Tax shift ties new governor’s hands

Third of three parts

BOISE – Just months before Idaho’s next governor will take office, an interim governor pushed through a sweeping tax reform plan that changed everything.

“Whoever is elected governor, his hands are to a certain extent going to be tied,” said Jim Weatherby, political scientist emeritus at Boise State University.

Yet, Idaho still faces a multitude of tax issues, including how to match its fast-growing needs for prisons, schools and Medicaid to its tax revenues; a sales tax system that’s both riddled with exemptions and based on the goods-based economy of the 1960s rather than today’s service-based economy; and a regressive sales tax on food that legislators increasingly are calling for reducing.

The tax reform plan, enacted in August, lowered property taxes while raising the sales tax. It eliminated $260 million in property taxes that previously went to schools while raising the sales tax from 5 percent to 6 percent.

Republican candidate for governor Butch Otter supported the shift; Democratic candidate Jerry Brady, Constitution Party candidate Marvin “Pro-Life” Rich-ardson and Libertarian candidate Ted Dunlap all opposed it.

State Sen. Hal Bunderson, R-Meridian, said the tax shift will have unintended consequences on the state budget, on education funding and on taxpayers. “This bill ostensibly was to reduce one kind of tax by increasing another kind of tax and failed to acknowledge that even another kind of tax got increased in the process, and that was the income tax,” said Bunderson, a CPA and chairman of the Senate Tax Committee.

As Idaho residents and businesses file income tax returns and lose deductions for property taxes they no longer pay, he said, “it results in a net tax increase.”

Dunlap, the Libertarian candidate, said, “It’s a little razzle-dazzle, sleight-of-hand, vote-for-me game. … Shifting the tax burden around to get votes is immoral.”

Richardson said that rather than increase the sales tax, he’d prefer to do away with it. “There’s no reason why you ought to be taxed for the privilege of buying something – that’s totally ridiculous, there’s no logic in that, there’s no fairness – it’s just a way of raising revenue for government,” he said.

But Otter said he likes the sales tax because it’s a broad-based tax that goes to the state’s general fund, providing services for everyone. That means users of state services are paying for them, he said.

Brady argues that Idaho’s tax system is becoming less fair, and changes are needed. “We’re excusing those who can most afford to pay in favor of those who can least afford to pay,” the Democratic candidate said.

He said wealthy out-of-state property owners, large corporations and other well-off taxpayers benefited from the tax shift by getting out of paying $150 million a year to fund Idaho schools, while low-income renters and other ordinary Idahoans will pay more through sales taxes.

“It has excused $150 million worth of support for the schools that we’re not going to get back,” Brady said. “Companies are not going to be paying any money to support schools from henceforth – I think that’s a mistake.”

It won’t be a selling point when courting companies to come to Idaho to say, “You’re not going to have to pay anything for schools – come here!” Brady said. “They’re going to say, ‘What kind of schools do we have?’ “

Otter defends the tax shift, noting that it also included a $100 million deposit from state surplus funds into a special savings account for schools. “I like it because, No. 1, it does give a safety reserve to the education stabilization fund, just in case we hit a bump in our economy,” he said.

Otter said he saw the shift as a “better option” than Proposition 1, an initiative to require a 20 percent increase in school funding that Otter originally supported, then decided in August to oppose. Brady supports Proposition 1.

School funding should be increased “if it’s needed,” Otter said, but he said he wanted to leave that decision to each year’s Legislature.

Bunderson said Brady is correct that the shift made Idaho’s tax system less fair. “Clearly, that’s the case,” he said. “The clear winner is out-of-state property owners. For them, it’s a windfall. … I suspect the majority of Idahoans will be in the category of a small loser, small winner or break-even. … And a clear loser is the 28 percent of Idaho households who rent their homes – they’ll be paying an increased sales tax and will not benefit with a property tax offset, as the offset will be retained by their landlord.”

Bunderson said his analysis of the measure is that it seriously reduces the state’s future budget flexibility. That’s in part because the increased sales tax doesn’t raise enough to replace the property tax funding for schools, requiring dipping into the state’s current budget surplus for millions more to make up the difference, beyond the surplus funds already tapped for the school savings account.

Weatherby agreed. “The sales tax has been increased by 1 percent and hasn’t provided any new money for major initiatives,” he said, though the state faces pressing needs in corrections, Medicaid and other areas.

Brady wants to broaden Idaho’s sales tax base by expanding it to some services and eliminating some exemptions, while lowering the overall rate. That, he said, would make the tax system more fair. Most versions of such proposals also raise more revenue overall.

Otter strongly opposes the idea, even running television ads in which he decries the idea of taxing services and vows, “Not on my watch.”

Bunderson said when Idaho’s sales tax was enacted in 1965, 60 percent of transactions in the state involved goods, while just 40 percent were for services. Today, those figures have reversed.

Weatherby said, “Public finance experts do argue, and are routinely ignored by politicians and elected officials, that it’s better to have a broader tax and lower rates. The sales tax has just been going in the opposite direction in Idaho, with the base narrowing and rates increasing.”

Otter said the biggest services that could potentially be taxed include medical, legal and accounting services. Taxing medical services would be wrong, he said, and Brady agreed with him on that.

Otter said he also wouldn’t want to tax legal or accounting services, because, “I don’t know if you’ve paid a legal bill or an accounting bill lately, but I have, and they’re pretty high right now.”

Brady said the broadening of the tax base that he favors would include removing some of the dozens of exemptions that lawmakers have added to the sales tax code over the last 30 years. “As to which ones and how many, you know this is going to be a dogfight between the Legislature and the governor,” he said. “It’s something you’d have to take time with, you’d have to negotiate with people.”

Otter said exemptions were enacted for a reason. “Obviously the system is responding to the merits of the persuasion that is offered,” he said. “There would have to be a pretty good reason before I would take ‘em off.”

But Bunderson said, “Any time you have a system that produces increasing numbers of exemptions over a period of several decades, circumstances change. … That underlying basis may no longer be valid. So for that reason, we need to go back and validate that underlying basis for the exemption. That’s just a common-sense kind of thing to do. Businesses do that all the time. I mean, if every decision we made was a forever decision, we probably wouldn’t have aircraft today.”

Brady also wants to enact more “sharpened” tax incentives to attract high-paying jobs to the state. Both candidates favor more flexibility for local governments to enact local-option taxes, though Otter would consider only those that are “broad-based.” Otter also said he’d consider increasing the grocery tax credit to make up for the increased sales tax Idaho’s now charging on food, something Democrats long have pushed.

Bunderson said, “We live in a wonderful state and a wonderful nation, and part of that is that for the common good, we pay taxes. The debate rests on what elements are part of the common good – that debate goes on forever. But that’s why we elect people to go in and try to make some judgment.”