Tax reform benefits questioned

BOISE – Several studies and analyses of Gov. Jim Risch’s tax reform plan completed in recent weeks suggest the majority of the benefit will go to businesses rather than homeowners.

“Business makes out like a bandit – they get a $100 million tax reduction,” said University of Idaho agricultural economist Stephen Cooke. “If the intention is to give middle-class homeowners tax relief, you can’t get there from here, according to my analysis, because you’re going to be raising their taxes next.”

The Risch plan would reduce property taxes while raising the sales tax.

Risch maintains that his proposal to lower property taxes and raise sales taxes will benefit all property taxpayers in Idaho, and that nearly two-thirds of the property tax reduction will go to owners of residential property. He said it’s impossible to tell how the sales tax increase and other factors will affect everyone’s bottom line, because “there are 1.4 million different scenarios.”

“People want property tax relief, and their property tax bills that they pay this year, Dec. 20, 2006, will be 20 percent lower than it would have been without this action,” the governor said. “Their property taxes are going to be 20 percent lower, and they want lower property taxes – I hear that loud and clear from people, and I’m going to do my best to get it to them.”

Idaho’s Legislature will convene in special session on Friday at Risch’s call, to consider his tax-reform plan.

Cooke’s study uses a complex economic model to forecast the impact of the Risch tax plan on all aspects of the state’s economy, from taxes to jobs to gross state product. The approach, called “computable general equilibrium” or CGE modeling, “takes all the changes that happen in the economy and traces them through to their logical conclusion,” Cooke said.

He acknowledges that the model is both highly complex and still being developed. “It’s new, and it has bugs, and there are data limitations,” he said.

But even with its limitations, the data can help provide more information about the effects of a major change like the tax reform plan, he said. “At least it’s a new way to think about it. … I want them to know what they’re getting into.”

The mathematical model predicted that the tax reform plan would lead to the creation of 2,660 jobs, but they’d be lower-wage jobs in retail and agriculture rather than higher-wage jobs in government and construction. It predicted that inflation would increase one-half of 1 percent, and there would be a $40 million decrease in public-sector goods and services to generate a $30 million increase in private-sector goods and services.

The model also predicted that Idaho households would pay $45 million more in taxes but would gain 0.3 percent in net income because of the economic impacts of the tax change. Business would pay $100 million less in taxes and would see a better climate for agriculture, retail, finance and insurance – but a worse climate for construction and food service.

Mike Ferguson, the state’s chief economist, is skeptical about the CGE analysis. “That’s cutting- or bleeding-edge technology – it’s fine in the academic realm, but to toss it into the public policy arena gives it a level of credibility and credence that I don’t think it deserves,” he said. “There’s a high level of uncertainty surrounding the conclusions. To try to base public decisions on the output of a model like that I think is stretching way beyond what it is capable of.”

Other, simpler analyses show varying amounts of the Risch plan’s benefits going to homeowners, but all show businesses gaining more than homeowners.

The state Tax Commission used two studies, one national and one regional, to weigh the sales tax increase against the property tax cut and calculate who benefits.

Using numbers from the Council on State Taxation of Business Inputs, the Tax Commission estimated that homeowners would get 0.5 percent of the $65.39 million net tax savings, owners of other residential property would get 41 percent, and businesses – including commercial operations, industry, agriculture, timber, mining and utilities – would get 58 percent.

Using numbers from the Utah State Tax Commission’s Western States Tax Burden Study, the Idaho officials calculated that homeowners would see 18 percent of the net tax benefit, owners of other residential property 47 percent, and businesses 35 percent.

Randy Nelson, head of the Associated Taxpayers of Idaho, ran calculations looking at this year’s increase in the homeowner’s exemption, the governor’s proposal, and the effects of reduced income tax deductibility related to the property tax decrease.

He found that homeowners would lose $10 million of the $47.1 million he estimated they’d gain from the increase in the homeowner’s exemption.

Meanwhile, Nelson estimated that business would see a tax increase of $24.3 million because homeowners got an increased exemption. Commercial and industrial properties would get back $14.8 million of that increase under the Risch plan, he estimated.Nelson then calculated various examples of overall impact on homeowners, all showing near break-even figures. After accounting for the property tax cut, the sales tax increase, and income tax deductibility changes, owners of a $185,000 home in Coeur d’Alene who have a family income of $70,000 would come out $2 ahead, he calculated.

He found similar results for a $160,000 home in Idaho Falls and a $60,000 household income; and a $180,000 home in Bonner County and a $66,000 annual income.

“I would not try to say that this is an average,” Nelson said. “My main thing here was to show what it takes to kind of break even. … The numbers are there, and then they can fit their own situation into it, do their own calculation.”

Risch noted residential property owners get nearly two-thirds of his proposed property tax reduction, including both homeowners and landlords.

“I believe and I continue to believe that the most tax relief on an overall basis will be by middle-class Idahoans, because most of this goes to residential property, almost two-thirds of it, and most residential properties are owned by middle-class Idahoans,” he said.

Risch said the only way to give property tax relief is to give it to everyone. “All property has to be taxed at the exact same level according to Article 5 of the Idaho Constitution,” he said. “I’m hoping every taxpayer and every business and every farm and every timber lot owner and every mining operation will obtain tax relief under my plan. I want tax relief for everyone.”