Bill would have hit the smallest of businesses

Small Business Tax Cut was on the Chopping Block

By Anthony K. Smith,

Oregon National Federation of Independent Business

By a vote of 31-28, the Oregon House of Representatives passed House Bill 2060 on June 23. The bill would have raised $196 million for the 2017-2019 state budget by effectively raising taxes on small businesses with fewer than 10 employees and other businesses in certain industry sectors. That’s it – there wasn’t anything else in the bill, so how in the world did we get to the point where anybody could possibly think raising taxes on the smallest of small businesses was a good idea? We’ll need to look back a few years for the answer.
In 2013, the Oregon Legislative Assembly adjourned in early July with some unfinished business still lingering. By the last day of September, legislators found themselves back in Salem working on a package of bills that would affectionately come to be known as “the Grand Bargain.”

A total of five bills passed both the House and the Senate October 2 – two bills making reforms to the state’s Public Employees Retirement System (PERS), a bill limiting local government regulation of genetically modified plants, a bill raising revenue, and a bill appropriating that revenue, mostly for schools and other public services. In total the revenue raising bill, HB 3601, raised $189 million in additional taxes for the state to spend immediately during the 2013-2015 biennium.

To complicate things just a bit more, this $189 million came to be by way of several tax increases, as well as several tax cuts. Tax increases included additional revenue from corporate income taxes, adjustments to personal exemption credits, phasing out the senior medical deduction, and an increase in the cigarette tax. Tax cuts included a break for certain exporters, an increase in the Oregon Earned Income Tax Credit (EITC), and finally, a lower tax rate structure for business income from qualifying pass-through entities, like S-corporations and partnerships. While the revenue-raising aspect of HB 3601 went into effect immediately, the pass-through tax savings weren’t available until 2015.

This last piece of the Grand Bargain puzzle is what lawmakers were arguing about in waning weeks of the legislative session, especially once it was clear that a major overhaul to Oregon’s business tax structure was not going to happen in 2017. As soon as the conversation ceased surrounding a new gross receipts tax, this complicated tax cut took center stage.

Known as the “PTE Tax Rates,” or the “2013 Small Business Tax Cut,” this issue was actually on the radar of many in the business community since December of last year when Gov. Kate Brown’s 2017 recommended budget called for the complete repeal of Small Business Tax Cut.

However, due to a provision in Article IV, Section 25 of the Oregon Constitution, enacted by voters in 1996, a bill repealing a lower tax rate would fall under the definition of “a bill for raising revenue” and this constitutional provision clearly states that “Three-fifths of all members elected to each House shall be necessary to pass bills for raising revenue.” The votes to do this, however, were never going to materialize, so legislative leaders started looking for other ways to roll back the Small Business Tax Cut.

This is where a 2015 Oregon Supreme Court case, City of Seattle v. Dept. of Revenue, comes into play. The lawyers that work for the Legislature determined that based on the ruling in this case “a bill for raising revenue” probably requires the creation of a new tax, or a change in tax rates that results in additional revenue. However, if the bill simply expands the base of taxpayers required to pay the tax, or limits the number of taxpayers qualified to pay at a lower rate, the court might not consider a bill that results in more revenue to be the same as “a bill for raising revenue.”

This is exactly how HB 2060 passed with a simple majority in the House. Fortunately, the Senate did not take action on the bill and now that the session is over, small businesses can take a moment to breathe a sigh of relief. If it had become law, the state would have raised $196 million in additional revenue and many businesses would have seen their tax rates increase from 7 percent to 9 or 9.9 percent starting on January 1, 2017…. That’s right – this bill was also retroactive. It’s July now. How could anyone have possibly planned for that?

Just remember folks, this bill wasn’t a bill for raising revenue.