581,000 Oregon Income Tax Filers Could Benefit from $10,200 Federal Exemption of Unemployment Insurance Benefits But State Inaction Could Reduce the Net Benefit.

The federal Rescue Plan legislation approved this week provides for a one time up to $10,200 exemption of 2020 unemployment insurance compensation from federal income tax. This exemption will be available to filers with adjusted gross income of less than $150,000, regardless of filing status.

This provision is similar to federal legislation during the last recession that provided up to a $2,400 exemption for 2008 unemployment insurance compensation.

In 2009 Oregon adopted legislation that also exempted up to $2,400 in 2008 unemployment insurance compensation from state income tax.

There are several related questions, some with immediate answers and some not.

Q1. Will Oregon adopt a similar exemption for state income taxes?
A1. Not yet decided. A bill to exempt one time stimulus payments has been introduced in the Senate. Background and text for SB842 are HERE. 

Q2. How does this impact timing of filing a return? 

A2. Not yet clear. Unless the legislature acts quickly it seems likely that filers who want to claim any benefits from these income exemptions from the Rescue Plan legislation will need to later send modifications of the returns due April 15 or file for extensions for filing their returns.

Q3. What 2009 Oregon legislation was adopted to exempt  up to $2,400 in 2008 unemployment compensation from state income tax?
A3. HB2694 HERE. Section 5 has the relevant language which seemingly could be modified relatively easily to reflect the Rescue Plan changes:

"SECTION 5. There shall be subtracted from federal taxable income for Oregon tax purposes the difference between the amount allowable as a deduction under section 85 of the Internal Revenue Code as applicable to the tax year of the taxpayer and the amount allow- able as a deduction under section 85 of the Internal Revenue Code as amended and in effect on December 31, 2008, and as applicable to tax years beginning on or after January 1, 2008, and before January 1, 2009."

[A little trivia. The Oregon unemployment exemption legislation was later part of Ballot Measure 66, a referendum in January 2010 where the voters elected (by a 54% majority) to not repeal income tax increases and this exemption. The Secretary of State in 2010?  Kate Brown].

Q4. How many Oregon filers received unemployment compensation during 2020? 

A4. From OED, 581,638. 

(This number could be slightly less if it includes filers with AGI's $150,000 and higher).

Q5. Of those filers how many had unemployment compensation of less than $10,200
A5. From OED, 309,315. That’s 53% of all filers with 2020 unemployment compensation. The 272,323 filers with 2020 unemployment compensation of more than $10,200 will still be able to exempt that amount and pay taxes on the amount greater than $10,200 as long as the filer has an AGI of less than $150,000.

Q6. Any there any projections of potential tax savings should Oregon adopt the federal exemption?
A6. In 2009 Oregon estimated total revenue loss from the exemption of $2,400 in unemployment compensation at $32 M. While revenue loss may not be exactly the same as tax savings multiplying the $32 million by the 4.25 ratio of the 2020 $10,200 exemption to the 2008 exemption results in a projection of $132 million in revenue loss/tax savings. 

This is likely a ballpark number only, as the number of recipients in 2020 could be substantially higher and the income mix of unemployment insurance recipients could be different from the last recession. 

Q7. Did the state actually lose income tax revenue in 2008 and potentially in 2020 because of the exemption of unemployment compensation income?

A7. In both years "revenue loss" is more accurately described as a potential revenue windfall to the state. 

A lowering of federal income taxes because of the exemption can increase the income on which Oregon income tax is calculated. The net effect is that the amount of INCREASED income resulting from a reduction in federal taxes can be REDUCED by the amount of  any offsetting state income tax increase.

Originally created and posted on the Oregon Housing Blog.