The Governor has called the Legislature into a special session on September 30. My goal in this newsletter is to inform citizens of what is in the package of 5 bills under consideration. For those with little time, I will start with a very brief overview. For those who want more information, I will delve more thoroughly into the details in the rest of this newsletter.
The Brief Overview
Who will pay more taxes?
- Corporations with more than $1 million in income
- Higher income citizens (over $100 thousand income if single, over $200 thousand if married)
- Higher income seniors who use Oregon's unique deduction for medical expenses
Where is the money allocated?
- In 2014, schools will get a funding boost: $100 million for K12, $15million for community colleges, $25 million for universities
- Senior services will receive an extra $41 million
Starting in 2015, nothing extra is allocated to schools or seniors, but other allocations continue:
- Mental health services get permanent funding through the tobacco tax increases.
- More of the working poor will qualify for the Earned Income Tax Credit.
- Some businesses with one or more employees and some export companies will get permanent tax rate reductions.
Public Employee Retirement System (PERS) changes:
- Already retired PERS members will see further reductions in Cost of Living Adjustments, indexed to income. Overall this reduces the unfunded PERS liability, (which is currently $14 billion,) by $4.8 billion. Schools and other governments will benefit by lowering of PERS obligations.
- Future legislators will not be PERS members.
- Insurance payments cannot be used to spike future PERS payments.
- On-the-job felony convictions will disqualify PERS for future employees.
- This bill bans counties from individually passing laws to limit or outlaw genetically modified crops. Jackson County is excluded pending the outcome of an election currently on the ballot.
FAQ — The most frequently asked question is:
What happens if the courts overturn the PERS changes, do the tax changes remain? The answer is yes.
I am asking for your feedback. Please let me know what you think before the special session. Below is a more detailed description of the bullets in this overview. Contact my office with further questions and comments at: 503-986-1420 or firstname.lastname@example.org
At this time, all the numbers are preliminary estimates, subject to change.
Bill # 1 — Tax changes:
- Currently the 7.6% corporate rate applies to net income above $10 million — under the proposal it will apply to net income above $1 million. Oregon has relatively few taxpayers in this income category, but they are generally very big, very profitable companies. The revenue generated by extending the 7.6% rate to lower income is expected to be $41 million in the 2013-15 biennium; $33 million will come from the Rainy Day Fund leaving a total of $74 million in new revenue for the General Fund. Expected revenue is estimated at $74 million in the each of the 2013-15 and 2015-17 biennia. In the 2017-19 biennium, this is decreased to $34 million because money would be re-directed back into the Rainy Day Fund. Some of the General Fund additions available in this package therefore come from a policy choice to spend now, not feed the Rainy Day Fund.
- The personal exemption on state income taxes would not be allowed for any taxpayer with an adjusted gross income of over $100 thousand if single or $200 thousand if married. Currently this exception is $183 per dependent, including the taxpayer, but that number is indexed to the Consumer Price Index (CPI).
The expected revenue increases are: $61 for the first biennium, $64 in second and $76 in the third.
- All Oregon taxpayers can deduct medical expense above 7.5% of Adjusted Gross Income (under new federal provisions this is changing to 10%) due to our connection to the Federal tax code. Oregon is probably the only state which allows a deduction of medical costs from state income taxes to any taxpayer over 62 for any medical expenses up to 7.5 %. Seniors over 65 can deduct expenses above 7.5% until 2017 when the federal floor is increased to 10% for them as well. This tax package would completely remake the somewhat unique Oregon senior medical deduction provision. The percent of income would be replaced with a hard cap on the deduction. That cap would start at $1800 for very low income taxpayers and is indexed upward so higher income filers (over $100k AGI single, $200k AGI joint) would not be eligible for any personal exemptions. The age of eligibility would also climb, from 62 to 66 over a seven year period. This is the biggest piece of the revenue-raising package: $82 million the first biennium, $117 million the second, $158 the third.
- Cigarette taxes would increase by 10 cents per pack. This raises Oregon's current $1.18 per pack tax to $1.28. Other tobacco products taxes would rise 5%, moist snuff would be taxed an extra 18 cents, as well as some other changes.
This is expected to bring in $27 million in the first biennium, $32 million in the second, $31 million in the third.
