The Oregon Legislature has approved a bill that will partially disconnect the state’s tax code from recent federal tax changes. According to reporting by Oregon Public Broadcasting, lawmakers acted to prevent what state budget analysts projected would be hundreds of millions of dollars in lost revenue if Oregon automatically replicated new federal tax cuts.

The measure, Senate Bill 1507, passed the Oregon House on a 34–21 party-line vote, after clearing the Senate on Feb. 16. The bill now awaits action by Gov. Tina Kotek, who is expected to sign it. Because Oregon is one of a handful of states that automatically couples its tax code to federal changes, legislators moved to selectively disconnect from several new federal deductions.

According to OPB’s reporting, the bill preserves an estimated $291 million in tax revenue over the next 18 months, largely by rejecting immediate bonus depreciation for new equipment, disallowing a new federal auto‑loan interest deduction, and disconnecting from the federal Qualified Small Business Stock Exemption. Combined, the partial decoupling is expected to protect about $342 million in state revenue.

Democratic bill sponsor Rep. Nancy Nathanson said in a statement that the changes were intended to protect funding for schools, health care, and community‑based services while expanding targeted tax relief for low‑ and moderate‑income Oregonians.

Republican lawmakers opposed the bill and argued that rejecting full federal conformity would disadvantage small businesses and family farms. According to OPB’s reporting, Rep. Ed Diehl said Republicans plan to pursue a ballot referral, which would require gathering more than 78,000 signatures within 90 days after the Legislature adjourns.

The bill also creates new state‑level incentives, including $25 million for job‑creation tax credits tied to in‑state hiring at wages of at least 150% of Oregon’s minimum wage. Another $26 million will expand Oregon’s Earned Income Tax Credit by five percentage points for eligible taxpayers.

While Oregon’s policy debate has centered on revenue stability, the decision carries cross‑border implications. Many Southwest Washington residents work in Oregon and pay Oregon income taxes despite living in Clark, Cowlitz, or Pacific counties. Changes to Oregon’s tax structure can therefore affect household budgets, withholding expectations, and annual tax liabilities for Washington‑based workers who do not pay income tax in their home state but must file in Oregon.

The partial disconnect does not change tax obligations for Washington workers directly, but it may alter eligibility for specific deductions and credits tied to Oregon’s tax code. Any future ballot referral, if it proceeds, could also introduce short‑term uncertainty heading into the 2026 tax year.

Local governments in Cowlitz County monitor Oregon’s tax policy closely because cross‑river economic ties influence workforce stability, commuting patterns, and disposable income spent in Washington communities. With SB 1507 now approaching the governor’s desk, more detailed guidance will emerge once the Oregon Department of Revenue issues filing instructions for upcoming tax years.

Sources

Oregon Public Broadcasting: Oregon will partially disconnect state tax code from new federal code to curb revenue loss