Business and industry groups can generally count on a friendly reception at the Idaho Legislature these days, but 124 years ago it was a different story.

When the Idaho Constitution was written in 1889, convention delegates were so leery of corporations they expressly prohibited lawmakers from cutting sweetheart deals to bargain away the state’s taxing authority.

In Article VII, Section 8 of the Constitution — titled “Corporate Property Must Be Taxed” — Idaho’s founding fathers vowed the power to tax corporations and corporate property “shall never be relinquished or suspended.”

Such populist sentiments are hardly popular at the Statehouse today, but as efforts to eliminate the business personal property tax heat up this session, some lawmakers think they deserve a second hearing. Even if the tax can be eliminated legally, some question whether doing so would be consistent with the founders’ early vision for the state.

“Every lawyer I’ve talked to said we can eliminate it, but the point I’m trying to make is about the spirit of the Constitution,” says Sen. Dan Schmidt, D-Moscow. “I think the founders knew corporations and powerful businesses could lean on the Legislature to get out from under their tax burden — and they were saying, ‘No, we don’t think that’s appropriate.’ ”

Nothing about Idaho’s current tax code suggests delegates were mistaken in their concerns, Schmidt says. The code is replete with dozens of credits, deductions, exclusions and exemptions that collectively total more than $2 billion. Eliminating the personal property tax would zero out an additional $141 million in local tax revenue, mostly to benefit a small number of large corporations.

“We’re letting ’em go,” Schmidt says.

Alex LaBeau, executive director of the Idaho Association of Commerce and Industry, disputes that notion, saying Idaho has a more balanced and reasonable tax code than most neighboring states.

“We’re surrounded by a unique cadre of states that don’t have income tax, don’t have sales tax, that have unbalanced tax codes, and we’re far better off,” he says. “To suggest our code is rife with giveaways is a fully inaccurate statement. We don’t give away the farm.”

Eliminating the personal property tax is more a matter of fairness and proper incentives than financial benefit, LaBeau says. IACI, which represents many of the state’s largest corporations, wants to get rid of the tax because its members say it’s difficult to administer, penalizes investment in capital equipment and acts as a drag on the economy.

“It’s antiquated and needs to go,” he says. “Eliminating it would spur investment in equipment and people.”

IT STARTED WITH THE RAILROADS

Schmidt wrote a recent blog post saying the pressure to eliminate the personal property tax this session “feels like a huge freight train coming at us, while we’re tied to the tracks.”

The imagery is fitting, given the historical context of Section 8.

“The language in that section gives you an idea of the kind of hostility the founding fathers had toward corporations — and when they say corporations, they mean railroads,” says Jim Weatherby, a retired Boise State University professor and longtime observer of Idaho politics.

“The rates railroads charged could mean life or death for one business over another,” Weatherby says. “People had a love-hate relationship with them, and it created a populist force in Idaho and other Western states. That’s why Idaho’s first vote for president (in 1892) went to James B. Weaver, the Populist candidate.”

How the state transitioned from this early skepticism about big business to its current love affair is somewhat sketchy, he says, but it may have had something to do with J.R. Simplot, Joe Albertson and other business leaders.

“A lot of the big corporations in Idaho were home-grown, so people started looking at them very differently,” Weatherby says.

The changing economy also played a role.

Like most states, Idaho initially relied on property taxes to fund state and local government. Frontier communities had few businesses, so sales tax couldn’t pay for schools and other services, but private property was always around.

At first, lawmakers didn’t distinguish between classes of property. “Property” referred to everything from land and livestock to household goods, business equipment and stocks and bonds. Lewiston historian Steve Branting says he’s even heard tell of a hated outhouse tax.

Retired tax historian Glenn Fischer of Colorado says the philosophy of the time was that taxpayers should pay for government services in proportion to their overall wealth.

That started to change nationally at the beginning of the 20th century, he says. States created different classes of property and taxed them at different rates. Various groups also began advocating for an income tax as a more appropriate measure of wealth, and tax exemptions became commonplace.

“Intangible property (like stocks and bonds) was the first to be exempted,” Fischer says. “It was so hard to enforce, many states just gave up.”

Household goods were the next to go. Assessors used to come into homes to count pots, pans and furnishings, which was extremely unpopular. Idaho exempted household goods under $400 in value in 1901. Home improvements under $200 in value were exempted in 1911.

Public aversion to property taxes also played a central role in the creation of Idaho’s modern tax structure.

