Last year’s federal stimulus payments will generate $112 million in additional Oregon taxes because of a quirk in state tax law.
The taxes will hit 877,000 Oregonian taxpayers, about half of all those who received federal stimulus payments in 2020 and early in 2021, according to the state. They would owe an average of about $130 apiece, including many lower income workers would owe $100 or more.
Lawmakers from both parties say that’s unfair, and the Legislature is examining a fix that would wipe out the higher tax bill. But with the April tax filing date already fast approaching it’s not clear there’s consensus to make a change.
Here’s why this is happening.
Last March, Congress authorized $1,200 in stimulus checks for adults and an additional $500 for children, with the amount declining for wealthier taxpayers. A second round authorized in December, and paid early in 2021, paid $600 per adult and another $600 per child – again, with the totals declining in more affluent households.
The stimulus payments were structured as a tax rebate, which means they aren’t subject to federal or state income taxes. But Oregon is one of six states that allow taxpayers to deduct a portion of their federal tax payments from their state income taxes.
Most years, the deduction functions as a state tax break. But when the feds are handing out free money it reduces the size of that break. A lower federal tax bill means there’s less to deduct from your state taxes.
The Legislative Revenue Office estimates Oregon will collect an additional $103 million this year, and $9 million next year, from taxes generated by that stimulus money. That’s 3.6% of the $3.1 billion in stimulus money that Oregonians received.
That tax hike won’t hit everyone, though. Low-income Oregonians with no federal tax liability won’t pay more in state taxes, and some high-income residents with large federal tax bills won’t pay, either.
The more people earn, generally speaking, the more they will owe – but even some Oregonians earning under $50,000 a year will owe $100 in additional taxes. That’s a hefty chunk of their stimulus payments.
(The calculations of who will owe, and how much, are complex and vary considerably based on taxpayer income and family status. See some detailed examples from the state here.)
While stimulus payments from 2008 had a similar effect on Oregonians’ taxes, few people anticipated the pandemic relief payments would generate additional costs. And few people appear to have set aside money to cover the costs.
Congress intended the stimulus payments to be tax free, according to U.S. Rep. Peter DeFazio, D-Springfield.
“It is unconscionable to ask those working families who have struggled the most during this crisis to bear the weight of the state’s budget shortfall,” DeFazio wrote in a letter to Gov. Kate Brown and legislative leaders last week. He asked them to relieve Oregonians of those higher taxes.
Oregon State Sen. Dick Anderson, R-Lincoln City, plans to introduce a bill the protect Oregonians’ stimulus checks from state tax implications.
“The sole purpose of federal stimulus checks was to give people help when they needed it the most,” Anderson said in a statement last week. “There is no justification for the state to be taking some off the top. Helping people get back on their feet means helping them keep more money in their pockets.”
Gov. Kate Brown’s office said she is interested in an “overall conversation” about the effects of stimulus programs on Oregon taxes. Spokeswoman Liz Merah said the governor wants to consider the question of stimulus taxes in the broader context of how federal relief programs have impacted Oregon’s budget.
Other elements of the programs, she said, have reduced Oregon’s tax revenues and more changes could be coming with a new relief bill now before Congress.
“The governor’s goal is to ensure that we’re targeting state financial aid to the neediest families who have been hit hard by this pandemic,” Merah said.
House Speaker Tina Kotek, D-Portland, appears to be open to a fix to the stimulus tax. Her spokesman, Danny Moran, said the House Committee on Revenue is evaluating the issue and the speaker is “looking forward” to receiving feedback from committee Chairwoman Nancy Nathanson.
But Rep. Nathanson, D-Eugene, noted that Oregon law requires that tax changes go into effect 90 days after the end of a legislative session – which is currently scheduled for June, well after the April 15 tax deadline. Many people have already started filing their taxes, so Nathanson said she is examining when the state can modify tax returns.
“I’m looking for options that can get help to people who need it as easily and quickly as possible, given timing constraints of changing the tax laws,” she said in an email. “There’s time for this legislature to consider separate action related specifically to the 2021 tax return. In other words, we are looking at one approach for helping people this year and a different approach for next year in order to help Oregonians who need it most.”