Budget surplus growing

BOISE – The last time state lawmakers turned a budget surplus into permanent tax cuts, the state plunged into a multiyear budget crisis that didn’t end until then-Gov. Dirk Kempthorne pushed through a two-year sales tax increase.

Now, lawmakers are looking at a big – and growing – state surplus once again, just as calls for permanent property tax relief are reaching a peak.

“This year was just far stronger than expected,” said Mike Ferguson, Gov. Jim Risch’s chief economist. As of the end of May, with one month still to go in the fiscal year, preliminary figures showed state tax revenues were running $168.5 million ahead of projections for the year.

When lawmakers had a $330 million surplus in 2001, then-Gov. Kempthorne called for spending $100 million of that on one-time tax rebates. But the Legislature enacted permanent income tax cuts instead, with disastrous results.

The big question this year is whether the current surplus is a one-time blip – like the 2001 surplus – or a sign that tax revenues are reliably running far higher than expected and will continue to do so into the future.

Risch greeted the latest figures as “excellent news.” He said, “Our economy is strong, the jobless rate is low and we look forward to seeing this positive trend continue.”

In his inaugural speech a week ago, Risch called on lawmakers to come up with a consensus plan to shift school operations funding off the property tax to ease the property tax burden statewide. If they do, he’ll call a special session of the Legislature to enact it. Some lawmakers want to tap surplus funds to do that.

However, Sen. Brad Little, R-Emmett, said, “My gut feeling is a part of it’s one-time.”

On behalf of the Senate GOP leadership, Little sent a letter to every senator a week and a half ago cautioning against banking on “one-time revenues related to the wild real estate market” as a permanent funding source. “What if the real estate market slows or stops?” Little asked in the letter.

He said Friday, “We are very aware of the problem, and we want to do something – we just want to do it so it’s fundamentally sound.”

He added, “We want to make sure that before we take on an ongoing liability for the state into perpetuity, that we’re certain that there’s a high likelihood that these funds will be sustainable, contrary to what happened in … 2001.”

Ferguson said the reasons behind this year’s surplus still are being explored, but much of it comes from the individual income tax – and much of the late-spring surge came from payments that people sent in when they filed their annual tax returns.

“We’ve actually done fairly well on estimating the amount of refunds and the amount of withholding,” he said.

But Idaho is one of just two states – Utah is the other – that doesn’t require estimated tax payments for individuals. So taxes related to non-wage income or under-withholding are paid in a lump in April.

The filing payments “basically represent business and investment income, and whatever under-withholding there was for the whole year,” Ferguson said.

As of May, those filing payments were up $95 million over projections for the year. Individual income tax made up “the biggest part” of that, Ferguson said.

Until all those tax returns are processed and data is analyzed and compiled after the end of the fiscal year, “it’s hard to say exactly what’s going on,” Ferguson said. But he said the state Tax Commission has informed him that an initial look at returns found “large amounts of capital gains … in real estate and stocks.”

Another significant source of filing payments came from retirees whose retirement income is from out of state and didn’t have Idaho income taxes withheld.

That could be an ongoing revenue source, Ferguson said, as the retirees likely would have similar income in future years. But the capital gains are different.

“The part of this that’s due to the stock market or housing activity, that’s certainly more volatile and is subject to some major swings, both up and down,” he said.

Last week, Senate Majority Leader Bart Davis said he favored a special session to approve just a one-time property tax relief plan, along with a vote in the next election on how the tax system should be changed in the future.

Idaho’s employment data is strong – the state was first in the nation in April for total employment growth. But high-tech employment, which drove the state’s economic boom in late 1990s, is actually down – it’s down to where it was 10 years ago.

The biggest gains are in the sectors tied to the real estate boom. “Virtually all the sectors that are exhibiting stronger than average growth are related to the construction industry,” Ferguson said. “So basically what we’re seeing is very spectacular economic performance that appears to be driven by low interest rates and the housing boom that’s sweeping not only the state but the country.”

Little noted that, ironically, it’s that same real estate boom that’s driving concern about property taxes, because home values have been rising so rapidly.