Despite trend, bill would cut business property taxes

BOISE – Even after lawmakers last year raised the homeowner’s exemption for the first time in a quarter-century, owners of residential property are continuing to pick up a bigger and bigger share of Idaho’s property tax burden, while the share for other types of property – businesses, farms and utilities – is dropping.

The Idaho Tax Commission’s figures for 2006 show that residential property accounted for 64 percent of property taxes paid – up from 63.2 percent the year before. Back in 1990, it was just 47.1 percent.

“We saw a clear pattern of shifting from other sectors onto the residential,” said Sen. Shawn Keough, R-Sandpoint, who co-chaired an interim legislative committee that studied property taxes in 2005. “We’ve been trying to balance that. … However, we’re still out of whack.”

But this year’s major property tax legislation is a plan to phase in a $100 million property tax break for businesses by eliminating the personal property tax on business equipment. In the first year, the bill would shift nearly $10 million in property taxes to non-business property, including homeowners. In each subsequent year, the state would take millions from its sales and income tax revenue to reimburse counties for additional reductions in the property tax on business equipment.

“It’s not at all clear to me that we should be adjusting more tax burden to homeowners,” said Keith Allred, a Harvard University professor and head of The Common Interest, a citizen group that studies Idaho legislative issues and backed the homeowner’s exemption increase. “The homeowner’s exemption was passed in order to square things up, and we don’t need to compensate for it.”

However, the personal property tax on business equipment is anything but popular. “It’s cumbersome and unwieldy, and compliance is low,” Allred said.

“It’s very bureaucratic,” Keough said.

A tax on business equipment means a business must file a report to the county each year on all its equipment and its value – from computers to telephones – and pay property tax on that value.

Alex LaBeau, executive director of the Idaho Association of Commerce and Industry, said, “It’s an inherently punitive, unfairly administered and overly complex tax.”

Idaho eliminated the personal property tax on agricultural equipment several years ago at a cost of more than $12 million a year. The state has been sending payments to counties to make up for that property tax break for the agricultural sector.

Senate Tax Chairman Brent Hill, R-Rexburg, is a co-sponsor of IACI’s bill to eliminate the personal property tax, HB 245. He said he would prefer to see business give up some other tax breaks as a trade-off, such as the investment tax credit. But he’s welcoming a chance to get rid of the personal property tax, which he called “hard to comply with, very subject to manipulation and very hard to verify.”

Hill, an accountant, said he has run the numbers to see the impact of last year’s decision to both increase the homeowner’s exemption and index it to inflation in the Idaho Housing Index in the future. Those changes won’t shift the property tax burden back to businesses, he said, because homes grow in value so much more quickly than business property.

“That index is not there to shift more and more of the burden to businesses – it just keeps it even; that’s all it’s doing,” Hill said.

Asked if Idaho’s current split in its property tax burden between residences and other types of property is the right one, Hill said, “That’s a matter of judgment.”

Allred said, “It’s a hard question, to know what’s the right balance. It’s an important question – we ought to be asking that question as we discuss these bills.”

The other major property tax change Idaho has made in the past year was a shift of $260 million in school operations funding off the property tax last fall, while raising the sales tax from 5 percent to 6 percent. That cut property taxes for all types of property owners, so it didn’t alter the tax burden between different classes of property.

LaBeau said he believes businesses pay too much in taxes in Idaho, though he said Idaho’s tax climate is more favorable to some types of businesses than others.

“The taxes that businesses pay are the taxes on all of us,” he said. “It’s our citizens that own these businesses. To try to pit individuals against business, we’re pitting ourselves against ourselves.”

For 25 years, IACI strongly opposed any increase in the homeowner’s exemption, saying an increase would shift the tax burden to businesses. Until last year, the influential business lobby was successful.

Keough said those years saw a “huge shift” of the property tax burden onto the residential sector. “They appear to be interested in exacerbating that,” she said. “I’m not going to give up trying to get some relief for the homeowners.”

The personal property tax bill would phase in the tax break by first eliminating the tax on $50,000 worth of equipment for each Idaho business. According to IACI, that would end all personal property taxes for an estimated 81 percent of Idaho businesses.

The bill doesn’t include any first-year state funding, however, so the cost of the tax break – just under $10 million – would be shifted to other property taxpayers.

In the second year of the phase-out, the state would begin allocating millions each year to repay counties for eliminating additional portions of the personal property tax for larger businesses. By the year 2015, depending on state appropriations, the tax break would cost the state nearly $100 million a year and eliminate all personal property taxes on business equipment.

Democrats and some Republicans in the House have tried repeatedly to amend the bill, HB 245, to limit it to just the first-year tax break and pay for that first-year break with state funds to avoid a shift onto other property taxpayers.

Rep. George Sayler, D-Coeur d’Alene, said that plan is “affordable” and “helps small businesses.”

But backers of the bill have held off those amendment attempts; the bill passed the House Friday and headed to the Senate.

House Tax Chairman Dennis Lake, R-Blackfoot, said, “I think personal property tax (relief) in some form will pass – I think something will happen there.”

Lake said he’s not troubled by the trend toward residences bearing more of the property tax burden. “The growth in Idaho is in residential properties,” he said. “Factories depreciate – residences do not.”

Said Rep. Ken Roberts, R-Donnelly, a co-sponsor of the bill, “Let’s take a look at how many of the services that are being demanded are actually being demanded by residential and paid by all of us.”