Bill #2 — Where the revenue increases would be spent:
- Businesses which are organized as partnerships, LLCs (Limited Liability Corporations) and as S-Corps (Organized under Chapter S of the Federal code) would have a reduced rate of income taxes beginning in 2015. This type of business enterprise is generally smaller, more local and family-oriented. (The bill is not limited, however, and there are a few pretty large businesses which have this organizational structure.) Currently, the tax rate paid by the owners or partners in these types of businesses is the personal income tax rate for Oregon, roughly 9.9%. The proposal would give a tax rate encourager to small family businesses. If certain criteria are met, including active work in the business and at least one full time employee, the tax rate would apply according to the schedule below:
||Income from the business
||over $5.0 million
These rates would apply starting in the 2015 biennium and would have some adjustments before the rates are made permanent in 2020. Current estimates are that about 90,000 taxpayers will be able to take advantage of the lower rates. This number is expected to grow to 120,000 by 2019. The package allocates $38 million in the current biennium, $205 million in the second, and $239 in the third to this tax code change.
- A part of this package would set up in Oregon a tax provision similar to the federal IC-DISC (which stands for Interest Charge- Domestic International Sales Corporations.) This is a tax advantage to exporters of agricultural products in Oregon but is not limited to only agricultural products. Oregon is an export state and this provision benefits Oregon-based companies only. The impact of this will be an allocation of $5 million in the first biennium and $7 million and $11 million in the next two.
- Above what was already allocated to schools in the last legislative session (over $6.55 billion this biennium for the K12 schools) this proposal dedicates an extra funding boost. $100 million dollars goes to K12 districts in Oregon through the funding formula. This means that each school district receives this money in relation to its size. Community Colleges would receive $15 million and universities $25 million for the purpose of preventing tuition increases. This money is a one-time allocation in the 2013-2014 biennium only.
- One of Oregon's safety nets for the working poor is the Earned Income Tax Credit. This provision of the tax code allows those in poverty to get a credit against their income taxes so they can get a job without having their net earnings be so low that it discourages working. The EITC would increase from 6% of the federal credit under current law to 8% of the federal amount under the proposal. The allocation is $25 million each biennium. Because it will not be implemented until 2014, the cost for the first biennium is half, or $12 million.
- Senior programs which prevent elder abuse and improve the quality of long term care will get a one-time boost of $41 million in 2014.
- The cigarette tax increase of 10 cents is essentially dedicated to services (unspecified at this time) to treat mental health issues. This is estimated to be $20 to $23 million each two year period.
Bill #3 — PERS COLA changes:
This package decreases the Cost of Living Adjustments for already-retired PERS recipients. It will be indexed to income so those receiving a smaller retirement benefit will get a higher COLA, and at the higher benefit level, the COLA will be minimum. I cannot give the exact rate at this time because actuarial analyses are still being made to finalize the adjustments. The agreed package reduces the PERS liability by $4.6 billion — this includes the $2.6 billion from SB 822 passed in the session plus an additional $2.0 billion from the special session bill reducing COLAs. The PERS unfunded liability (last updated in July 2013) shows an unfunded liability of $14.0 billion excluding side accounts held by employers and $8.5 billion when these side accounts are included.
School districts, local governments, and the State, which use the PERS system for retirement, are assessed payments into the system based on liability. By reducing the overall liability, these government agencies save money. Each PERS agency has a different PERS profile but on an average basis, PERS costs are at 25% currently and expected to go up in future years.
Bill #4 — Other PERS policy changes:
- Future legislators would not be eligible for membership in the PERS system. They would be eligible for other state retirement benefits which are much less generous.
- There has been at least one high profile case of a PERS employee going to jail on a felony conviction for on-the-job illegal activity who then qualified and received PERS benefits. This bill would specifically prevent this in the future.
- It has also happened that employees could pay their own insurance during the last few years of their employment and have the agency raise salary to cover those costs. This has the effect of spiking the future retirement benefits of the employee. Under this bill, such a scheme would be specifically prohibited.
Bill #5 — SB633:
SB633 passed the Senate by a 17 to 12 vote during the regular session. It had no hearing in the House and therefore died. This proposal is a reaction to the changing nature of our agricultural economy. Genetically Modified Organisms (GMOs) are being grown or proposed for growth on Oregon farmlands. Some see these genetically modified crops as a threat; others see them as an improved agricultural product. The issue is who regulates them. Under this bill, genetically modified crops would be regulated statewide under the Department of Agriculture instead of a patchwork of county ordinances. The bill removes Jackson County from this state preempt because it currently has a county ordinance regarding these products on the November ballot.
I hope this helps explain a very detailed and complex package of proposals and I welcome your thoughts and opinions.