Why does Idaho have to cut the budget in the midst of a booming economy?

Someone left the control room of Idaho state government, and the autopilot is off course. How else can you explain a national jobs report that is the best in years and a booming economy in the most populous corner of the state that accounts for so much of the tax base of Idaho state government, yet a state budget requiring spending cuts in critical operations of state government?

As late as 2018, the Mercatus Center at George Mason University ranked Idaho seventh in the nation for how well states can meet their short-term and long-term bills. What possibly could have happened in the span of one year to cause the governor to announce a mid-year budget cut for state agencies, including higher education, and then another budget cut for the coming fiscal year?

In 2018, Congress passed President Trump’s Tax Cuts and Jobs Act of 2017. It was heralded to be the savior of the nation’s economy with tax cuts that would cause annual economic growth to surge to 3%, even 6%. It would boost average household incomes by at least $4,000. According to Gregory Ip, the chief economics commentator for The Wall Street Journal, “Nearly two years later, none of those things have happened and there is scant sign they will.”

That’s not to say nothing happened. In fact, something critical to the health of the Idaho state budget happened that apparently played a key role in Gov. Brad Little’s budget cuts, including higher education. Remind you, these cuts to Idaho’s universities and colleges come on the heels of information provided by Idaho Education News that Idaho’s higher education spending hasn’t fully recovered from the budget cuts of the Great Recession with spending per full-time college student declining since 2008 and Idaho’s losses more severe than national averages.

State Board President Debbie Critchfield reiterated the state’s failure to return higher education spending to its pre-recession levels in her recent column in the Statesman. She added her concern that restoration of operational funding has been underway for K-12, but no such initiative has been undertaken by the state for higher education.

What happened to cause the governor of Idaho to call for cuts in spending in a state heralded everywhere as growing in prosperity?

After the federal tax cut of 2018, Idaho decided to join only six other states (Colorado, Minnesota, New Mexico, North Dakota, South Carolina and Vermont) in choosing to use federal taxable income rather than adjusted gross income as the starting point on the Idaho income tax form. As the independent tax policy resource, the Tax Foundation pointed out, these states, including Idaho, would most likely experience revenue losses, since they would be granting the income pass-through on Idaho taxes, as well as federal, for a good number of Idaho taxpayers.

In other words, it appears the loss in general fund revenues comes from the way the state chose to conform the new 2017 federal tax code to the individual income tax here in Idaho. Income and sales taxes are the principle sources of revenue for the state and account for 90% of general fund revenues. As a sign of the robust Idaho economy, the sales tax collections for 2019 were $108 million higher than 2018. Income taxes for 2019, on the other hand, were $167 million lower than 2018.

In 2019, Idaho’s personal income grew 7.4%, and if there were no change in the tax code, individual income tax collections would have increased to $2 billion, but with the changes in the tax code, collections were only $1.6 billion. That is a loss to the general revenue fund estimated at $330 million.

What’s perplexing about all of this is that my admittedly dim recollection of the days when the Legislature and then-Gov. Butch Otter were drafting legislation to conform Idaho’s tax policies to the new federal law, much of the discussion was the need to avoid “an unintended tax increase” for Idahoans. I sure don’t recall discussion of a substantial tax decrease for certain business owners and others who are able to remove up to 20% of their income before figuring out Idaho taxes due.

As the Legislature convenes again this month, the consequences will come to light as the Legislature struggles with how to meet the challenge of expanding Medicaid, with more than 60% of Idaho voters calling for such in the 2018 election. There will hand-wringing about why we have a prison system that has to send inmates to Texas. There will be hand-wringing over why we use prisons and county jails to hold prisoners who need mental health treatment this state is ill-equipped to provide. And there will be the usual reminder, such as a recent Education Week study that scored Idaho as the worst in the nation when it comes to education spending and the equity of how education dollars are spent across the state.

As for higher education, it’s hard to understand how the State Board of Education and the governor could be on such very different pages by imposing a tuition freeze and a budget cut on higher education in the same year. For a state far from reaching the State Board’s 60% goal of some form of postsecondary education for its citizens and not enough scholarship funds to achieve the goal, perhaps someone needs to get back in that control room and design a tax and spending plan more attuned to Idaho’s educational and workforce needs.

Without such a plan, Idaho will once again deliver too little for the critical needs of this state. As Gov. Little’s speechwriters prepare his State of the State, perhaps they will remember the income tax revenue that disappeared from Idaho’s tax rolls. Perhaps they will acknowledge how that happened by executive and legislative branch action and recall those famous words of Pogo, that at least in this case, “we have met the enemy, and he is us.”