Sen. Mark Hass, D-Beaverton, was one of the top architects behind a proposal that would bolster education funding by $1 billion per year. (Aubrey Wieber/Salem Reporter)
SALEM — Seeking money to pay for an ambitious agenda, Democrats in the Oregon Legislature are proposing to raise taxes on businesses, tobacco sales and more.
Now, legislators have to figure out which proposals they can pass, and businesses have to figure out what that means for them.
The headline tax proposal so far this year is in the Student Success Act.
With Gov. Kate Brown’s encouragement, House Bill 3427’s framers want to impose a new tax on businesses making more than $1 million and use that money to reduce class sizes, increase learning time and bolster the performance of Oregon’s flagging public school system.
Lawmakers have proposed taxing businesses just over half of a percent of their gross sales receipts over $1 million to raise $1 billion per year for education.
It’s a similar approach to the one taken by Ballot Measure 97, a business tax that voters rejected in 2016. But there are key differences.
For one, the new tax plan would let businesses deduct up to 35% of either their labor or production costs.
For another, it would exempt sales of motor fuel and groceries, two daily living expenses for most Oregonians.
Hospitals and residential care facilities wouldn’t have to pay the tax, either.
While raising taxes on businesses, the proposal would cut personal income taxes. All but the wealthiest taxpayers would see their personal income tax rate cut by a quarter of a percent.
Combined, those moves are expected to net the state just over $1 billion per year, according to the nonpartisan Legislative Revenue Office.
Over the next biennium, the new tax on certain businesses would raise an estimated $2.8 billion for the Student Success fund, offset by $700 million less for the general fund, due mostly to the income tax cuts.
The plan’s architects don’t think the tax will burden businesses nearly to the same extent as Measure 97, which taxed at a much higher rate of 2.5%.
State Sen. Mark Hass, D-Beaverton, points to the deduction for labor or production costs.
“I think the deduction is a good compromise,” Hass said.
Proponents of the Student Success Act have some hurdles to clear before the state starts collecting the new tax and granting money to Oregon’s 197 school districts and 19 education service districts.
State law requires a yes vote from three-fifths of lawmakers in both the House and Senate in order to raise taxes. That means 36 state representatives and 18 state senators have to approve it.
Voters can also refer the tax to voters at the next general election. That would delay the collection of the new taxes and provide voters a chance at a “citizen’s veto,” where a majority of voters overturn the law.
State Rep. Barbara Smith Warner, D-Portland, said legislators are keeping that in mind.
“Our goal has been to have a balanced package that, if it were to be referred, that would be very defendable on the ballot,” she said.
The Student Success Act’s next stop is the full House for a vote, now expected Wednesday.
Although it’s moving more slowly than the education package, a major cap-and-trade plan is also high on Democrats’ agenda this year.
Through 2050, the proposed carbon pricing program is expected to bring in billions to fund highway projects and climate change mitigation projects.
The cap-and-trade program would limit industrial emissions.
Polluters controlled by the new limit would have to pay for each ton of greenhouse gas they emit, either by buying pollution allowances at auction from the state or through offset programs like reforesting.
But it’s not clear how much money the proposal would raise.
In the beginning, the state would give a lot of allowances away for free.
Right now, the state projects the allowances to cost about $16 per ton, but that could change by 2021, when the program would start.
Sen. Michael Dembrow, D-Portland, co-chairs the committee that drafted the proposal. He said he hopes to pass the bill with the 60 percent vote required for revenue-raising legislation. But, he said, he will take whatever majority he can get.
Oregon requires three-fifths majorities to raise taxes, but Democrats don’t think the cap-and-trade plan counts as a tax. They point to a legal opinion from legislative lawyers and a California appeals court ruling on a similar program.
It could still face a legal challenge if it can’t get support from 36 representatives and 18 senators, so the bill specifically says that if there is any challenge to the margin on which it passes, the case goes straight to the Oregon Supreme Court.
“We know there is going to be debate about that,” Dembrow said.
Oregon Business & Industry, a leading business group, says cap-and-trade would effectively be a $1.1 billion tax.
Dembrow said that is because OBI didn’t take into account things like free allowances and a gasoline refund for low-income Oregonians that are meant to lighten the impact the program would have on residents.
