Lost in all the talk of ‘cap and trade’ and other major issues facing the Oregon legislature in 2018, a battle is brewing over taxes.
And no one is talking about it – yet.
As of today, state finances are stable. There are no budget cuts on the immediate horizon, and there’s no reason to believe the legislature won’t have additional resources to spend in the 2018 session.
BUT, the legislature has a looming decision on whether or not to “connect” Oregon’s tax code to the recently passed Federal ‘Tax Cut and Jobs Act.’
The implications are significant to Oregon companies and the state budget. Connecting to the federal tax cuts will cost state government over $100 million in the current budget cycle. But on the other hand, disconnecting from the federal tax cuts will cost Oregon businesses well over $100 million in otherwise available tax cuts and incentives for capital expenditures.
Specifically, the federal legislation:
- Allows 100% depreciation on capital purchases through 2022 (…a $76 million tax benefit to Oregon companies in 2018!)
- Allows a 20% deduction of pass-through income for pass-through businesses (…a whopping $182 million state tax benefit to Oregon businesses in 2018!)
Combined with the various tax increases in the Federal ‘Tax Cuts and Jobs Act,’ the net effect of these provisions is a $100 million projected loss in state revenue in 2018 (see chart).
BUT, there is one major caveat. This $100 million projection does not include any tax projections from re-patriated income that comes back to the US due to federal tax incentives. It is too early to project this, but it very well could dampen the state’s revenue loss.
This tax battle will be difficult enough in the current stable budget environment, but it will be doubly difficult if Measure 101 (the $222 million health care tax) fails at the ballot next week.
Further, the Oregon legislature has a history of denying federal tax benefits to Oregon companies when there are negative budget implications.
OSCC understands that Oregon’s “reconnect” tax policy is good for Oregon businesses. Our intention is that business receives the full benefit of the federal tax provisions on their Oregon tax returns. It’s a good thing to fully incentivize capital investment. We will be watching this issue very closely.