The state income tax, for example, was approved in 1931. Called the “Property Tax Relief Act,” it reduced the state property tax levy by an amount equal to what was raised from the new tax.

“That was so important in the Depression, when people were losing their homes,” Weatherby says.

A business-inventory tax was also created in 1931. It wasn’t repealed until 1967 — two years after a retail sales tax was implemented to replace the last state property-tax levy. Cities and counties got a share of the sales tax revenue to replace money they had received in inventory tax.

A QUESTION OF FAIRNESS

Given this long history of tax policy changes, House Speaker Scott Bedke, R-Oakley, believes eliminating the business personal property tax will pass legal muster.

“No one stopped us on this slippery slope in 1965,” Bedke says. “We’ve followed a legal model to this point. And I think everyone agrees using income tax and sales tax to run the state general fund is a better way of doing things than going back to a property tax levy on couches and tableware.”

For all the reasons homeowners don’t want to go back to the old ways, he says, businesses now think they deserve a similar break.

LaBeau says when lawmakers exempted agricultural equipment from the personal property tax in 2001, they promised to eliminate the tax on business equipment and furnishings — and it’s time to follow through.

“It’s a fairness issue,” he says.

There haven’t been any bills introduced yet, so it’s unclear how lawmakers will tackle the issue. The main sticking point seems to be how to replace the lost revenue.

“What makes this difficult is the current paradigm that tax relief must be paid for,” LaBeau says. “It’s the idea that this money ‘belongs’ to the government, rather than to the private sector.

“Government needs to be as concerned about how it taxes people as it is about how it spends their money, (but) local governments obviously care more about revenue than they do tax policy.”

Cities, counties, school districts and a whole host of special jurisdictions — ranging from the Port of Lewiston to the Reubens Community Center auditorium district — count on the personal property tax. The fear is that eliminating it would simply shift the burden to someone else.

Jurisdictions depend on the tax to varying degrees. For some, it’s half their property tax collections. For others, it’s only a percent or two.

One possibility being floated by IACI is to “buy down” every district to 12 percent. Above that mark, any lost revenue would be offset with state general fund dollars. Below it, the property tax would be phased out over six years, and local jurisdictions would adjust their budgets accordingly.

Many lawmakers are uncomfortable with that approach. They’re considering a long list of revenue alternatives, such as having the state pay for public defenders, community colleges and other county services, as well as granting local option taxing authority or lowering the voter threshold for school bond levies.

WHAT IS GOOD POLICY?

Whatever approach they settle on, eliminating the personal property tax seems likely to withstand any legal challenge.

In a 1930 case, Williams v. Baldridge, the Idaho Supreme Court noted that Section 8 “does not prohibit the Legislature from exempting from taxation corporate property, nor does it require all corporate property to always be taxed.”

But that still doesn’t address the question whether eliminating the tax is consistent with the spirit of the Constitution.

“I’ve always thought there’s a difference between what the Legislature can do and what it should do,” says Rep. Grant Burgoyne, D-Boise. “That’s the whole question of public policy. What’s a good policy for Idaho?”

At the time the Constitution was being written, various Eastern states were wooing railroads with promises of perpetual relief from taxation. Idaho’s founding fathers clearly wanted to restrict that type of pandering — but in Article VII, Section 5, they also gave lawmakers the authority to approve “such exemptions from time to time as shall seem necessary and just.”

Burgoyne says lawmakers have been using direct public subsidies and tax code manipulation to promote certain types of economic activity since at least the days of the Erie Canal. That goes against the ideal of creating a level playing field, but sometimes it’s necessary to advance the state.

“We have a very significant economic problem in Idaho,” he says. “Decade over decade, we’ve been losing good-paying jobs and replacing them with not-so-good-paying jobs. That problem isn’t going away without a sustained commitment to sound economic growth. If that means creating an un-level playing field, we may have to consider it.

“The business community has been unified in saying the personal property tax is a disincentive to growth. They’ve also been unified in saying schools and local government budgets have to be protected. How we do both is a difficult question.”

Senate Local Government and Taxation Committee Chairman Jeff Siddoway, R-Terreton, says before anyone even considers eliminating the personal property tax, he has to be a believer.

“You have to believe tax policy can be used to attract business and industry. You have to believe tax policy can cause business and industry to react,” he says. “I think (the Legislature) is an integral partner with business. We can affect them in a lot of different ways, with rules and regulations and with tax policy. I think we have an obligation to put the best policy out there that we can.”

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William Spence, the Lewiston Tribune. bspence@lmtribune.com, (208) 791-9168