.
He said the bill now moving forward does not address all of the problems leaders were aware of when they drafted the law all those years ago.
“The concern then was OK, you’re trying to create jobs and we know for the most part closely held doctor’s offices don’t create jobs,” Boquist said. He said it has proved challenging to find a way to restrict the break to certain sectors of business without drawing a legal challenge.
A large share of the state’s top 1% of earners receive income from the types of businesses that can take advantage of the tax break: nearly 70%, according to the Legislative Revenue Office. Construction represented the largest sector of pass-through businesses in Oregon, followed by the combined category of “professional,” scientific and technology, which includes lawyers and doctors, according to the state’s most recent tax data from 2018.
The current proposal, Senate Bill 139, would completely eliminate the tax break for owners of businesses with more than $5 million in annual profits.
For partnerships and S corporations with $251,000 to $500,000 in income, including lawyers and doctors, it would slightly lower the tax rate from 7.2% to 7%.
By way of comparison, people’s wages are taxed at 8.75% for a single filer with $9,200 to $125,000 of income and 8.75% for joint filers with $18,400 to $250,000 of income.
Senate Bill 139 would also tighten employment requirements businesses must meet to qualify, with an increasing ratio of employees to owners the more profits a business makes.
For example, business owners with $250,000 to $500,000 in profits would have to employ one Oregon worker per owner of the business, according to a legislative document.
Currently, the state allows businesses to qualify if they have at least one employee other than the owner who works at least 1,200 hours a year.
Businesses that could not meet the tighter requirement could still qualify for the special business tax rates, if they plow a large portion of their profits — 75% — back into the business.
Lawmakers on the Senate Committee on Finance and Revenue voted along party lines Monday to send the proposal to the full Senate for a vote. All three Democrats plus Boquist voted for it and Sen. Lynn Findley, R-Vale, voted “no.”
Findley did not express opposition to the change itself but questioned why his colleagues were not sending the bill to the Ways and Means committee, since the state would have to spend an estimated $165,000 to administer the changes over the next two years.
Boquist said in an interview Monday afternoon that he and Burdick pored over reams of state tax data in recent months as they researched potential changes to the business tax break.
“Ironically, the companies that are making more than $5 million a year in profit don’t seem to be reinvesting the money and they don’t seem to need the money for additional employees,” Boquist said.
He said the state’s largest business lobbying group, Oregon Business & Industry, told lawmakers they did not need to raise tax revenue because the state budget is in good shape. Boquist said he retorted, “Yeah but we don’t need to waste revenue, either.”