Oregon’s business environment has eroded in recent years, and its swelling tax burden on businesses and individuals deserves much of the blame. That burden is particularly heavy in Portland, where a handful of city, county and regional taxes have contributed to an exodus of businesses and individuals. As of 2022, Portland had the nation’s second highest combined state and local individual income tax rate, trailing only New York City.
Personal income taxes are an important business issue for a couple of reasons. One is the fact that they affect existing and potential employees. The other is that partners and owners of certain kinds of organizations report business income on their personal returns. Such “pass through” entities include partnerships, limited liability corporations and S corporations and are particularly sensitive to income tax rates. And even if rates in Portland weren’t a particular problem, Oregon’s top marginal rate is one of the nation’s highest.
The Legislature in 2024 can ease the tax burden on pass-through entities by adopting a simple fix it failed to pass in 2023.
The fix would reduce the impact of a 2017 federal law, the 2017 Tax Cuts and Jobs Act, which capped itemized deductions for state and local taxes (SALT) to $10,000 through 2025. This cap has had a disproportionate effect on states, like Oregon, with large state and local tax burdens. In response, legislatures in many affected states, including Oregon, created workarounds that blunt the impact of the federal SALT limitation.
Oregon’s workaround has a problem, however. For any member of a pass-through entity to benefit from the income tax workaround, every member of the entity must elect to use it. By contrast, California and Arizona allow individual members to use their SALT workarounds.
Giving taxpayers in Oregon the flexibility enjoyed by their counterparts in nearby states would be straightforward, but a bill (SB 158) that would have made the change died during the 2023 session. Passing similar legislation in 2024 would be a small but easy way for lawmakers to improve Oregon’s troubled business climate.