Capitol & State

Quick fixes, but no serious tax overhaul: After veto of grocery tax repeal, what’s next?

The twin failures of the Idaho Legislature’s tax reform efforts this year — one coming in legislative chambers last month, the other this week under the governor’s veto stamp — point again to a tacit consensus that state lawmakers routinely fail to heed, either in their zeal to cut any tax they can, or by overlooking the larger context and lessons of history.

That consensus holds that if Idaho lawmakers really want to cut taxes — and poll after state poll shows they are among the few constituencies who are really exercised about it — they won’t get far if they don’t look at the big picture. Nor can they expect to prevail by picking off only low-hanging fruit.

The 2017 tax debate kicked off in the Legislature, as it often does, with an income tax cut plan floated by House Majority Leader Mike Moyle. It passed the House in January but got hijacked in the Senate, where members bucked leadership and converted Moyle’s bill into a repeal of the state sales tax on grocery food.

The House concurred with the changes. But at the same time, Moyle, looking to force the question on what has long been his pet project, bolted his income tax cut onto another bill aimed at reducing out-of-whack unemployment taxes employers now pay. When that amended bill died in the Senate on the session’s last day, Moyle had lost the fight again, this time taking with him hundreds of Idaho employers who currently pay too much in unemployment tax.

The irony is that had Moyle’s original plan passed the Senate and reached the governor’s desk, Gov. Butch Otter was poised to sign it. The governor said as much when he vetoed the grocery tax repeal on Tuesday. The income tax cut carried a smaller financial impact — less than $30 million, compared to $80 million on the grocery tax repeal. Otter vetoed it on the ground that the state couldn’t take such a hit on revenue, but told lawmakers to send him his unemployment tax bill, together with a modest income tax trimming, “as soon as possible” next year.

Otter’s veto incensed lawmakers, and several announced a quixotic effort to get the veto overturned in court. That’s not likely to happen, but it plays well to the crowd.

IDAHOANS AMBIVALENT ON TAX CUTS

To step back for a moment: Polling in recent years consistently shows that state residents aren’t as concerned about taxes as they are about education, jobs or health care — or in continuing declining order, the environment, public lands, immigration or population growth. The subject of taxes in the latest Boise State University survey earlier this year came next to last on the list of issues. In both BSU’s 2016 and 2017 surveys, two-thirds of respondents had a Goldilocks response regarding taxes, saying they were just about right. (Idaho’s relative tax burden also consistently ranks low in national per-capita comparisons.)

The reaction is different, however, when the question is asked in the context of what neighboring states do. Montana and Oregon, for example, have no sales tax. Nevada, Washington and Wyoming have no income tax. If the choice is between having a low or moderate tax vs. not having one at all, the choice for most people is obvious.

Idaho keeps going about tax reform in grasping, almost impulsive fashion. The grocery tax repeal substitution was a procedural power grab on the Senate floor. Remember the “tax working group” of lawmakers assembled in 2015? They held eight public sessions, heard from dozens of experts and advocates, comprehensively reviewed decades of state tax policy. In the end, what they delivered was a handful of conventional, timeworn options to cut the income tax, the business tax on property purchases or kill the grocery tax.

GROCERY TAX REPEAL MYTHS

The effort to repeal the grocery tax united anti-tax lawmakers and like-minded interest groups with others who see a tax on food as particularly insidious: How, after all, can a government in good conscience tax items that all people need to live? But that’s exactly the point: A tax on food is seen as stable revenue source that is immune to economic fluctuations.

Of the 45 states with a sales tax, 32 exempt food bought for consumption at home. Six tax it at a lower rate. Three tax it at the going rate. And four, including Idaho, offer an offsetting tax credit. Idaho’s credit is $100 per person, $120 for seniors.

Another repeal argument asserts that Idaho’s border communities lose out both in sales and business expansion opportunities to the neighboring states that don’t tax sales. There is no data to support or refute this anecdotal claim; other surveys of why businesses pass on Idaho for relocation or expansion usually cite concerns over education as the main factor in their decision, not taxes. And a counterclaim holds that revenue from the sales tax on food gives the state a boost from vacationers and other visitors to the state.

Finally, there is a case made that repealing the tax helps lower-income families. That might seem true based on percentages, because those at the lower end of the income spectrum tend to spend a greater share of what they earn on food. In real dollar terms, though, the greatest benefit of repeal accrues to wealthier households that buy more expensive food.

A December 2016 report by the Idaho Center for Fiscal Policy projected the impacts of a grocery tax repeal across the full income range. The lowest 20 percent of earners actually could see their tax bill increase by $16 under a repeal scenario. How is that? Because the offsetting credit they receive is greater than what they pay in sales tax on food purchases.

The tax savings is highest for those in the top 20 percent income bracket — those for whom a food tax might be considered least burdensome — ranging from a base of $99 to $234 for the top 1 percent of earners.

Another way to look at it: Under the current system a family of five spends nearly $700 a month on food before they would pay more in sales tax than they receive in credits. A more balanced solution, say tax fairness advocates like the Center for Fiscal Policy, would be to increase the food tax credit for all residents, for just those in the lower-income brackets, or tie the credit to food inflation.

WHAT’S MISSING FROM THIS PICTURE?

Discussion and debate on any one Idaho tax misses the big picture. The state often looks enviously at Utah’s tax structure, but Idaho lawmakers cannot find their way to enact the kind of sweeping tax review and overhaul that state undertook starting in 2005.

Idaho’s 2015 tax working group was the latest group to punt on it. Utah has a single income tax rate of 5 percent, a lower rate that is actually applied to a higher amount of adjusted gross income. But it’s the rate, not the actual tax paid, that so captivates Idaho’s tax foes.

Besides simplifying and fine-tuning the state’s income tax structure and reducing and consolidating rates, lawmakers also could undertake a long-overdue review of the state’s outdated sales tax exemptions. Those exemptions cost the state $2.2 billion in foregone tax revenue this year, a figure that is forecast to climb by about $100 million annually through 2019. Services are excluded from sales tax, but tax experts say such policies need a review with the rise of service-based economies.

Last month, as the doomed grocery tax repeal moved through the Legislature, House Speaker Scott Bedke opposed it. He told anyone within earshot that his preferred tax plan would eliminate all but the original sales tax exemptions carved out in 1965. That could be worth more than $250 million in additional tax revenue a year — more money for schools, roads, workforce development or greater flexibility to lower other taxes.

COMPREHENSIVE REVIEW?

Such a comprehensive review, by itself, could spur confidence in the business world at large that Idaho was serious about tax reform.

But with so many sacred cows in the list of exemptions, someone’s ox — to mix species metaphors — is bound to get gored. It is much more politically palatable for lawmakers to put up repeal of a widely disliked but critical revenue source such as the grocery tax, even if some perhaps voted for it full in the knowledge that the governor couldn’t let it happen.

There’s no intersession tax study this year. And with statewide and legislative elections coming in 2018, it hard to see lawmakers next year doing any better than this year’s contorted tax dance.

Given the governor’s veto language, and how close lawmakers actually got to a tax cut this year, they might succeed with the same modest tweak to the income tax.

But a heavier lift on tax reform, one that could actually strengthen state collections while trimming taxes and making them more fair, isn’t anywhere on the horizon.

Bill Dentzer: 208-377-6438, @DentzerNews

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