Polluters that are especially vulnerable to competitors because they are on a state border or compete with out-of-state companies would get nearly all of their allowances free starting out.
Dembrow said OBI’s figure is at least double the reality.
“They’re assuming worst-case scenario in every case, and they’re not taking into account any of the credits or any of the direct allowances,” Dembrow said.
Meanwhile, Democrats are also drumming up money for the state’s healthcare system.
Oregon is coming to terms with increasing healthcare costs, as the federal government gradually reduces the amount it pays to cover people.
Medicaid, better known in the state as the Oregon Health Plan, is the government healthcare plan for low-income people and other qualifying groups.
Earlier this session, legislators passed a bill raising money from providers, insurers and managed care organizations to help pay for the plan and to stabilize rates on the open market.
Another proposal would have required certain businesses that don’t provide health care plans for their employees to chip in for their employees’ healthcare costs. House Speaker Tina Kotek agreed to drop that bill, though, a casualty of negotiations with OBI.
About 250,000 Oregonians working for large employers are ineligible or aren’t offered coverage through work, according to the governor’s office.
As part of a larger package to fund Medicaid, Brown also proposed increasing Oregon’s tobacco tax by $2 per pack, falling closer in line with neighbors California and Washington.
The tax is expected to raise about $175 million per year.
A tobacco tax increase has historically been hard to achieve. This increase would push Oregon’s tobacco tax from a relatively low $1.33 to $3.33 per pack, as well as remove the 50-cent cap per stick on the cigar tax.
In a recent hearing, nicotine retailers testified against the increase, saying it would hurt business. The cigar lobby has also complained, saying their products shouldn’t be taxed further.
Brown has said she expects the tax will end up being referred to voters.
Observers expect the tobacco industry would spend big on a campaign to kill the tax increase.
Some lawmakers, including House Majority Leader Jennifer Williamson, also hope to pass a program to support working parents and others who need to take time off of work to care for loved ones.
In simple terms, the proposal would require employers and employees to contribute to an insurance program that would pay at least part of workers’ wages when they have a medical emergency, need to care for a new child or ill family member, or are unable to work due to pregnancy.
OBI and House Republicans hammered Williamson’s original proposal as a $1.5 billion “family leave tax,” which Williamson’s office disputed.
Kotek reportedly agreed to some changes to alleviate pressure on businesses, such as exempting small employers, limiting the number of paid leave hours a worker can take in a year, and adjusting the payroll tax proposal to slightly favor employers.
Though it’s gotten less attention this year than cap-and-trade, healthcare, and education, affordable housing also remains a priority for Democrats during this legislative session.
Kotek said earlier this month that lawmakers have requested about $70 million to pay for housing-related proposals.
She is among them, with a set of bills intended to promote “housing choice.”
To provide that housing money, Rep. Alissa Keny-Guyer, D-Portland, has proposed capping the mortgage interest deduction, a tax break that homeowners can claim.
House Bill 3349 takes away the deduction for second homes and households with $250,000 or more in adjusted gross income, and it limits it for households making an adjusted $200,000 or more.
“There’s not one good policy reason why we are paying people a tax incentive for a second home,” Keny-Guyer said. “I am working really, really hard to both find a reasonable way to pare back the mortgage interest deduction where it’s most egregious and direct it toward the things where it’s needed.”
Kotek is leery of a political fight over taking away the tax break, which would take a three-fifths vote.
While Keny-Guyer’s proposal remains alive, Kotek suggested she sees it as a fallback if the Legislature can’t find the money for housing elsewhere.
“At some point, if you don’t get the big thing, you’re going to need a bunch of smaller things,” Kotek said, comparing the new corporate activity tax to the limits on the deduction for mortgage interest. “So I think it’s just in that menu of things we could go back to if we needed to.”
But legislators already have reached into some taxpayer pockets, dialing back the so-called “kicker” that refunds income tax collections when they exceed state projections. House Bill 2975 would reduce the expected kicker by an estimated $108 million. Brown signed the bill into law April 10.
Reporters Mark Miller of the Pamplin Media Group, [email protected], Aubrey Wieber of Salem Reporter, [email protected] and Claire Withycombe of EO Media Group, [email protected]. Withycombe work as the Oregon Capital Bureau.
