The Idaho Legislature approaches the 2017 session as hungry as ever to cut taxes, with leading proponents hoping improved economic and financial numbers will make 2017 the year they get it done.
Rep. Brent Crane of Nampa, the assistant House Republican majority leader, said he anticipates “robust discussion on tax policy and what we can do to put more money in the taxpayer’s pocket.”
Specific tax cut proposals haven’t changed much, but neither have the arguments against cutting taxes. Specific tax cut plans have died in the Legislature each of the past two years.
But there are other ideas and initiatives that will compete for money in the coming year. Extra funding for teacher salary increases is the biggest number yet: $58 million. And some of the state’s leading business interests tell lawmakers they still see greater benefits from more state investment in education and job development than cutting taxes.
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Here’s what’s broadly in play:
▪ Cutting the top two personal income tax rates and the corporate income tax rate by one-tenth of a point, and increasing the $100,000 exemption on taxable business equipment.
▪ Eliminating the sales tax on groceries entirely, dispensing with the grocery tax credit.
▪ Deciding what to do with the state’s burgeoning surplus, running well ahead of projections and estimated now at $139 million by the time the fiscal year ends in June.
▪ Whether to extend the 2015 program that diverts a portion of year-end surplus to badly needed transportation projects — known by the ominous term “surplus eliminator.”
A bigger question, and a heavier lift politically, is what to do about legacy tax exemptions and credits that seem outdated in an economy where untaxed services, not taxable goods, increasingly drive sales, not to mention tax policy omissions, such as when and how to start taxing internet sales.
And perhaps the heaviest lift: whether to address all of the above and restructure the state’s income taxes to reduce the number of brackets and change the level at which the top bracket kicks in.
Given all that, and weighing tax cuts against possibly eliminating certain credits and exemptions, it’s easy to see what the new Senate tax committee chairman meant earlier this month when he told the Idaho Association of Commerce and Industry: “Somebody’s ox is going to get gored.”
“They laughed at that,” Sen. Dan Johnson, R-Lewiston, told the Statesman, “but the point is we all want our special exemptions and credits and it’s very hard to give those up.” Some of those changes, he said, might emanate from actions taken by the new president or Congress, such as changes to federal taxes or subsidies.
WHERE TAX CUTS GO TO DIE?
By law, all revenue measures, including tax bills, originate in the House; by recent tradition the tax bills die in the Senate. That was the fate of House-approved bills in 2015 and this year. Mike Moyle, the Republican House majority leader from Star, saw his 2016 tax cut bill die in the Senate committee for want of a second even to bring it to a vote. He’s hoping for a different outcome in2017. Specific proposals aren’t public yet, but “personal income and corporate income tax reductions will be high on my priorities,” he said.
“If you watch the last few years, we’ve grown government by about $200 million-plus a year,” Moyle said. Referring to the teacher salary package, he added: “We’ll take care of education, but I think it’s time to give back to the poor guy who’s paying the bill. We have got to quit spending like drunken sailors. This is not good for the state of Idaho.”
Though general fund spending — the portion of the state budget funded by taxes – did increase by just over $200 million this year, on average the annual increases have been lower. Following two years of steep, recession-driven cuts in 2009 and 2010, spending has risen on average by $148 million annually for the past six years, or 5.4 percent. Annual revenue increases during the same period have averaged a bit less than $150 million, also 5.4 percent.
Moyle and other tax cut advocates make the case that surrounding states look better than Idaho on taxes, and hence are more attractive to business. For example, Nevada, Washington and Wyoming have no income tax, and Oregon and Montana no sales tax. Utah has a 5 percent single-rate income tax.
What gets lost in the comparison is that Utah taxes a broader base of income than does Idaho. When all is taxed and done, Idaho’s total tax burden as a percentage of personal income is the lowest of all its neighbors. The most recent data show it was 41st among states overall. The state Tax Commission just released its own assessment confirming those results on Thursday.
DOLLARS & (PER)CENTS
Idaho’s top two personal income tax rates are 7.4 and 7.1 percent; its top rate kicks in at a relative low point, just $10,900 in taxable income. Oregon’s top rate of 9.9 percent, Moyle points out, doesn’t kick in until taxable income hits $125,000.
Estimates on how much it would cost to cut Idaho’s top two income rates by a tenth of a point range from about $28 million to $31 million. The property tax on business equipment amounts to about 3 percent of all tax collections. Increasing the current $100,000 exemption to $250,000 or even $500,000 would cut paperwork and tax headaches for smaller businesses but draw objections from bigger companies.
The cost of cutting the income tax roughly equals what it would cost the state, in reduced tax revenue, to eliminate all sales tax on groceries. The argument for doing so holds that none of the neighboring states except Utah taxes food, and Utah taxes it at a lower rate. (In fact, Idaho is one of only seven states that taxes groceries, according to the Tax Foundation.)
Sen. Cliff Bayer, R-Meridian, the Senate tax committee’s vice-chair, is a leading advocate for getting rid of the grocery sales tax. Doing so, advocates argue, would stop people in border communities crossing state lines to do their shopping in sales tax-free states, meaning higher sales and more jobs.
Bayer decries as “totally inaccurate” the argument that the grocery tax is one of the few taxes paid by out-of-state residents and “some people” — a euphemism for undocumented immigrants. He thinks ending the grocery tax is more important than cutting income taxes.
“I’m not speaking mutually exclusive,” Bayer said, “but if you’re asking me my sense in terms of prioritizing, I’ve found the grocery tax to be a higher priority.”
There are other arguments against doing away with the grocery tax, advanced by those who say poor people are treated more equitably with a bigger food tax credit. The Institute for Taxation and Economic Policy, analyzing Idaho’s 2015 grocery tax cut plan, noted that higher-income households with higher grocery bills would save substantially more than lower-income households with the tax’s elimination.
ROADS AND BRIDGES, OR SOMETHING ELSE?
Also among discussion topics for 2017: how to spend Idaho’s expected revenue surplus. In 2015, the Legislature worked out a two-year provision to put the extra year-end surplus toward road and bridge repairs. The amount didn’t fully meet the need but was better than nothing. That funding mechanism expires at the end of the current fiscal year in June, and with anticipated year-end surplus running $92 million ahead of projections, transportation is a likely prime beneficiary.
Other one-off or capital expenses could be financed with the surplus, but in sound budgeting that kind of one-shot money does not go to cover ongoing operating expenses — or permanent revenue reductions from tax cuts.
“I think to be talking about tax cuts in light of this huge surplus — it’s not the whole picture,” Johnson said. “It’s just probably one of the indicators to open up the discussion for changes to our tax policies. ... I’m not focused on how large the surplus is and I wouldn’t translate that into some sign of how big a tax cut we might be able to give.”
Tax Commission releases annual comparison
The state commission released its annual study of taxation in Idaho compared to other states. The study puts the state’s per capita tax burden at 10th lowest in the country and lowest among Western states. Additional highlights:
▪ Idaho’s individual income tax burden has gone from 14.1 percent over the U.S. average in fiscal 2008 to 4.2 percent below the national average in fiscal 2014 That’s the lowest relative burden since fiscal 1984.
▪ Corporate income tax burden is “highly volatile” due to how corporate taxable income varies. Comparing taxes paid to income, Idaho was 14.9 percent below the U.S. average in FY 2014.
▪ Idaho’s relative sales tax burden is declining and as of FY 2014 was 3.3 percent below the U.S. average.
▪ Idaho’s property tax burden is 20.6 percent below the U.S. average. Even still, in FY 2014 it reached its highest level since FY 2006.