Oregon law requiring personal income taxpayers to “addback” the IRC Sec. 199A deduction did not violate the Oregon Constitution. Taxpayers claimed the law was a tax increase enacted in violation of the Oregon Constitution’s:
- Origination Clause; and
- Supermajority Clause.
TCJA Included 199A Federal Deduction
The Tax Cuts and Jobs Act created a 20% deduction for non-corporate taxpayers with qualified business income from a domestic business. Oregon passed legislation requiring taxpayers to add to their federal taxable income any amount allowed as a deduction under IRC Sec. 199A.
Oregon Adopts an “Addback”
The Democratic controlled Oregon legislature passed, and the governor signed, the legislation requiring the addback. At the time of passage, the legislature estimated that the adoption of the addback would bring in:
- $258.4 million in 2017-19;
- $404.7 million in 2019-21; and
- $455.4 million in 2021-23.
The taxpayer plaintiffs in the case were two Republican state senators who argued that the purpose of Oregon’s addback was to raise taxes.
Oregon Constitutional Requirements
The senators claimed that the legislation was a “bill for raising revenue” enacted in violation of the Origination and Supermajority Clauses.
The Origination Clause requires bills raising revenue to originate in the Oregon House.
The Supermajority Clause requires 3/5 of all members of each house to pass bills raising revenue.
The Oregon Supreme Court has established a two-part test to determine if bills are raising revenue:
- does the bill collect or bring money into the treasury; and
- does the bill levy a tax?
Three examples of bills to collect or bring in money are bills:
- imposing a new tax;
- increasing an existing one; or
- eliminating an exemption.
If the bill does not collect or bring money into the treasury, there is no need to reach the second question.
While there is no positive definition of a bill levying a tax, Oregon case law excludes bills:
- imposing fees for governmental services;
- primarily regulating behavior or legal relationships outside the area of taxation, imposing fines, penalties or other charges merely incident to regulation; or
- regulating a tax to secure a just or expedient basis for the tax.
199A Addback Did Raise Revenue
Requiring the addback increases the starting point for Oregon taxable income and raises revenue.
Federal taxable income is the starting point in determining Oregon’s tax base. The legislation states that IRC Sec. 199A allows a deduction from federal taxable income and requires taxpayers to add an amount to federal taxable income.
The purpose of the legislation was to undo the net economic effect of IRC Sec. 199A. Undoing the effect did not mean that the deduction ceased to exist. Without the legislation, taxpayers could utilize the federal deduction.
The Legislation Was Not Levying a Tax
The tax court found the legislation was a tax base bill. The bill did not have the features of levying a tax. The revenue effect of a bill does not determine if it is a bill raising revenue.
A revenue increase is a useful factor in determining the legislature’s purpose. However, the tax court was not examining the purpose of the legislature because the act fit within the tax base bill exclusion.
The bill regulates the personal income tax by securing a basis for the tax.
The legislation was like numerous other addbacks, subtractions and other modifications to federal taxable income. The legislature routinely passes legislation to modify the federal tax base to enact its policy choices that differ from those of the U.S. Congress.
Andrew Soubel, J.D.