Gov. Kate Brown's Proposed Tax Break Causing Tension in Her Own Party

For years, Oregon Democrats have railed against a business tax cut they argue disproportionately benefits the wealthy. Now, in a move that’s causing tension, their party’s leader has called them back to Salem to expand the tax break many recently voted to curtail.

Gov. Kate Brown plans to call a one-day special session on May 21 to expand a reduced tax rate for a segment of businesses known as sole proprietorships, some of the smallest businesses in the state.

The move comes after the governor blocked another set of tax cuts in April, but the decision has caused uneasiness amongst her own party. It’s also got Republicans criticizing Brown for playing politics as she gears up for what looks to be a competitive re-election fight.

“I very much support our governor and am aligned with her on many issues,” said state Rep. Alissa Keny-Guyer, D-Portland. But, she added, “I’m not willing to vote for this when you’re adding more people to a poorly designed tax credit without any sunset to evaluate it and you’re taking money from schools, human services and housing.”

Oregon Senate President Peter Courtney put things more bluntly in a recent interview with journalist Dick Hughes.

“We’re in a very bad situation right now going into this thing,” Courtney said, making clear he’d asked Brown not to call the Legislature into a special session. “There’s no emergency for this session. We weren’t expecting this.”

Related: Oregon Tax Bill Produces Political Dilemma For Gov. Kate Brown

At issue are long-simmering tensions over a tax cut negotiated in 2013 by then-Gov. John Kitzhaber. As part of a “grand bargain” that year, Kitzhaber convinced Democrats to back lower tax rates for thousands of S-corporations, partnerships and LLCs. Sole proprietorships weren’t part of that deal.

In the years since, Democrats have voiced concern about the tax cut. They say it’s primarily benefited well-off professionals such as lawyers and doctors — and hasn’t spurred job growth or brought money into the state as intended.

“This is not one we should have on our books,” said state Rep. Phil Barnhart, D-Eugene, chair of the House Revenue Committee. “There’s no value in this tax break.”

Just last year, Barnhart successfully argued that point to many of his colleagues. In a bill passed in June 2017, the vast majority of House Democrats voted to trim the tax break by around $100 million a year.

That vote contrasts starkly with the governor’s current proposal, which would expand the tax break by more than $11 million a year — with most of the benefit going to the wealthiest sole proprietorships.

Brown says she’s bucking her party in the name of fairness. In April, the governor announced she’d sign a bill that effectively ensured larger tax cuts passed as part of federal tax reform efforts wouldn’t also apply on a business’s state taxes.

The move angered Republicans and business interests, but Brown proposed a silver lining: She’d give a tax break to the sole proprietorships who were left out of Kitzhaber’s deal in 2013 — and she’d convene the Legislature in an emergency session to do so.

“I’m simply not willing to let these main street businesses … go through another tax year with unfair tax treatment as compared to their larger competitors,” the governor said in a statement.

In order to qualify under the current proposal, sole proprietorships need to have at least one employee who isn’t the owner. State revenue analysts say the change would effect roughly 4 percent of sole proprietorships in the state.

Much of the benefit of Brown’s bill would go to the most successful businesses. More than 40 percent of the relief  would go to sole proprietorships with $500,000 or more in annual income. Nearly three-quarters of the tax relief would be felt by businesses with at least $200,000 per year in income.

“I think it’s a hard vote for Democrats no matter what, right?” said Rep. Rob Nosse, D-Portland. “At one level, maybe it’s not fair the smallest of small businesses don’t get this tax break. But at the same time, there is a legitimate argument that says you have to have an employee to get this. So the employer would pay less taxes than the employee.”

Democrats aren’t the only ones with reservations. Sen. Brian Boquist, R-Dallas, conceded Republicans would be handing Brown a small political victory if they vote to approve a tax cut. But, he said, his party will remind voters on the campaign trail the governor raised taxes on a greater segment of the population.

“We don’t need a special session,” he said, adding the tax cut could easily be tackled during the regular session next February.

The sentiment was echoed on Monday by Sen. Kim Thatcher, R-Keizer, who appeared at a press conference held by the Libertarian Party of Oregon.

"You have to ask yourself, 'Why is the  governor only now calling us into a special session? Why couldn't it wait until the next session?'" Thatcher said. "Political posturing. That’s all it comes down to."

Despite the heartburn in both parties, Brown’s legislation looks primed to pass. Republicans and business groups likely won’t miss an opportunity to expand a tax break — however small. And even Barnhart, who can fulminate at length about how the business tax is improperly sapping money from state responsibilities like schools and health care, won’t say he’ll vote “no.”

“I vote for things I’m not real fond of,” he said. “Every legislator does.”