SALEM — Even as Oregon lawmakers opened their second special session of the summer, the political battle lines are being drawn over legislation that would disconnect the state tax code from three federal business-related tax breaks passed earlier this year.

The Oregon Legislature’s tax experts explained the proposed measure last week at a virtual meeting of the House Revenue Committee.

Advocates of state services and schools say the measure would recoup $225 million for the state budget. But business groups argue that they need the cash generated by the federal provisions to revive their operations.

Oregon’s state budget is on a two-year cycle — the current period ends June 30, 2021 — but taxes are collected annually.

Oregon’s tax code automatically adopts federal tax-law changes, unless the Legislature specifies otherwise. Although changes are uncommon, lawmakers did disconnect the state tax code for six years, starting in 1981, from accelerated write-offs for business that Congress passed as part of President Ronald Reagan’s tax cuts. The Legislature reconnected in 1987, the year after Congress overhauled the federal tax code — and even with the change, Oregon taxpayers got the largest tax cut up to that point in state history.

The tax breaks were inserted into the CARES Act, the $2 trillion pandemic aid plan that Congress passed and President Donald Trump signed March 27. But the provisions drew attention only after the bill passed.

Arguments for

For supporters, the proposed state measure would retain an estimated $225 million for state coffers even as collections of personal and corporate income taxes drop during the downturn caused by the coronavirus pandemic and shutdowns in business activity. Lawmakers during the special session were considering $400 million in spending cuts, $400 million in fund shifts and other ways to close a budget gap of more than $1 billion.

“We cannot wait until 2021 to plug this ($225 million) hole. The Oregon Legislature must act during a special session,” Patty Wentz said on behalf of the Fight for Our Future coalition.

“The current plan for the special session includes cuts to important services all Oregonians depend on. While we appreciate the Legislature’s desire to protect some services by utilizing reserves and not making across-the-board cuts, we encourage you to go one step further and take action to protect everyday Oregonians, not the wealthy.”

Daniel Hauser of the Oregon Center for Public Policy, a think tank based in Portland, said richer — and white — Oregonians will benefit most from the tax breaks.

“They do not need more tax breaks, especially when those resources could be used to relieve the suffering of Oregonians hit hardest by the pandemic,” Hauser, a tax and housing analyst, said in a paper filed with the House committee.

Arguments against

For opponents, the state measure would scale back deductions and increase tax liability for businesses hoping to retain cash as a result of the federal breaks.

“The congressional leaders designed CARES Act provisions … specifically to assist businesses experiencing losses due to COVID, allowing them to hang on to scarce cash during this extraordinarily challenging economic time,” Sandra McDonough, president of Oregon Business & Industry, said in written testimony.

“Adopting (proposed state measure) will demonstrate that the Oregon Legislature prioritizes its own budget challenges over the needs of Oregon’s private-sector employers and the urgent imperative to restore lost jobs.”

A letter from the Portland Business Alliance, which McDonough once led, makes a similar point:

“Instead of admitting this is a new tax burden on struggling businesses, they will say this is simply a technical change, impacting only a few wealthy Oregonians,” the letter provided to the Portland Tribune said. “That’s simply not true. Many Oregon businesses will lose much-needed cash if this tax increase moves forward.”

Specific changes

The federal provisions, and how the proposed state legislation differs:

• Deductions for interest costs on business loans: The federal change increases the allowable deduction from 30% to 50% of adjusted taxable income for tax years 2019 and 2020, and lets a business choose 2019 as its base year instead of 2020. (Assuming the 2019 figure is greater than 2020, it would allow a greater deduction for a business.) The state proposal would leave the maximum at 30% and a business must use its adjusted taxable income for 2020. Net gain for state coffers: $44.4 million for the 2019-21 cycle.

• Net operating losses: Businesses usually can spread these in tax returns over several years. The federal change allows net operating losses originating in tax years 2018 and 2019 to be carried back up to five years. Those same operating losses in 2018 and 2019, if carried forward, can be used by businesses to offset 100% (instead of 80%) of their adjusted taxable income in tax years 2019 and 2020. The state proposal would reinstate an 80% limit on businesses for net operating losses originating in 2018 and 2019 and used in tax years 2019 and 2020. Net gain for state coffers: $91.4 million in 2019-21.

• Limitations on net business losses: The federal change eliminates limits of $250,000 in losses — $500,000 on a joint return — for a S-corporation to offset income for tax years 2018, 2019 and 2020. Greater amounts can be converted into net operating losses that can be carried forward. (The change does not affect C-corporations, which are larger businesses.) The state proposal would disallow this change for state tax returns. Net gain for state coffers: $89.2 million in 2019-21.