Idaho tax cuts, rebates and education boost are on the table. Who will they benefit?
Idaho lawmakers will convene for a special session on Thursday to consider a widely supported proposal that would cut income taxes, create a new pot of money for public schools and return hundreds of dollars to each Idaho taxpayer.
Republican Gov. Brad Little, who is running for reelection this fall, called the special session to address inflation, which this year surpassed 8%, a 40-year high. It’s the third special session of the part-time Idaho Legislature since 2015.
The tax cut and rebates will benefit middle-income Idahoans in the short-term and the wealthy down the road, experts say.
The proposed boost to school funding using sales tax has been widely praised. However, it could kill a ballot initiative that would instead raise income taxes on corporations and wealthy Idahoans to better fund education.
“Policymakers wanted to get ahead of that but also have the resources to provide additional funding for education,” said Jared Walczak, vice president of state projects for the Tax Foundation, a Washington, D.C.-based think tank. “What we see is the grand bargain, essentially, that includes something for everyone.”
Here’s what you should know about the legislation lawmakers will consider Thursday.
Rebates benefit middle-income families; tax cut benefits wealthy
Little’s proposal establishes a new flat income tax: a 5.8% rate across the board, for individual and corporate income. The current rate for the top individual and corporate income tax bracket is 6%.
The bill would exempt from taxation the first $2,500 of income for individuals and $5,000 for joint filers. Those figures would be inflation-adjusted, however; in 2021 dollars, the first $3,970 of taxable income for individual filers would be exempt along with the first $7,940 for joint filers, according to an analysis by the Associated Taxpayers of Idaho.
“The fact this legislation includes the inflation adjustment is an important factor, since some taxpayers would otherwise see a tax increase,” the analysis said.
High earners would see the greatest benefit from the flat tax, while most Idaho households would not see a significant change in tax bills, according to the Idaho Center for Fiscal Policy.
The top 20% of households — $113,000 and above in annual earnings — would get 58% of the benefits, and the remaining benefits will go to the 80% of households that earn less, the nonprofit’s analysis said. The top 1% of household income levels — $557,000 or more annually — would receive 16% of the share of total tax benefits from the flat tax.
The legislation would also return $500 million to Idaho income taxpayers through rebates, which primarily would benefit middle-income families.
Each resident who filed income taxes for both the 2020 and 2021 tax years would receive $300 — or $600 for joint filers — or 10% of income taxes paid for 2020, whichever is greater.
A middle-income family that earns $110,000 annually will save $123 in income taxes, according to the Associated Taxpayers of Idaho analysis.
A moderate-income family earning $75,000 will save $115. And a low-income family that earns $50,000 will save $66.
A typical corporation with $15 million in income will save $30,000.
Tax cuts decrease revenues that fund services
Critics of the proposed legislation warn that continued reductions in income tax revenues could lead to funding cuts for education and other state responsibilities during a recession.
A flat tax at 5.8% would reduce state income tax collections by $162 million, according to the drafters of the legislation.
However, the combined tax cuts in the past two years would total a $571 million ongoing reduction in long-term income tax revenue, according to the Idaho Center for Fiscal Policy analysis. That would remove the equivalent of 12.4% of the state’s fund that supports public services like transportation and education.
“When the next recession hits the economy, a lack of revenue may force cuts to education and other important public services and resources,” the analysis said. “Or a recession could prompt an increase in other taxes — like sales and property taxes, which hits lower-income families and communities harder than wealthier ones.”
But Idaho has seen three consecutive years of record surpluses, and it’s used some of that money to bolster rainy day funds. Tax cuts in many states are backed by trends toward short- and long-term revenue growth, Walczak said.
“There does appear to be sufficient revenue growth over the last couple of years to sustain tax relief on a permanent basis in many states, including Idaho,” he said.
Legislation sets up conflicting education funding proposals
The proposed bill would continue Little and his allies in the Legislature’s support for public schools, while shielding wealthy Idahoans and corporations from a tax increase posed by a citizen initiative.
Spearheaded by citizen advocacy group Reclaim Idaho, Proposition 1 — also known as the Quality Education Act — would raise more than $320 million annually by creating a new 10.925% income tax bracket for Idaho taxpayers who earn $250,000 or more in taxable income, and increasing corporate income taxes from 6% to 8%.
Little’s proposal would instead direct $410 million in state sales tax revenue annually to education. Most of the money would go to Idaho’s public school income fund, while the remaining $80 million would be directed to workforce development programs. Beginning in fiscal year 2025, the money distributed to each fund would increase by 3% annually.
If approved by the Legislature, Little’s bill would establish a flat tax on Jan. 3, two days after new tax standards set by the ballot initiative would take effect.
If the governor’s bill passes, it will place on the general election ballot, along with Proposition 1, an “advisory question” that asks voters whether they support the legislation’s intent. The results of the advisory question will guide the Legislature on whether it’ll continue “ongoing elements” of the bill, according to the draft legislation. The question will be placed on the ballot preceding all other measures, except Senate Joint Resolution 102, which asks whether the Legislature should be able to call itself into special session.
Little last week denied that his proposal is related to the education initiative, but Proposition 1 supporters said the connection is evident. The bill is “clearly designed to supplant” the Quality Education Act, Luke Mayville, Reclaim Idaho’s co-founder, said last week.
Meanwhile, tax experts in recent weeks identified several flaws in the initiative.
It would reverse the Legislature’s 2022 income tax decrease, returning the rate for many income taxpayers from 6% to 6.5%. And the initiative reverses a typical inflation indexing formula. Instead of increasing the $250,000 income threshold for the new top tax bracket to account for inflation, it decreases the threshold, “resulting in higher taxes at lower and lower minimum income thresholds every year going forward,” the Associated Taxpayers of Idaho analysis said.
“It is ill-advised to pass Proposition 1 with all of its unintended consequences, including a significant tax increase during a time of unprecedented budget surplus,” the analysis said.
The Tax Foundation first reported the tax increases posed by the initiative, and the Idaho attorney general’s office agreed with the think tank’s assessment, according to emails obtained by the Statesman.
Broad support for education funding, but resistance looms
Little’s proposed education funding boost has broad support, including from Mayville along with Idaho’s teachers union and State Board of Education.
The draft legislation has 62 co-sponsors, which surpasses vote majorities needed in both the House and Senate. And the Legislature during this year’s regular session supported Little’s proposal to increase education funding by more than 12%.
There likely will be resistance from conservative Republicans, however. Rep. Ron Nate, R-Rexburg, who sits on the budget-setting Joint Finance-Appropriations Committee, said in a Facebook video last week that he supports the tax cut and rebates but believed education funding should be considered separately.
“When is it enough?” Nate said, noting the Legislature’s school funding increases in recent years.
The House and Senate convene at 8 a.m. Thursday.
This story was originally published August 31, 2022 at 4:08 PM.
