Pass Through Tax: don’t decouple, get rid of Oregon tax pass through rate

In 2013 as part of the not so grand bargain that reduced PERS costs the Democrats offered the Republicans a deal. We’ll reduce the tax rates on small  business profits (referred to as “pass through” profits since the profit isn’t taxed at the corprorate/business level, but simply reported and taxed on the business owners tax return) if you vote for our PERS reform. Many of us believed Republicans would have voted for PERS reform even without a tax cut, but then Democrats have a different negotiating style.

The 2018 GOP tax cut also included a pass through tax break. Under the new law, up to 20% of pass through income will be exempt from federal tax. This presents revenue issues for Oregon, since Oregon has a law that automatically “couples” federal tax changes to Oregon tax law. So in essence, Oregon businesses also get the 20% exemption of pass through profit on top of the lowered tax rate they received in 2013.

Many, including the conservative Tax Foundation, believe that it would be entirely appropriate for Oregon do decouple it’s tax law from the federal tax cut law in regards to the small business exemption. Otherwise, Oregon small business owners would be paying closer to 60% of the tax rate on it’s profits as compared to what their employees pay on their wages. The Democrats now have a bill that would decouple the federal 20% small business tax exemption.

I agree that the Oregon law and new Federal law creates a “double dip” for small business profits. But I believe the better remedy would be to eliminate the 2013 Oregon law that reduced tax rates for pass throughs and not decouple federal law.

The Federal law applies to all small businesses that pay wages to employees and/or have capital investments in their businesses. It is meant to benefit businesses that truly are job providers and risk takers. The fact that it doesn’t discriminate or favor based on business types  is a more libertarian approach.  In Oregon we know that Democrats are intent on social and economic engineering using tax exemptions, breaks, grants and special carve outs for “emerging” industry. Every Oregon tax law is an opportunity is a chance to reward friends or political and economic philosophy. That makes Oregon’s small business tax incentive at risk for repeal or change at any time.

It may be that the federal tax break isn’t as generous as Oregon’s reduced pass through tax rates. But as a small business owner, I prefer to do business with vendors I can count on for stable prices over vendors with  histories of mismanagement, jacking up prices and cramming new terms down my throat after I become dependent on them.


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