Sen. Anthony Broadman, D-Bend, speaks on the Senate floor on Thursday, June 26, 2025. Brodman is one of the Oregon Democrats proposing to selectively divest from parts of the federal tax code that, if fully applied to Oregon’s state tax code, could result in the state taking in nearly $1 billion less than expected over the next 18 months. (Photo by Laura Tesler/Oregon Capital Chronicle)
To prevent the state’s budget from losing nearly $1 billion in revenue over the next two years due to federal tax reform, Democrats in the Oregon Legislature have proposed a strategy to selectively disconnect parts of the state’s tax code from fully automatic connections to federal code.
The proposal, Senate Bill 1507, would decouple Oregon’s state tax code from three of the 115 federal tax changes congressional Republicans passed last summer in a tax and spending cuts bill. Oregon is one of the few states that automatically ties its state tax code to federal tax law when state tax law changes, rather than selectively making changes later.
The Democratic plan also includes new state tax credits for businesses that promote in-state hiring, as well as for low- and moderate-income Oregonians. The plan will preserve $291 million in net tax revenue for the state over the next 18 months that would otherwise not be collected under federal reforms.
The Democratic chairs of the state House and Senate tax committees — Rep. Nancy Nathanson of Eugene and Sen. Anthony Brodman of Bend — described the strategy Monday as closing a tax loophole that would disproportionately benefit wealthy Oregonians and businesses at the expense of public services and ordinary residents.
“Chairman Nathanson and I both believe that this is a plan that is as focused on affordability as it is on protecting the services that Oregonians rely on: health care, education, public safety, and then, at a time when our state’s resources are scarce, this is an opportunity to invest in Oregonians living safer, more affordable lives, given the federal impact on our budget,” Brodman said.
The plan is likely to be unpopular with state Republicans, who have called on colleagues to preserve federal tax reform and focus instead on reducing spending.
It didn’t go as far as many of the state’s largest unions had hoped. Ahead of the meeting, the union coalition has stepped up an advertising and pressure campaign against moderate Democrats in hopes of completely disengaging and selectively reconnecting them with state and federal tax laws.
selective cleavage
Changes in federal tax law have left the state’s budget $888 million smaller than expected over the next 18 months, according to Oregon’s chief economist and legislative tax office. Much of that comes from new federal reforms that eliminate income taxes on overtime and tips and allow individuals and businesses to immediately deduct 100 percent of the cost of “depreciable assets” such as real estate and equipment and research and development costs from their taxes.
Income tax deductions for overtime, tips, research and development and commercial property as depreciable assets would remain in the Democratic proposal. But the tax chairman said businesses are not allowed to take premium deductions when buying new equipment, which helps the state retain about $267 million in tax revenue that would otherwise go unavailable over the next 18 months.
The Oregon tax code under the plan would also ban the new federal auto loan interest deduction, which would preserve $36 million in state revenue, and would take the state out of the Qualified Small Business Stock Exemption, which would preserve about $39 million in tax revenue for the state.
Designed to encourage investment in smaller, sometimes riskier, startups, the stock exemption allows individuals to avoid paying capital gains taxes when selling qualified small business stock (as distinct from publicly traded stock).
But Brodman said that even though it was thought of as helping small businesses, there were still large companies benefiting and investors avoiding taxes on tens of millions of dollars in passive income. He said it was part of a Republican overhaul of federal tax laws that many other states have already departed from, including California, Pennsylvania and Alabama.
Combined, if Oregon departs from these three federal provisions, the state could recoup approximately $342 million in tax revenue that the state would otherwise be unable to collect over the next 18 months.
new incentives
The bill would use $25 million in retained tax revenue to provide new state tax credits for businesses that create new jobs in Oregon, as long as they pay wages above the minimum wage. If these businesses show that they are also retaining new employees, then credibility will increase.
An additional $26 million in retained revenue will be used to increase the earned income tax credit by 5 percentage points for low- and moderate-income Oregon residents, allowing individuals and families making less than $68,675 to claim a credit of up to 17% of their income, based on income and household size.
More than 212,000 Oregon taxpayers are eligible for the earned income tax credit in 2023, or about 11% of all taxpayers, receiving an average of $222 each, according to the state’s latest data.
Nathanson said there are growing calls to completely end the state’s automatic connections and instead connect selectively, as most states do, but that won’t be discussed this session, but lawmakers could take it up during the lengthy six-month session in 2027.
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3:22 pmUpdated information on the union coalition’s efforts to completely separate the state from the federal tax code.
