Tech tax exemption will cost state, economist says

zkyle@idahostatesman.comApril 23, 2014 

Michael Ferguson says a bill passed during the 2014 legislative session will cost the state millions more in tax revenue than expected.

The bill was meant to amend and clarify — but not significantly add to — a 2013 bill that exempted goods, services and applications downloaded to computers, smart phones, tablets and other devices from the state’s 6 percent sales tax.

Click here for a previous Idaho Statesman story explaining what tech products and services will and won't be taxed under the law.

The Idaho Technology Council wrote this year’s bill. Its president, Jay Larsen, told lawmakers the bill would cost the state between $2 million and $5 million a year in tax revenue. The Idaho Tax Commission disagreed, saying it could cost tens of millions as cloud-based services become more prevalent. The bill passed both houses, although some lawmakers said they were uncomfortable with the uncertain fiscal impact.

A new report written by Ferguson, the former state economist who now directs the nonprofit Idaho Center of Fiscal Policy, agrees with the Tax Commission’s assessment. Ferguson said the bill’s proponents low-balled its fiscal impact and characterized significant policy changes as minor tweaks in a manner that was “misleading and bordering on deceptive.”

“It is hard to understand why Idaho, having already given up a substantial part of its revenue stream over the past decade and a half, and having fallen significantly behind on such fundamental obligations as its employee pay and (the education system), would choose instead to provide a massive new sales tax exemption without so much as a thorough examination of that new exemption’s true costs,” Ferguson wrote.

Larsen said he thinks the council’s estimate was accurate. Analysis by Ferguson and the commission didn’t take into account the possibility that the exemption could expand the tax base by keeping tech companies in Idaho and attracting more companies here, he said. Several Idaho-based technology firms were considering relocating to one of the other 16 states with similar tax exemptions, he said.

“Mr. Ferguson shows that he’s holding onto old paradigms and not looking to how in the future you can bring an even stronger software community as you modernize the tax code,” Larsen said this week.

State Sen. Jeff Siddoway, R-Terreton, chairs the Local Government and Taxation Committee that recommended passage of the bill. Siddoway said he and the committee members knew the bill would likely cost more than advertised. He said the committee passed it anyway because it expects to revisit the exemption next session — and likely again in future sessions — with the benefit of improved analysis.

“The committee was being a bit cautious in not chasing our businesses away over some tax they felt they didn’t owe,” Siddoway said.

Ryan Woodings, founder of Boise wireless network software developer MetaGeek, said he would rather have seen the state invest in education. Woodings, whose wife, Holli, is a Democratic state representative, testified against the measure.

“I believe ITC leadership downplayed the true fiscal impact of the bill in order to get it passed,” he said.


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