Oregon Senate lawmakers are advancing a bill that would disconnect the state’s tax code from three federal tax breaks, a move the Legislative Revenue Office projects would net an additional $311.6 million for the state’s General Fund in the 2025-27 biennium. SB 1507 is now in its engrossed form after clearing the Senate Finance and Revenue Committee. In practice, the bill would require Oregon taxpayers to add back certain federal deductions or exclusions when calculating their Oregon taxable income.
How the Disconnect Mechanism Works
Oregon’s income tax system is built on federal adjusted gross income as a starting point, which means changes to the Internal Revenue Code automatically ripple into state returns unless the legislature acts. SB 1507 uses a statutory “addback” approach to neutralize three specific federal provisions. Taxpayers who claim the new federal deduction for qualified passenger vehicle loan interest would have to add that amount back to their Oregon taxable income. The same treatment applies to the federal exclusion of gain on qualified small business stock and to the restored 100% bonus depreciation that lets businesses write off the full cost of equipment and other assets in the year of purchase.
The federal provisions at issue were recently enacted or expanded at the federal level, and Oregon would choose not to conform to them for state tax purposes. Among the tax components discussed in federal materials, 100% bonus depreciation under IRC Section 168 would allow full expensing in the year of purchase. By disconnecting from these provisions for tax years beginning on or after January 1, 2026, Oregon would effectively treat them as if they never existed for state purposes. The engrossed bill text spells out the addback and subtraction mechanics line by line, creating a parallel calculation that keeps Oregon’s tax base wider than the federal one.
Where the $311.6 Million Comes From
The revenue impact is not evenly distributed across the three disconnects. Bonus depreciation alone accounts for the largest share by a wide margin. According to the Legislative Revenue Office’s analysis dated February 9, 2026, disallowing the federal expensing provision would generate $267.0 million for the General Fund in the 2025-27 biennium. The qualified small business stock disconnect adds $38.9 million, and the vehicle loan interest addback contributes $36.4 million. Together, the three disconnects produce gross new revenue well above $300 million.
That total is partially offset by two spending provisions embedded in the same bill. SB 1507 expands Oregon’s Earned Income Tax Credit, which reduces the net gain by $26.2 million. A new jobs credit, structured with eligibility caps and set to run through 2031, costs an additional $4.6 million. After those offsets, the net General Fund impact lands at $311.6 million for the biennium. The bill pairs the disconnect provisions with an EITC expansion and a jobs credit, which together reduce the net revenue gain while still leaving a sizable projected net increase for the General Fund.
Bonus Depreciation Carries the Fiscal Weight
The outsized role of bonus depreciation in this bill deserves closer attention. At $267.0 million, it represents roughly 86 percent of the gross revenue gain. That figure reflects how widely Oregon businesses would otherwise use the restored federal write-off. Full expensing allows a company buying, say, a $500,000 piece of manufacturing equipment to deduct the entire cost in year one rather than spreading it over several years. When Oregon refuses to follow that treatment, the business still gets the federal benefit but owes more to Salem in the near term because its state taxable income stays higher.
This creates a timing difference rather than a permanent tax increase for many businesses. Over the useful life of an asset, total depreciation deductions may converge, but the state captures revenue sooner, which matters for a legislature trying to balance a biennial budget. The practical effect is that capital-intensive industries, from agriculture to tech hardware, bear a disproportionate share of the burden. Whether that discourages investment or simply shifts cash flow is a key question likely to surface as SB 1507 advances toward a floor vote and stakeholders weigh in on Oregon’s tax climate.
EITC and Jobs Credit as Political Counterweights
Embedding the EITC expansion and jobs credit inside the same bill is a strategic choice that makes SB 1507 harder to characterize as a pure tax grab. The EITC increase raises the percentage of the federal credit that Oregon matches, directing money toward working families who earn below certain thresholds. The jobs credit, meanwhile, targets employers who meet specific hiring criteria and includes a cap to limit state exposure. Its sunset date of 2031, as laid out in the A-engrossed language, signals that legislators view it as a temporary incentive rather than a permanent fixture of the tax code.
The combined cost of these two provisions, roughly $30.8 million, is modest relative to the revenue the disconnects produce. That ratio matters politically. Supporters can argue the bill takes from corporations and investors while giving back to low-wage workers. Critics, however, may note that the EITC expansion and jobs credit together offset less than 10 percent of the new revenue, leaving most of the $311.6 million available for general spending rather than targeted economic relief. The online measure tools show the bill gaining procedural momentum, but the floor debate will test whether the offset provisions carry enough weight to blunt business community concerns about Oregon’s direction on tax policy.
What Comes Next for Oregon’s Tax Policy
SB 1507 is unfolding against the backdrop of Oregon’s broader reliance on income taxes and its absence of a general sales tax, a structure that makes decisions about conformity to federal law especially consequential. Lawmakers and stakeholders following the measure through the state legislature’s website are watching to see whether the disconnect strategy becomes a template for future responses to federal tax changes. If the bill passes with its current structure intact, it would signal a willingness to selectively decouple from Washington when federal policy is perceived as too generous to higher-income taxpayers or large businesses.
For taxpayers, the practical upshot would be more divergence between their federal and Oregon returns starting in tax year 2026, particularly for investors claiming small business stock exclusions, households using the new vehicle interest deduction, and companies planning large capital purchases. Accountants and tax preparers would need to walk clients through the addback calculations embedded in SB 1507 and adjust planning strategies accordingly. Whether voters ultimately endorse this shift may hinge on how visible the EITC expansion and jobs credit are to households and employers compared with the quieter, but much larger, revenue gain the disconnects deliver to the state’s General Fund.
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*This article was researched with the help of AI, with human editors creating the final content.
Julian Harrow specializes in taxation, IRS rules, and compliance strategy. His work helps readers navigate complex tax codes, deadlines, and reporting requirements while identifying opportunities for efficiency and risk reduction. At The Daily Overview, Julian breaks down tax-related topics with precision and clarity, making a traditionally dense subject easier to understand.
