By Anthony K. Smith
We’re now seven months into the coronavirus crisis. The ongoing challenge for Oregon’s small businesses? Ultimately, it’s to stay in business – continue serving customers, keep Oregonians working, and all the while keeping everyone safe. No easy task.
The U.S. Congress recognized the financial hardships experienced by families and businesses because of sudden job losses and business closures by passing the CARES Act with overwhelming bipartisan support. Among other provisions, the CARES Act authorized Economic Impact Payments (stimulus checks) for individuals and households, created the Paycheck Protection Program (PPP) to keep as many Americans working as possible, and made significant reforms to the federal tax code to provide tax relief to businesses.
Normally, Oregon automatically connects to the federal tax code, so the starting point for determining an Oregon taxpayer’s state income tax liability is directly connected to one’s federal taxable income. Unfortunately for Oregon taxpayers, the state Legislature has occasionally decided to disconnect from certain tax-saving provisions of the federal tax code, requiring an add-back of that federal deduction or subtraction on their Oregon income tax filings. You may recall that legislators did this in 2018 when they disconnected from one of the most popular features of the Tax Cuts and Jobs Act – the 20% deduction for pass-through businesses.
Recently, the Legislature was once again considering a costly disconnection. The bill was never formally introduced during the August special session, but there is already talk of another special session, which means the state Legislature could still pass this ill-conceived tax increase. The proposal would have diverted much-needed cash from the pockets of struggling Oregon businesses to state coffers, making it harder for these employers to keep their doors open and put unemployed Oregonians back to work. This legislative concept, known as LC 2, would disconnect Oregon from three parts of the CARES Act: the business loss limitation provision, the net operating loss provision, and the business interest limitation provision.
Thousands of Oregon businesses are expecting significant financial losses in 2020. The two CARES Act provisions relating to losses allow for the immediate monetization of business losses, rather than having to carry those losses forward to future tax years. With PPP funds now all nearly spent, many businesses have had to borrow in order to stay afloat until the economy recovers. The third provision relating to business interest provides relief in this area. This feature of the CARES Act allows businesses that were previously limited by the Tax Cuts and Jobs Act to deduct an increased amount of the interest they pay on their debts, freeing up precious dollars for other business expenses, like keeping Oregonians employed.
If LC 2 were to become law, our elected leaders would be making the choice to deny much-needed tax relief to thousands of Oregon businesses, totaling $225 million in the current biennium. This would more than offset the financial assistance provided to certain businesses via the Legislature’s Joint Emergency Board in recent months. The state would be shortsightedly prioritizing its own immediate budget needs over the cashflow needs of Oregon businesses – and the jobs that those businesses provide to working Oregonians. The last thing any of them need right now is a higher tax bill.
On this note, LC 2 is completely silent on the impact of the CARES Act’s Economic Impact Payments (stimulus checks) on Oregon taxpayers. Because the stimulus checks will reduce taxpayers’ federal tax liability, Oregonians will not be able to subtract as much federal tax paid from their state income taxes. The result is that many Oregonians (almost exclusively middle-income Oregonians) will find themselves under-withheld on their state income taxes when they file in April 2021. The total for this biennium is about $103 million that middle-income Oregonians will have to pay because LC 2 does not disconnect from this provision – and that number grows even larger, leaving Oregonians under-withheld even worse, if Congress authorizes another round of stimulus checks as part of the next federal relief package.
Oregon taxpayers would, of course, still see a net benefit from receiving a stimulus check, even if they have to pay more in Oregon income tax as a result, but how many Oregonians will know to save a portion of it to pay a higher tax bill from the state next year – and even if they know, will they be able to do so when they have bills to pay today?