The Oregon Senate passed legislation Monday that would reclaim approximately $311 million in state revenue by disconnecting from three federal tax breaks included in H.R. 1, the spending package Congress approved in July 2025. Senate Bill 1507 eliminates state-level benefits for car loan interest deductions, accelerated business equipment depreciation, and qualified small business stock gains while expanding tax credits for low-income workers and job creation.
The measure passed along strict party lines, with all Democrats except Clackamas County Senator Mark Meek voting in favor and all Republicans opposing. The bill now moves to the Oregon House, where its procedural path remains uncertain amid constitutional questions about whether it requires a three-fifths supermajority to pass.
Why Oregon Faces Automatic Revenue Loss
Oregon’s tax code automatically incorporates changes to federal tax law because state taxable income calculations start with federal taxable income. When Congress passes tax cuts, Oregon loses revenue unless lawmakers actively disconnect from those provisions. Without legislative intervention, Oregon would permanently lose approximately $888 million over the current two-year budget cycle due to H.R. 1’s tax breaks.
Because Oregon’s taxable income calculations begin with federal taxable income, federal tax changes can affect state revenue unless lawmakers take action. Supporters and opponents of the bill said the projected revenue impact could affect funding decisions for programs including education, health care, and public safety.
Senator Anthony Broadman, the Bend Democrat who sponsored the legislation, framed the measure as necessary fiscal management. “This bill is a practical, balanced, and focused measure intended to make Oregon’s economy work for the people who live and work here,” Broadman said.
What the Bill Eliminates
The legislation blocks three specific federal tax provisions from applying to state income taxes. First, it eliminates a write-off for car loan interest that Congress created for vehicles purchased in 2025 and assembled in the United States. The federal provision allows taxpayers to deduct up to $10,000 in car loan interest, phasing out after $100,000 in taxable income for single filers and $200,000 for joint filers.
Second, the bill disallows businesses from fully writing off the cost of new equipment and machinery in one year. Instead, companies must depreciate these investments over multiple years, reducing immediate tax benefits but spreading deductions across a longer period.
Third, the measure blocks favorable tax treatment for gains from selling qualified small business stock, affecting venture capital investors and early-stage company shareholders.
Representative Nancy Nathanson, a Eugene Democrat who co-authored the proposal, emphasized that Oregon had no choice in accepting these federal changes. “Those were not our choices. We were just handed those decisions,” Nathanson said. She argued the measure reverses automatic changes rather than imposing new taxes.
Economic Context and Manufacturing Decline
The tax debate unfolds against significant economic headwinds in Oregon’s manufacturing sector. Manufacturing employment in the state declined more than 5 percent in 2025, with Roseboro Forest Products alone eliminating 146 positions in Southern Oregon as part of broader industrial contraction.
This manufacturing downturn complicates the policy debate. Republicans argue that maintaining federal tax breaks for equipment purchases supports business investment and manufacturing recovery. Democrats counter that the bill’s new Jobs Tax Credit, which provides $1,000 per job created at a cost of $25 million over two years, more directly incentivizes hiring.
Senate Republican Leader Bruce Starr characterized the legislation as a straightforward tax increase. “The revenue statement is the revenue statement, and the revenue statement clearly says that this is a tax increase on Oregonians,” Starr said. He warned that “small businesses and working Oregonians could lose out on hundreds of millions of dollars in needed tax relief in the next few years.”
Tax Credit Expansions for Low-Income Workers
While eliminating federal tax breaks, SB 1507 would also expand Oregon’s Earned Income Tax Credit, which supporters described as the largest EITC increase in state history. The measure raises the credit from 9 percent to 14 percent of the federal EITC for individual filers and from 12 percent to 17 percent for filers with children under age three.
Approximately 213,000 Oregon tax filers claimed the EITC in 2023, according to state revenue data. The expansion would cost $26 million over the current biennium but deliver direct tax savings to working families facing cost-of-living pressures.
Representative E. Werner Reschke acknowledged benefits Oregonians have already received from H.R. 1. “Since the passage of H.R. 1 by Congress in July of 2025, Oregonians have been experiencing the benefits from this economic stimulus program,” Reschke said. “No longer being taxed on tips, overtime or interest on car loans is a great relief for many Oregonians—especially those finding it difficult to make ends meet.”
Constitutional Questions and Procedural Hurdles
The bill faces potential constitutional challenges beyond its policy merits. Revenue-raising bills in Oregon typically must originate in the House and require three-fifths supermajorities in both chambers to pass. SB 1507 originated in the Senate as an amendment, potentially circumventing these requirements.
Democrats argue the measure qualifies as a “disconnect” from federal law rather than a tax increase, reverting to previous tax policy rather than imposing new taxes. Under this interpretation, the bill requires only a simple majority vote. The Oregon Business & Industry organization has challenged this legal theory as unconstitutional.
A House companion bill, HB 4027, exists but its procedural path remains unclear. The February 4 Senate Finance Committee hearing on the measure drew 495 public comments, with the majority opposing the legislation.
Even if SB 1507 passes both chambers, the state legislature would still face approximately $350 million in remaining budget shortfalls before the short session ends. Oregon currently ranks 35th nationally in tax competitiveness, according to business climate assessments.
The legislation’s fate will determine whether Oregon accepts federal tax cuts that reduce state revenue or maintains current tax policy to fund existing programs. For business owners planning equipment purchases or vehicle acquisitions, the outcome will directly affect 2025 tax liability calculations and investment timing decisions.
Source
Oregon Senate passes bill to reverse Federal tax breaks, add $311M in revenue | KATU