By William L. Spence, Lewiston Tribune
Idaho officials say the federal tax reform bill currently being finalized in Congress likely will have a huge impact on state revenue collections, but they aren't sure yet whether the effect will be positive or negative.
Estimates from various state agencies suggest the tax reform effort could boost state tax collections by upwards of $200 million per year - or cut annual revenues by as much as $450 million.
"We're looking at a range of $650 million," said Jon Hanian, spokesman for Gov. C.L. "Butch" Otter. "In a budget our size, that's a pretty dramatic swing."
Idaho's general fund budget for the current fiscal year is $3.45 billion.
How the reform bill will affect corporate and individual income tax collections next year depends in part on what provisions Congress includes in the final bill.
A bigger consideration, though, is whether Idaho lawmakers choose to modify state tax code to conform with some or all of those provisions.
The federal reforms "will have positive and negative effects on our revenue stream," said State Tax Commissioner Ken Roberts. "There will be a significant impact to Idaho's income tax system, because of how we conform."
For example, both the House and Senate tax reform bills nearly double the individual income tax standard deduction, from $6,350 for single filers and $12,700 for joint filers, to at least $12,000 and $24,000, respectively.
Idaho typically conforms with the federal code, meaning the state deduction would double as well - leading to a sharp decrease in taxable incomes.
"Doubling the deduction would lower taxable incomes and generate less revenue for the state," said Senate President Pro Tem Brent Hill, R-Rexburg. "If we conform with the federal code, it would decrease state revenues by something north of $300 million."
However, the congressional reform bills also repeal the $4,050 personal exemption taxpayers receive for themselves, as well as their spouse, children and other dependents. That shifts the balance sheet in the other direction - boosting taxable incomes and increasing state revenues.
Hill said if Idaho were to conform with that change as well, it would generate more new revenue than would be lost through doubling the standard deduction.
Eliminating the personal exemption, though, also removes any consideration for larger families, which he sees as problematic.
"Personally, I can't see us accepting that," Hill said. "I think there would be a great outcry if Idaho doesn't somehow compensate for the size of the family. That's a long-standing principle of taxation."
Congress addressed this issue by increasing the child tax credit, but Idaho historically hasn't offered a similar tax break.
"So we could continue to allow the personal exemption, or we could turn around and provide a child tax credit - something we haven't done in the past," Hill said. "If we don't do that, eliminating the exemption would bring in more revenue that doubling the deduction."
On the business side of the ledger, changes to the equipment expensing rules also could affect state revenues.
Under current state and federal law, Hill noted, smaller businesses can immediately write off the cost of new equipment, up to a maximum of $500,000 per year. Corporations deduct the cost over several years, through depreciation. The federal reform bill likely will raise the expensing limit to $5 million for small businesses, expand it to include investments in energy efficient heating and air conditioning systems, and allow larger firms to expense equipment immediately.
"I'm not sure anyone knows how much that might cost, but it could be a huge impact (on state revenues)," Hill said.
Alternatively, if Idaho chooses not to conform, he said, it could force businesses to keep two sets of books - a federal set in which equipment is immediately expensed, and a state set that still features multi-year depreciation.
The upshot of all this is that, depending on whether and how Idaho conforms with the federal tax changes - whether the Legislature accepts them as is, lessens the financial impact by phasing them in over time, or goes another route entirely - lawmakers could find themselves flush with extra cash or facing the need to make extensive cuts in next year's budget.
Either way, the issue likely will dominate much of the conversation during the 2018 session, which begins Jan. 8.
If there's any good news, it's that lawmakers will at least have some time to chart a path forward.
Roberts, at the Tax Commission, noted that the Legislature's annual tax conformity bill reconciles Idaho's tax code with the federal tax year that just closed. Consequently, the conformity bill that will be taken up during the 2018 session is for the 2017 tax year.
"The federal tax reforms will have no effect on that tax year," he said.
Nevertheless, he expects lawmakers to provide some guidance as to their plans for 2019. Otherwise, taxpayers and businesses will be left hanging, unsure how their 2018 financial decisions will ultimately be treated by state code.
"I'm sure the Legislature will take this up in some fashion," Roberts said.
Hill said the nightmare scenario for him is if Congress misses its end-of-year deadline for passing the reform bill and instead drags the issue out into March, leaving lawmakers in the dark as to what changes will actually be approved.
"The worst of all worlds is if we don't know," he said. "That puts us at a distinct disadvantage. This is a very complex issue with lots of things to be considered. I hope we'll have enough information from the feds. I don't want to come back for a special session."
Spence may be contacted at firstname.lastname@example.org or (208) 791-9168.