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A recent editorial took note of Gov. Kate Brown’s decision to sign a controversial tax bill while, at the same time, asking the Legislature to extend a tax break to the state’s smallest businesses. It was a politically savvy move: It adds money to the state's coffers and also allows her to position herself during her re-election campaign as an ally to small business.

What it doesn’t do — presuming the Legislature goes along with Brown’s plan in a special session in the next few weeks — is give tax relief to a large number of state businesses: In fact, according to an analysis of Brown’s proposal making the rounds among legislators, it would give a tax break to only about 3 to 4 percent of the state’s 264,000 sole proprietorships; only about 9,000 businesses would qualify for the tax break. (The analysis was brought to light in a news story by OPB.) 

We’ve reached the point at which some background is required: Earlier this month, Brown signed the tax bill, Senate Bill 1528, which was the subject of considerable partisan debate during this year’s short legislative session.

Here’s what you need to know about that bill: Oregon’s tax code is connected to its federal counterpart, so any tax reform enacted at the federal level, such as the measure passed last year by Congress, generally is duplicated in the state tax system. Last year's federal tax reform included a provision allowing owners of so-called "pass-through" businesses (generally sole proprietorships, partnerships, limited liability corporations and S corporations) to deduct as much as 20 percent of their business income on federal tax returns.

Since the federal tax system is connected to Oregon's tax code, owners of those businesses were in line to take the same deduction on their state returns. But the Legislature, without a single vote from a Republican, approved Senate Bill 1528, which breaks the connection between the federal tax reform and the state tax code on this particular provision.

The state winds up pocketing an additional $244 million in tax revenue, money that Brown said the state desperately needs. But as Brown announced her intention to sign the bill, she also said she planned to call the Legislature back into session for a day this spring to give a tax break to sole proprietorships, which had been left out of a previous tax break, passed in 2013.

It's a clever attempt by the governor to thread the tax needle: The state, which faces yet another budget shortfall next year (despite what will almost certainly be record revenue), pockets millions to start filling the gap. And Brown gets to cast herself as a friend to Oregon's smallest businesses as she hits the re-election trail.

The problem for Brown is that her proposed tax break won't give relief to that many businesses: According to the OPB story, about 200,000 of Oregon's sole proprietorships report that they made money. But only about 13,000 of those pay wages, which is a requirement for getting a better tax rate; of those 13,000 businesses, only about 9,000 filers report paying enough employees to qualify.

So Brown's proposal won't be enough to shield her from Republican attacks that she should have vetoed Senate Bill 1528; had she done so (and, to be fair, she did appear to be undecided on this for weeks), many more businesses would have received a tax break. 

A spokesman for Brown said last week that a one-day session isn't the place to tackle more complicated tax reform, so this small proposal would have to suffice. "More complex tax reform is better done in a long session," the spokesman said.

That's true enough. But it begs the question: What should "more complex tax reform" look like when the 2019 Legislature convenes? This is a question that should be near the top of voters' lists as they evaluate the candidates running in 2018's election. (mm)

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