Why is no one talking about Oregon eliminating QSBS tax breaks…?

Shame on me. I haven’t been closely tracking on this. But it’s coming up more and more often in conversations with startup founders and investors. “What is…?” you ask? The fact that disentangling Oregon tax law from federal tax law carries along with it language that basically eviscerates one of the most compelling tools that startups use to compensate founders, early employees, and investors: Qualified Small Business Stock. Rest assured, Oregon changing QSBS taxation could have demonstrable and irreparable impact on the Oregon startup community as a whole.

tl;dr: Currently in Oregon (but not for long apparently), if you build a startup, hold QSBS for 5+ years, and sell it — through a liquidity event or in the secondary market — you can exclude up to 100% of the gains from federal taxes and Oregon income taxes (because they were pinned to federal tax law). It’s one of the biggest incentives for starting a company. And this new law will change that completely.

First things first…

What is Qualified Small Business Stock (QSBS)?

Normally when you sell shares, they could be subject to either short or long term capital gains rates. Short term capital gains rates may be as high as 37% whereas long term capital gains rates may be as high as 20%. QSBS status offers the ability to lock in a 0% capital gains tax rate for federal purposes. However, the tax benefits differ depending on when the QSBS shares were acquired.

To put it another way:

In the event of an M&A transaction, many stockholders plan to take advantage of the exclusion from federal taxable income of gain realized from the sale or exchange of “qualified small business stock” (QSB stock).  Section 1202 of the Internal Revenue Code (the Code) permits non-corporate stockholders to exclude from federal taxable income a portion of the gain realized from the sale or exchange of QSB Stock held for more than five years

Why do folks think this is a good idea…?

According to the Oregon Center for Public Policy:

Qualified Small Business Stock (QSBS) Exclusion: One of the most sensible moves the legislature can make right now is ending Oregon’s connection to the Qualified Small Business Stock (QSBS) exclusion. Nationally, 94 percent of the benefits of QSBS go to investors making more than $1 million annually. QSBS functions by giving early investors, notably venture capitalists, special tax breaks on their shares of certain corporations. Among those who have reaped benefits from QSBS include early investors in Zoom, Uber, and other California tech startups. Ironically, California disconnected from this wasteful handout years ago.

I know I’m not telling you anything you don’t know when I say, “Oregon is not California.” Practically the only thing we have in common is a border. Unlike California, Oregon’s startup ecosystem is fragile at best and — except for the outlier 2010-2020 decade — pretty much in the habit of consistently losing people and companies.

It happens so often, it’s a trope. “So-and-so just moved to Vancouver. Guess they’ll have a liquidity event in six months.” A Portland founder can move to Vancouver, WA — because the Washington startup community fought to keep the QSBS exclusion — and pay zero state tax on QSBS gains. That’s a 9.9% swing for doing nothing more than changing your address.

Amy Harris, director of government affairs for the Washington Technology Industry Association (WTIA), said the [Washington QSBS] proposal “weakens one of the few policies Washington has that actually rewards startup risk.” Harris told GeekWire it “sends exactly the wrong signal, effectively telling homegrown startups to build in Washington, but plan their success somewhere else.”

Long story short, Oregon doesn’t have the startup gravitational pull to offset a tax penalty like this. Especially with the gravity of its neighbors to the north — who have now created shelter in the storm — and south which has its own litany of reasons for startups to relocate.

Also, lest we forget, people starting new companies are the single best source of net-new job growth. At a time where we’re struggling with unemployment and underemployment with a growing cost of living. This move could preclude the creation of new businesses — businesses which create new and more jobs — which results in more and more employees consistently contributing to the Oregon tax base over a longer period of time than a one-off exit from a handful of venture funded startups, here and there.

Also, fun fact: This only applies to Oregon folks. So those high-net-worth Angels or VCs from outside the state who take the opportunity to invest in Oregon companies? No impact. Local investors, however? Impact. Significant impact. And I don’t see our region exactly teeming with early stage investors, as is.

Despite this Democratic pedigree, with its clear incentive to create new businesses with new jobs, Democrats in Salem now seek to impose Oregon tax on Oregonians with gain from the sale of QSBS—this new Oregon tax would not apply to a nonresident selling the same QSBS (including a nonresident who was a resident of Oregon shortly before the sale). If the law is enacted, Oregonians would have to add to Oregon taxable income gain excluded by the QSBS regime with respect to sale of QSBS on or after January 1, 2026, (including gain that would have been excluded if the Oregonian sold the QSBS before 2026).

This new take on QSBS makes that pursuit even less attractive for local folks to invest. It goes from an anemic trickle of local investment capital to complete a non-starter. So if you’re one of those rare Oregon based investors who loves to “buy local” — and honestly, shouldn’t we all be…? — this is a huge disincentive to do so. Furthermore, the continues to ensure that investors from outside the state — rather than within it — continue to serve as the primary source of capital for early stage local startup activity. (And what’s the downside of that…? Story for another time.)

This basically puts a dent in — or outright kills — generational wealth creation opportunities for every Oregonian involved in the capital stack of the local startup community.

At a time like this, when we’ve barely begun to rekindle any sort of momentum in our post-pandemic startup community, this seemingly insignificant effort claiming to be directed at reducing tax breaks for millionaires could be the emergency brake that stops the whole startup renaissance thing in its tracks.

The bill (SB 1507) has already passed the Oregon house and senate. And now it’s awaiting Governor Tina Kotek’s signature.

What can you do…?

Honestly, this is so far gone, it’s fairly hopeless. But you can send your thoughts to the Governor. Robert Pease of Cascade Seed Fund has a good template:

Skip Newberry of the Technology Association of Oregon shared this:

There is also talk of this could be sent to Oregon voters in November 2026 as a referendum:

Rep. Ed Diehl, a Republican from Scio who is running for governor, said that Republicans would send the proposed disconnections from the federal tax code to voters in a ballot measure by November.

As an added twist of the knife, this is retroactive to January 1, 2026.

“People made financial decisions based on current law,” said Diehl. “Changing the deal midstream is not stability — it is moving the goalposts.”

Whatever the case, this is a mess for the entire Oregon startup community — even those people who haven’t taken the leap yet. Founders, investors, and early employees all stand to lose out on the benefits of taking a risk on early stage ideas. And our already questionable presence in the world of startups becomes almost laughable.

I guess, on the upside, if we do nothing I’m going to get a whole bunch of time back. Because I won’t have any local startups or investors to write about. Or a community to help. So that will take a load off of my plate.

Maybe I’ll take up knitting.