Priority Recommendations

Priority Recommendations The most important step the Governor and Legislators can take to address Oregon’s uneven tax structure is to support moving Oregon beyond its current “one-and-a-half-legged stool” model, which relies heavily on personal income tax and constrained property tax revenues. Reform should aim to strengthen long-term revenue stability, diversify the tax base, reduce volatility, and increase contributions from nonresidents. Achieving a more balanced and competitive tax system may require broader-based revenue tools that can be more regressive in isolation. But when paired with targeted investments in education, housing, healthcare, early childhood programs, and other essential services, they can support more equitable long-term outcomes for Oregonians. Over time, revenue growth and the elimination of ineffective programs and tax expenditures can help fund these investments while improving Oregon’s competitiveness for business, talent, and investment. 2027 Legislative Session: Strengthen Oregon’s Economic Competitiveness While the Council agrees that more comprehensive reforms are ultimately needed, the following recommendations move the state closer to a balanced tax system in the near term, help businesses of all sizes innovate and employ more people, and make Oregon a more competitive place to do business. At this critical time when

18 - OREGON PROSPERITY COUNCIL | RECOMMENDATIONS FOR OREGON’S LONG-TERM COMPETITIVENESS AND PROSPERITY | JUNE 2026

2 . TA X E S Oregon must both respond to immediate economic pressures and prepare for its future, these policies support businesses and workers together to build a stronger and more resilient statewide economy. The Governor should also reject proposals that increase personal or business taxes and fees unless there is meaningful support from Oregon’s employers of all sizes. Modernize economic incentives, including the Research & Development tax credit to better support innovation and help smaller businesses working to grow, add employees, and stay in Oregon. Oregon’s incentive structure often favors capital-intensive investments while providing more limited support for research development, talent, and operating expenditures that drive innovation and long-term competitiveness. Oregon should continue to support and expand programs that incentivize beyond capital expenditures, as well as modernizing the Research & Development tax credit to apply to more industries and include companies that pay above median county wages. To encourage innovation and strengthen connections between industry and higher education, Oregon could offer a 15% tax credit for company-led research and development and a 20% credit for projects conducted with Oregon universities. Update the Estate Tax to support family businesses, so they can transition successfully from one generation to the next. Oregon should introduce targeted deductions for small businesses, following a best practice from Minnesota, and explore raising the threshold of the exemption to $3-5 million to achieve competitiveness with West Coast states. Minnesota defines a small business as having sales of less than $10 million annually and allows for a $2 million deduction, in addition to the exemption limit. Reform the Corporate Activity Tax (CAT) so that small and medium-sized businesses, particularly those operating on thin margins, do not face extraordinary administrative burdens and costs. The current structure increases costs at every stage of production and sales, while the standard deduction disproportionately disadvantages smaller businesses with higher input costs. Oregon should consider increasing the filing and taxability threshold from $1 million to $2 million to reduce burdens on small business, while also moving to a subtractive method that allows a complete deduction of input costs while preserving the administrative structure. Any reforms should maintain revenue neutrality and ensure continued funding for essential public services, including K-12 education. Reconnect the Qualified Small Business Stock (QSBS) policies to the federal tax code because they are critical to helping Oregon retain and grow emerging small businesses at a time when founders, investors, and growing companies are increasingly being recruited to other states. Keeping support for long-term investment in Oregon businesses can prevent the loss of jobs, capital, and future business growth to more business-friendly states. Develop a Holistic Proposal to Be Implemented by 2029 Council members agree that our existing tax structure, with its over-reliance on income taxes and limitations on property taxes, is a barrier to needed investments in the education, healthcare, infrastructure, and climate resilience programs that our communities deserve. The Council recommends that the Governor convene a nonpartisan tax reform working group to develop a long-term reform proposal that can be implemented by 2029 in advance of the expiration of federal State and Local Tax (SALT) provisions. The group should be

19 - OREGON PROSPERITY COUNCIL | RECOMMENDATIONS FOR OREGON’S LONG-TERM COMPETITIVENESS AND PROSPERITY | JUNE 2026

2 . TA X E S chartered to develop principles for reform, evaluate trade-offs in reform scenarios, develop recommendations for specific tax changes, and develop a pathway for implementing those changes though the Legislature and voters. This group should be chartered to create a more balanced tax system that reduces the state’s over-reliance on income taxes to fund essential public services. Topics the group should consider include: Reforming the Corporate Activity Tax as part of a comprehensive rebalancing. Enabling local governments to increase funding stability with common sense property tax regulations that sufficiently fund core programs without needing a complex array of local voter-approved funding sources. Rebalancing personal income tax structure to maintain progressivity and reduce effective rates for all income brackets. Supporting ongoing progressivity in the system through reforms that support low- and middle-income households. BEST PRACTICES Indiana’s approach to comprehensive property tax reform offers useful lessons in how to develop durable, system-wide change through bundled reforms and stakeholder alignment. In 2008, the state enacted a bipartisan legislative package that paired property tax caps with shifts in state and local responsibilities, later reinforced through a 2010 constitutional amendment. Dissenting perspective: Nearly all Council members agreed with this section, however two members disagreed with the need for many of the proposed tax changes and expressed concerns about the necessity of broader business incentives and their long-term impacts to the state. They agree that Oregon must strengthen its long- term competitiveness, but believe increasing investments in workforce and existing programs is more critical than increasing investments in business tax expenditures. Additionally, while further fiscal analysis would occur before implementation, these two Council members believe that the impacts of individual recommendations or their combined effects should be better understood before recommendations advance.

20 - OREGON PROSPERITY COUNCIL | RECOMMENDATIONS FOR OREGON’S LONG-TERM COMPETITIVENESS AND PROSPERITY | JUNE 2026

Parent: Chapter 2: Taxes · PDF: pp. 18-20