Special Session in Oregon Over Pensions and Revenues

At the request of Oregon Governor John Kitzhaber, the state’s legislature will convene a special session on September 30th to pass a negotiated pension reform and revenue package which lawmakers failed to act on during the regular session this year.  The Governor and key lawmakers have been back and forth for months trying to come up with a “grand bargain” that would please members of both sides of the aisle, allowing the state to move forward on reforming the public pension system and raising revenue to boost education spending.  Lawmakers reached an impasse early this summer because most Democratic lawmakers were willing to raise revenue, but were not eager to support cuts to public employee’s benefits while most Republicans were open to significant changes to the state’s public pension system, but would only accept revenue increases if they are balanced with tax cuts for “small” businesses.  And, even though Democrats have majorities in the House and Senate, thanks to Oregon’s supermajority requirement to enact tax increases, a handful of Republicans were needed to strike a deal. 

Now it appears the impasse has broken.  The Governor and the majority and minority leaders of the House and Senate reached a deal on a plan that will initially raise more than $200 million (over two years) in new revenue for education, further reduce costs to the state’s pension system, give tax breaks to some businesses, and slightly increase the state’s Earned Income Tax Credit.

Is it time to celebrate?  Not so fast.  Our friends at the Oregon Center for Public Policy (OCPP) are calling the deal a “Grandly Flawed Bargain” due to three major flaws with the revenue package:

• The initial revenue gains shrink substantially after the current budget period.
• The tax cuts included in the revenue package are highly tilted to the wealthiest 1 percent who will benefit from the new business tax break.  And, the special business tax breaks are the reason for the revenue collapse after the first budget period.
• Despite proponents’ claims, the revenue package will not create jobs.

The bargain contains two progressive revenue raising elements: eliminating the personal exemption credit for high-income taxpayers; and capping the additional deduction for medical expenses available to older taxpayers and phasing it out for upper-income households.  And, it gives a small tax cut to working families by bumping the state’s Earned Income Tax Credit up from 6 to 8 percent of the federal credit.  But, most of the progressive changes are more than offset and overshadowed by the new optional personal income tax rate structure for taxpayers with pass-through business income, which will amount to more than a $100 million tax break each year for those filers once fully phased-in.

Our partner organization, the Institute on Taxation and Economic Policy (ITEP), crunched the numbers OCPP highlights in its report.  ITEP found that the so-called revenue raising package largely amounts to a significant tax cut for the wealthiest 1 percent of Oregonians who report pass-through business income on their returns. This group receives almost 70 percent of the tax cuts contained in the package while low- and moderate-income taxpayers (the bottom 40 percent) who benefit from the increased EITC get less than 10 percent of the total tax cut.

More than 60 percent of the wealthiest 1 percent of taxpayers will actually pay more under the plan thanks to the changes to the personal exemption credit.  So, it is a small number of wealthy business owners sharing the big cut that’s going to cost more than any part of the plan.     

OCPP is recommending lawmakers consider removing the costly wealthy business owner tax break from the bargain package in order to ensure adequate revenue for education, not only for this year but for years to come.  It would also make the tax package more fair, giving tax cuts only to low- and moderate-income working families while raising revenue from the state’s wealthiest residents.