Legislature Rubber-Stamps Brown’s Tax Break for Sole Proprietors

Even as the Legislature debates reducing classroom sizes and potential cuts to services for disabled kids, Brown pushes a tax break that will cost the state $25 million a biennium and go to sole proprietor businesses with as much as $5 million in profits.

The Legislature pushed through a big tax break for 6,000 mostly wealthy Oregonians, allowing sole proprietorships to pay a reduced tax rate currently enjoyed by S-corporations and limited liability corporations.


The election-year tax break came at the behest of Gov. Kate Brown, who made the unusual decision to call an emergency one-day special session to cut these taxes, arguing it was only fair that these business be offered the same tax break that other business won in 2013.


Rep. Phil Barnhart, D-Eugene, said sole proprietors had been left out of the 2013 tax legislation by accident. That vote also occurred in a rushed special session.


Ninety percent of the tax savings will go to sole proprietors who earn more than $100,000 a year. Seventy-five percent of the tax savings would go to those who earn more than $200,000 and 40 percent to those who make more than half a million dollars, with the tax capped at incomes of $5 million, according to state economists.


The $11 million tax cut for 2018 comes after Brown signed legislation earlier this year that disconnected Oregon’s tax code from the federal tax code, creating a $145 million windfall for the state. At the time, Democrats argued that if they did nothing, mostly wealthy business people who got a big tax cut from the federal government would get a second one from the state.


The most likely recipients of House Bill 4031’s new tax break include small businesses in the construction industry and healthcare professionals. The tax break allows them to pay lower taxes than wage-earners if they have at least one non-family employee.


“In the words of Joe DiMaggio, ‘It’s deja vu all over again,’” said Rep. Warner Reschke, R-Klamath Falls, mistaking the legendary baseball player for his teammate, Yogi Berra. “This tax-break gimmick will fool no one.”


In an election year, the policy choice seems to run counter to other budget decisions and to claims that Brown and the Democrats are in the corner of working-class people. At the same time, the Democratic Party is increasingly the preferred party of the state’s wealthiest residents in Lake Oswego and Portland’s West Hills.


Last year, the Democrats argued that they would be forced to cut services for disabled children unless $6 million in savings were found, a cut that was averted in February when caseloads came in under forecast.


In the next full biennium, 2019-2021, House Bill 4301 will pare tax revenues by $25 million, with the windfall going overwhelmingly to people with significant economic privilege. The policy was passed without amendments, and presented as a one-day, take-it or leave-it tax break for the state Legislature to consider.


Sen. Mark Hass, D-Beaverton, sharply broke from his party and pointed to a 70-30 vote in Beaverton School District that raised property taxes as evidence that voters don’t think lower taxes are the most pressing need for Oregon, either.


He said business tax cuts were a weird priority given the state’s myriad problems, including rising college student debt and tuition and large public school class sizes.


Hass also said he had anecdotal evidence that the 2013 tax cut had led to doctors and lawyers calling up their accountants asking how they could get their “$20,000 bonus from the state.” He said the jury was out if the business tax cuts already approved in 2013 were having a positive economic effect and creating jobs.


“Until we have a definitive study or analysis on this, it’s hard for me to support expanding it,” Hass said. “I think it’s the wrong direction.”


For the 51-8 vote in the House, the lower chamber’s Democrats sat mostly in silence as more than a dozen Republicans made floor speeches, most in begrudging support.


Only Rep. Bill Kennemer, R-Canby, stood to oppose to HB 4301. Seven Democrats also voted against it, including Portland liberals Rep. Rob Nosse and Rep. Alyssa Keny-Guyer and Lane County Democrats representing blue-collar districts like Rep. Julie Fahey of Eugene.


Kennemer noted that HB 4301 helps mainly wealthy Oregonians and excoriated Brown for vetoing a bill he sponsored in the 2017 session which would have allowed a small number of psychologists to prescribe medications, and alleged that her opposition to that bill and her support for this tax cut were both focused on gaining an edge on Republican Rep. Knute Buehler in this fall’s election.


“It’s politics over principle,” Kennemer said.

The Senate vote was much closer, passing 18-12, with just three Republicans supportive -- Sen. Jackie Winters of Salem, Sen. Tim Knopp of Bend and Sen. Kim Thatcher of Keizer. Democratic Sen. Sara Gelser of Corvallis, who fought the cuts to children’s disability services, joined Hass and the remaining Republicans in opposition.

Reach Chris Gray at [email protected].