Oregon lawmakers approved legislation Wednesday that breaks the state’s automatic link to specific federal tax breaks, a move projected to recover nearly $900 million in state revenue over the next two years. The House passed SB 1507 more than a week after Senate approval, sending the measure to Governor Tina Kotek for her expected signature.
The bill responds directly to tax provisions in H.R. 1, the federal legislation signed into law in 2025 under President Donald Trump. Oregon has maintained a “rolling reconnect” to federal taxable income calculations since the 1960s, automatically adopting changes to the federal tax code. SB 1507 severs that connection for three specific breaks introduced in H.R. 1, effective for tax year 2026 and beyond.
What the Bill Changes
The legislation disconnects Oregon from three federal tax provisions: bonus depreciation rules under Section 168(k) of the Internal Revenue Code, a new deduction for auto loan interest on U.S.-assembled vehicles, and expanded exclusions for gains on Qualified Small Business Stock. Without this decoupling, Oregon would have automatically adopted these breaks, costing the state general fund $888 million over the 2025-27 budget cycle.
The federal bonus depreciation provision allows businesses to immediately write off 100% of equipment costs rather than depreciating them over five to seven years. The auto loan interest deduction permits taxpayers to deduct interest on loans for passenger vehicles assembled in the United States, with the benefit phasing out for vehicles priced above certain thresholds. The QSBS exclusion lets early investors in small corporations exclude capital gains when selling their stock.
By rejecting these federal changes, Oregon businesses will add back federal deductions when calculating state taxable income and continue depreciating equipment over multiple years. Individual taxpayers will lose the vehicle loan interest deduction at the state level, even if they claim it federally. Investors selling qualified small business stock will pay Oregon taxes on gains that federal law now excludes.
Revenue Impact and Budget Protection
State revenue analysts estimate the three decouplings will generate $311 million for Oregon’s general fund through the current biennium. The largest revenue source comes from maintaining Oregon’s existing depreciation schedule rather than adopting immediate expensing, which accounts for the majority of the $311 million recovery.
Senator Anthony Broadman, a Bend Democrat who co-authored the bill with Representative Nancy Nathanson, said the measure protects funding for education, healthcare, childcare, and food assistance programs. “We are cutting taxes for Oregonians consistent with Oregon values,” Broadman said, noting that Oregon joins other states in rejecting these specific breaks without losing economic competitiveness.
The Fight for Our Future Coalition and Oregon Revenue Coalition supported the legislation, arguing that the federal tax cuts in H.R. 1 disproportionately benefit wealthy individuals and corporations. Data shows that nationally, 94% of QSBS exclusion benefits flow to taxpayers earning over $1 million annually, with early investors in companies like Zoom and Uber among the primary beneficiaries.
At the federal level, H.R. 1 delivers an average tax cut of $42,000 to Oregon’s top 1% of earners, compared to $70 for the bottom 20% of households, according to analysis by the Oregon Center for Public Policy.
Expanded Credits for Low-Income Families
SB 1507 includes provisions that offset the revenue gains from decoupling. The bill increases Oregon’s Earned Income Tax Credit from 9% to 14% of the federal credit, with the rate rising to 17% for families with children under age three. The current rate is 12% for young children.
The EITC expansion will cost the state $26 million annually but is projected to generate $40 million in economic benefits, with nearly all gains flowing to the bottom 60% of income earners. This means low and moderate-income Oregonians will pay less in state income taxes under SB 1507 than they would have under the federal changes alone.
The legislation also creates a new nonrefundable tax credit for businesses that create jobs in Oregon, estimated to cost $4.5 million. This credit aims to encourage employment growth while the state maintains stricter depreciation rules than federal law.
Business Opposition and Referendum Plans
Republican lawmakers and business groups oppose the bill, arguing it will increase costs for Oregon companies and slow job creation. Representative Ed Diehl released a statement Wednesday night saying the legislation eliminates valuable deductions that help families and small businesses.
Diehl specifically cited the loss of vehicle loan interest deductions, QSBS exclusions, and immediate bonus depreciation as provisions that will force businesses to pay higher state taxes even as their federal liability decreases. He announced plans to pursue a statewide referendum on what he termed the “tax-increasing sections” of SB 1507, potentially placing the issue before voters in November 2026.
Business owners will need to track both federal and state depreciation schedules separately, adding complexity to tax compliance. Companies that purchased equipment in 2026 can claim immediate federal deductions but must spread those deductions over multiple years on Oregon returns. This creates short-term cash flow impacts, though the total deduction amount remains the same over time.
Oregon Joins Majority of States
About two dozen states already disconnect from federal bonus depreciation rules, and California decoupled from QSBS exclusions years ago. Oregon’s decision aligns the state with the majority of jurisdictions that maintain independent depreciation policies rather than automatically conforming to federal changes.
Only eight states besides Oregon offered conformity to the new federal auto loan interest deduction before SB 1507 passed. The legislation positions Oregon within the mainstream of state tax policy rather than as an outlier, according to supporters.
Senator Wlnsvey Campos, an Aloha Democrat, framed the bill as protection against federal policies that shift tax burdens onto working families. “This body must be the backstop against an increasingly hostile federal administration that doesn’t care about raising prices on everyday people to pay for tax cuts for wealthy corporations,” Campos said during floor debate.
The bill now awaits Governor Kotek’s signature. Once signed, the provisions take effect for tax year 2026, meaning Oregonians filing returns in early 2027 will see the first impacts. Taxpayers should expect tax preparation software to account for Oregon-specific additions to federal taxable income, and businesses may want to consult advisors on the cash flow implications of maintaining separate depreciation schedules.
If Representative Diehl succeeds in qualifying a referendum, voters could overturn some or all of the tax changes in the November 2026 election. Referendum petitions must meet signature requirements and pass Oregon Department of Justice review, typically by summer of an election year.
Source
Bill That Proposes Oregon ‘Disconnect’ From Federal Tax Code Passes State Legislature | Yahoo news