When Donald Trump signed H.R. 1, coined “The One Big Beautiful Bill Act” on July 4 of last year, Oregon’s revenue forecast took a substantial hit.
That’s because Oregon is one of the few states in the country that has a rolling reconnection to the federal tax code, meaning the state automatically replicates any changes to the federal code in its state tax code.
As a result, the passage of H.R. 1, which handed large tax breaks to the wealthy and major corporations, reduced the state’s expected revenue by $888 million—contributing significantly to an overall budget shortfall of around $650 million that has numerous state programs and agencies bracing for potentially debilitating cuts ahead of the March 8 budget deadline.
Now, however, a group of progressive lawmakers and organizations are trying to claw back roughly $311 million of the deficit by amending the state tax code to eliminate three tax breaks included in H.R. 1.
“We know that if we replicate the tax breaks that have been given through H.R. 1, our state is going to be in deeper crisis than we already are and working families are going to feel the pinch even more deeply than we already do,” Annie Naranjo-Rivera, state director of the Oregon Working Families Party, said.
The Working Families Party and its allies are pitching the fight as a battle of wills in Salem between corporate-aligned legislators disinclined to anger big businesses and progressive legislators attempting to block a key part of Trump’s agenda at home.
“We have a hole to fill of $900 million, and we can fill that hole,” Naranjo-Rivera said. “It’s a policy choice and a moral choice.”
The disconnect effort got a major boost on President’s Day, when the Senate passed SB 1507 by a 17-13 vote. All the Democrats in the chamber voted in favor of the bill with the exception of Sen. Mark Meek of Gladstone. The bill now goes to the House Committee on Revenue, chaired by Eugene Democrat Nancy Nathanson.
The passage of the bill through the Senate represents a major milestone. Last year, a similar effort to disconnect parts of the state tax code from the federal tax code passed in the House, but was never brought up for a vote in the Senate and failed.
The failure to pass the bill last year meant the state lost out on hundreds of millions of dollars of revenue. Given the Democrats’ commanding advantage in the House, this year’s bill will likely make it to the desk of Gov. Tina Kotek in the coming weeks.
If Kotek signs the bill, it won’t be the first time in recent years that Oregon has changed its tax code in response to legislation at the federal level.
“Oregon has connected, disconnected, connected in different ways, selectively picked certain things to disconnect from many times over the last few decades,” Daniel Hauser, deputy director at the Oregon Center for Public Policy [OCPP], said. “It’s kind of a recurring question that the Legislature takes on.”
In 2018, in response to the Tax Cuts and Jobs Act passed during Trump’s first term as president, Oregon passed a disconnect that saved more than a billion dollars for the state over subsequent years. There are other examples as well, and states like Colorado have already acted to disconnect parts of their tax code from the federal code following the passage of H.R. 1.
The stakes for this potential disconnection, however, are sizable for a number of reasons. One is the extent to which Oregon is likely to be harmed by H.R. 1, both because of its connection to the federal tax code, and because Oregon relies more heavily on personal and corporate income taxes than other states to fund services.
“Our immediate budget deficit is much, much larger than many other states will face because of that connection,” Hauser said. “The current estimate on what the price tag is for the state over the next five or so years is billions of dollars.”
The effects of the loss in revenue may be felt most acutely by working class Oregonians who may soon be facing concrete threats to their day-to-day survival as a result of impending budget cuts.
“A lot of my constituents have lost or are going to lose access to SNAP benefits and housing vouchers, and at the state level, we also are facing major cuts to eviction prevention rental assistance,” Sen. Khanh Pham, who represents residents in East Portland, said.
SB 1507 will not do away with the state’s rolling reconnection, rather it would disconnect the state from just three specific policies: a tax break for interest paid on new car loans, a bonus depreciation, and a tax break called the qualified small business tax exclusion that tends to benefit venture capitalists.
The bill would return some of the money to Oregonians by expanding the Earned Income Tax Credit and creating a new tax incentive for small businesses that create jobs in the state. The rest of the money, the vast majority of it, would flow into the state’s general fund.
Republicans warned during debate on the bill that its passage risks further alienating businesses by increasing state taxes at a time when the state’s economy has slowed—a challenge that has been particularly acute in the Portland area.
“Our economy is struggling enough without making our state less affordable for Oregonians and less attractive for business,” Rep. E. Werner Reschke, a House Republican, testified in opposition.
But Hauser argued that the economics of the bill are slanted toward the interests of lower-income Oregonians.
“People will see tax increase, or they’ll see these big, bold statements, but in practice, for families struggling to pay the rent, for working families, for the bottom half of Oregonians, if they get the [Earned Income Tax Credit], they’ll be better off financially from this package,” Hauser said.
Indeed, some Democrats already consider SB 1507 a compromise package. The OCPP wanted lawmakers to disconnect from enough of the federal tax code to cover the entire budget shortfall, which the Legislature ultimately declined to do.
Pham, who voted for SB 1507 and also supported last year’s disconnect effort, said many Oregonians are unaware of how changes in the federal tax code impact the state’s revenue picture—a potential hurdle to building the popular support necessary to force through what amount to tax increases on the wealthy.
“I get, every day, hundreds of emails from people telling me we need to fund schools more, or we need to fund critical eviction prevention dollars, or other critical services, and I think that it’s so important to be fighting together for a bigger revenue fund,” Pham said.
For now, SB 1507 appears headed toward passage.
“A lot of work was done to make sure it’s balanced and to get the votes there, so I do think it’s looking good,” Naranjo-Rivera said.
