Idaho bill would eliminate most property taxes for homeowners. How would it work?
A Caldwell Republican on Friday introduced a bill to overhaul Idaho’s property tax system — by removing much of the current property tax burden on homeowners and instead making the state’s sales tax rate the highest in the country.
The proposed legislation would eliminate most property taxes levied on those who qualify for the homeowners exemption, and reduce property taxes by an estimated 65% to 70%, Sen. Jim Rice, who introduced the bill, told a legislative committee Friday. It would leave in place voter-approved bonds and school levies.
“We’re just taking homes and switching the funding mechanisms from property tax to sales tax,” he told the Idaho Statesman, adding that the shift to sales tax would mean travelers to Idaho would pay a portion of the tax.
Under the 41-page bill, Idaho’s statewide sales tax would rise to 7.85%, from the current 6% rate. The new rate would make Idaho’s sales tax the highest in the nation, surpassing California’s 7.25% rate, according to the Sales Tax Institute, a Chicago-based consulting firm.
Rice said that despite local jurisdictions losing property tax revenue, they would be “kept whole” through the amount they get from the sales tax increase and general funds. But some are still skeptical.
“There’s not a municipality around that thinks it’s a good idea,” Joe Borton, a Meridian City Council member, told the Idaho Statesman.
How local taxing districts would get revenue
The majority of the sales tax increase would be dedicated to local taxing districts, which receive property tax revenues and would expect to otherwise lose a significant chunk of their budgets. The rest of the sales tax increase — roughly 10% of the hike — would go toward expanding the grocery tax credit to offset the burden of the higher tax on residents.
The increased sales tax would be expected to bring in $810 million in revenues, with most of those funds getting directed back to local taxing districts. About another $12.2 million in general funds would also be used to offset the reduction in property taxes.
The distribution of those funds would be done based on the proportion of the state’s property tax revenue that individual taxing districts currently receive, Rice told the Statesman.
If sales tax revenue grows, taxing districts could expect to receive up to 3% more in disbursements, plus additional allocations based on population growth.
The new bill also includes a rainy day fund to be used in economic downturns, when residents often buy fewer goods. In July and August, when the bill would go into effect, all sales tax collected in Idaho would be distributed to the “tax relief stabilization fund.” After that, the sales tax revenue would begin being disbursed monthly to the local taxing districts, with a proportion of subsequent increases in revenues also going toward the stabilization fund.
The bill would also increase the qualification for the homeowners exemption from 1-acre to 5-acre parcels.
Bill includes increase in grocery tax credit
Several legislators, both Democrats and Republicans, had pushed to repeal the sales tax on groceries this year. Instead, GOP leaders proposed a $20 increase to the grocery tax credit.
This bill would increase the grocery tax credit by $75 for most residents, from $100 to $175. At the new rate, a family of four could spend around $8,900 on groceries before having to pay sales tax, Rice said.
“That really does offset that (shifted tax burden) in a very significant way,” Rice told the committee.
The original proposal to raise the grocery tax credit by $20 awaits a hearing in the Senate Local Government and Taxation Committee, which Rice chairs. At Friday’s committee hearing, Rice said the other bill would likely be held if the sales tax bill gets passed.
Idaho lawmakers concerned about renters
If passed, the bill would be on the November general election ballot as an advisory vote. While the bill would not rely on the outcome of the November vote, it would “guide the Legislature” on whether the high sales tax rate should continue.
Though the lengthy bill was first introduced Friday, some legislators have already expressed concern about the potential consequences.
“Everything on this looks good, sounds good, but I just have this niggling feeling that it may not be as good as it all looks,” said Rep. Linda Wright Hartgen, a Twin Falls Republican.
House Assistant Minority Leader Lauren Necochea, a Boise Democrat, said she’s “very troubled” that Idaho would have the highest sales tax rate in the nation. She also said she was worried a higher sales tax would push Idahoans to travel to other states when purchasing expensive items.
Necochea and Rep. David Cannon, a Blackfoot Republican, said renters could be negatively impacted.
“Renters probably are hurt by an increase in the sales tax without that offset of being benefited by property tax reduction,” Cannon said.
Borton, the Meridian City Council member, told the Statesman that the differences between how property taxes and sales taxes are collected would cause major problems.
“The principle of funding a fixed cost with a variable revenue source, instead of (with) a fixed revenue source, is a recipe for disaster,” he said. “It ignores the natural economic swings of recessions, booms and busts. … When sales tax revenues plummet during a recession, cities still have to provide police and fire service.”
Rice said that sales tax revenues usually remain relatively stable, and that more volatility during downturns appears in income tax revenues.
This story was originally published March 4, 2022 at 6:31 PM.
