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Bush Tax Cuts: Oregon’s federal tax code link impacted

October 4, 2010

By Oregon Tax News,

How Would the Expiration of the Bush Tax Cuts Affect Oregonians?
The Bush tax cuts, set to expire at the end of the year, have many Americans worried about how it will affect their taxes.  According to the Wall Street Journal, “If returning lawmakers don’t pass legislation by December 31, the expiration date of the cuts, tax rates would rise not only on income, but also on estates, capital gains and dividends. Important corporate tax credits and relief from the Alternative Minimum Tax also are up for renewal.”

Over a dozen states, including Oregon, intertwine their state tax codes with federal law so the expiration of the Bush tax cuts could affect state revenue.

Oregon could both gain and lose revenue if the Bush tax cuts expire, which may potentially offset each other.  Oregon collects state taxes based on federal taxable income.  Therefore, if the tax cuts expire, certain tax deductions will disappear, raising both federal and state taxable incomes and increasing state revenue.  On the other hand, Oregon will lose revenue if some or all of the Bush tax cuts expire because its code allows taxpayers to deduct federal taxes paid from their state tax liability.  In the latter case, when federal taxes rise, state revenue falls.

One way for Oregon to avoid a shift in state revenue is to adjust its budget and reduce the deduction for federal taxes paid.  Legislators voting for these budget adjustments often face negative press for raising both state and federal taxes.  However, Stateline reported that Steve Purkeypile, personal income tax policy coordinator for the Department of Revenue, says the Oregon Legislature has taken steps in the past to disconnect the state from increased federal deductions.  In fact, Oregon did so to adjust to some provisions of the federal stimulus law.

If Congress decides to vote against the Bush tax cuts, Oregonians will face possible tax liabilities in 2011.  Therefore, November will determine what solution Oregon will utilize to its maintain its state revenue.

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