Oregon Dems propose partial split from federal tax code, preserving $291 million for state

Sen. Anthony Broadman, D-Bend, speaks in the Senate chamber on Thursday, June 26, 2025. Broadman is among Oregon Democrats who have proposed selectively severing ties with parts of the federal tax code; If this were fully implemented into Oregon’s state tax code, it could leave the state with nearly $1 billion less in revenue than expected over the next 18 months. (Photo: Laura Tesler/Oregon Capital Chronicle)

To prevent the state budget from losing nearly $1 billion in revenue over the next two years due to federal tax changes, Oregon Democrats in the state Legislature are proposing a strategy for selectively separating parts of the state’s tax code from its full, automatic connection with federal law.

Offer, Senate Bill 1507It would distinguish Oregon’s state tax code from three of the 115 federal tax code changes that Congressional Republicans passed last summer in the tax and spending cuts mega-bill. Oregon is one of a handful of states that automatically ties state tax law to the federal tax code when it changes, rather than selectively binding to changes later.

The Democratic plan also includes new tax credits at the state level for businesses that increase in-state employment and for low- and middle-income Oregonians. The plan would preserve a net $291 million in tax revenue for the state that would not be collected under federal changes over the next 18 months.

The Democratic chairmen of the state House and Senate Revenue committees — Rep. Nancy Nathanson of Eugene and Sen. Anthony Broadman of Bend — on Monday characterized the strategy as closing tax loopholes that would disproportionately benefit wealthy Oregonians and corporations at the expense of public services and ordinary residents.

“Both Mayor Nathanson and I believe this is a plan that focuses on both affordability (working to protect the services Oregonians rely on: health, education, public safety) and, at a time of scarcity in our country, given the impacts the federal government has on our budget, this is an opportunity to invest in Oregonians living safer, more affordable lives,” Broadman said.

The plan is likely to go down well with state Republicans, who have urged their colleagues to pursue federal tax changes and instead focus on reducing spending.

It doesn’t go as far as many of the state’s largest unions would like. A coalition of unions launched an advertising and pressure campaign on moderate Democrats ahead of the session; He hoped to have them completely separate state tax law from federal tax law and selectively reconnect it.

selective cuttings

Federal tax code changes have left Oregon’s state budget $888 million less than expected over the next 18 months, according to the state’s chief economist and the Legislative Revenue Service. Much of this is due to new federal changes that end income taxes on overtime pay and tips and allow individuals and businesses to immediately deduct 100% of the cost of research and development costs as well as “depreciating assets” such as real estate and equipment.

Overtime and tips, research and development, and income tax deductions on commercial property as depreciable assets would remain under the Democrats’ proposal. But revenue chiefs said businesses would not be allowed to deduct premiums for the purchase of new equipment, which would help the state retain about $267 million in tax revenue it would otherwise miss over the next 18 months.

Oregon’s tax code under the plan would also disallow a new federal deduction for auto loan interest, preserving $36 million in state revenue and disconnecting the state from the “Qualified Small Business Stock Exemption,” which would save the state about $39 million in tax revenue.

The stock exemption is intended to encourage investment in smaller, sometimes riskier startup businesses by allowing individuals to avoid paying capital gains tax on the sale of qualified small business shares that differ from publicly traded stocks.

But Broadman said that although this is framed as helping small businesses, there are large corporations benefiting from it and investors avoiding taxes on tens of millions of dollars in passive earnings. He said it’s part of Republican changes to the federal tax code that many other states, including California, Pennsylvania and Alabama, have cut off.

If Oregon is cut off from the three federal provisions, the state could claw back about $342 million in tax revenue it wouldn’t normally collect over the next 18 months.

new incentives

The bill would direct $25 million of protected tax revenue into a new state tax credit for businesses that create new jobs in Oregon as long as they pay above the minimum wage. If these businesses show that they retain new employees, the credit will increase.

The other $26 million in protected revenue would go toward increasing the Earned Income Tax Credit for low- and middle-income Oregonians by 5 percentage points, allowing individuals and households to claim a credit of up to 17% of their earnings, depending on their income and family size, if they earn less than $68,675.

More than 212,000 taxpayers in Oregon qualified for the earned income tax credit in 2023 (about 11% of all taxpayers), receiving an average of $222 each, according to the state’s most recent data.

Nathanson said growing calls to end the state’s automatic connection altogether and instead selectively connect, as most states do, are not on the table this session, but are something lawmakers could consider during the six-month long session in 2027.

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• 15:22Updated with information about a union coalition’s efforts to secure a complete break from the state’s federal tax laws.