Oregon legislators are deciding whether to reject portions of last year’s federal tax overhaul, a move that would protect $291 million in state funding for schools and health care but eliminate certain tax breaks for businesses and investors. Senate Bill 1507, now under consideration, would decouple Oregon’s tax code from specific provisions in House Resolution 1, the federal tax package passed by Congress in July 2025.
The bill targets three federal provisions: a stock exclusion benefiting venture capitalists, accelerated depreciation for business equipment, and a deduction for new car loan interest. Oregon would keep federal rules exempting tips and overtime from taxation. More than 200,000 low-to-moderate income households would gain expanded state tax credits if the measure passes.
How State Tax Conformity Works
Most states that impose income taxes align their rules closely with federal provisions to simplify filing and business planning. Oregon operates under automatic conformity, meaning the state adopts federal tax changes unless legislators vote otherwise. Idaho takes the opposite approach, requiring legislative approval to match federal rules.
The Legislature has decoupled before. In 2018, Oregon rejected certain federal provisions to protect state revenue. This year’s bill would affect multiple major federal provisions and has a larger projected fiscal impact than previous conformity updates. The state faces a potential $900 million revenue impact from federal tax cuts, according to the Oregon Center for Public Policy.
The Budget Pressure
Oregon’s fiscal picture presents competing pressures. The state’s 2026 budget forecast showed an atypical $198 million surplus, reversing previous deficit projections. But other economic indicators have deteriorated. Private-sector employment dropped for the first time since the Great Recession in 2025. Unemployment climbed to 5.2 percent, nearly a full percentage point above 2024 levels and outpacing national trends.
Manufacturing has taken the hardest hit. The sector shed more than 5 percent of jobs in 2025. Roseboro Forest Products eliminated 146 positions in Southern Oregon, part of a broader contraction across the state’s industrial base.
These economic headwinds complicate the tax debate. Both sides claim their approach would better support job creation and business investment. Republicans estimate SB 1507 would cost the state $311 million for the remainder of the 2025-27 biennium. Democrats counter that decoupling would generate $291 million for education, health care, and public safety.
What the Bill Targets
The qualified small business stock exclusion gives special tax treatment to investment gains, primarily helping venture capitalists and early investors in certain corporations. The provision offers minimal benefit to typical Oregon taxpayers but represents significant revenue loss for the state.
Bonus depreciation allows corporations to write off equipment and machinery purchases immediately rather than spreading deductions over multiple years. The Oregon Center for Public Policy criticized the provision, saying it would reduce state revenue while benefiting corporations. Bonus depreciation allows businesses to deduct equipment costs immediately rather than over time.
The auto loan interest deduction provides tax relief for new car purchases. The deduction applies only to new vehicles and does not cover used car purchases.
The federal law also exempts tip income from taxation, covering 68 Treasury-designated occupations including self-enrichment teachers, pet caretakers, and club dancers. The exemption for tips and overtime has received less debate in committee hearings compared with other provisions.
Political Battle Lines
Senate Republican Leader Bruce Starr called the bill “a tax increase, plain and simple,” arguing that “small businesses and working Oregonians could lose out on hundreds of millions of dollars in needed tax relief in the next few years because Democrats are creating a loophole to funnel it into the state’s already-bloated budget.”
Representative E. Werner Reschke emphasized economic stimulus benefits. “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.”
Senator Anthony Broadman framed the measure differently. “Democrats are laser-focused on putting more money in the pockets of everyday Oregonians,” Broadman said. “At a time when the cost of living is too high and rising, we need to take urgent action this legislative session to invest in affordability and support local businesses.”
A February 4 Senate Finance and Revenue Committee hearing drew 495 public comments. A slight majority opposed the bill, favoring retention of federal tax rules. Some opponents appeared to misunderstand the legislation, citing concerns about sales tax implementation that isn’t part of SB 1507.
What Changes for Taxpayers
If SB 1507 passes, the state’s Earned Income Tax Credit would expand from 9 percent to 14 percent for individual filers and from 12 percent to 17 percent for those with a child under three. This represents the largest increase in Oregon history for the credit, which supplements federal EITC benefits.
The bill would establish a $25 million Jobs Tax Credit targeting businesses that create net employment increases in Oregon. This provision aims to offset the loss of bonus depreciation by incentivizing hiring rather than equipment purchases.
Buyers of new vehicles would lose the auto loan interest deduction. Venture capitalists and early-stage investors would face higher taxes on stock gains. Business owners planning equipment purchases would need to depreciate those investments over multiple years rather than taking immediate write-offs.
Low-to-moderate income households stand to gain the most from the expanded EITC. More than 200,000 Oregon families would qualify for increased credits. The average benefit increase would vary based on income level and family composition.
The Competitive Landscape
Oregon’s decision occurs against a backdrop of interstate tax competition. Neighboring states have taken different approaches to federal conformity. Idaho’s Legislature is moving quickly toward full alignment with federal rules, partly to match national Republican policy priorities.
Washington state, which has no income tax, faces no conformity decision. California has signaled intent to decouple from certain federal provisions. These varying approaches create different tax environments for businesses considering where to locate or expand operations.
Manufacturing businesses should monitor the outcome closely. Oregon’s manufacturing sector contracted significantly in 2025, with employment declining more than 5 percent. Manufacturing employment in Oregon declined more than 5 percent in 2025, according to state labor data.
The bill’s fate remains uncertain. Democrats hold majorities in both legislative chambers but face pressure from business groups and Republican opposition. The Legislature has until the end of the 2026 session to act. Without legislative intervention, Oregon will automatically adopt all federal tax provisions by default.
Source
A partial decoupling from federal tax law | Oregon Capital Chronicle