BOISE – As the Idaho Legislature’s Tax Working Group ponders whether to cut income tax rates to spur economic growth, three Idaho economists said the strategy won’t work.
“There’s no consensus in economics that tax cuts have a boost on the economy in the long run,” said Eric Stuen, an economics professor at the University of Idaho. “I think a few percentage points here or there doesn’t make much of a difference for the functioning of the economy.” But, he said, “It can change the government fiscal picture and budget deficit picture pretty dramatically.”
Idaho has done this two times before, with mixed results.
In 2001, personal and corporate income tax rates were cut by four-tenths of a percentage point, dropping the top income tax rate to 7.8 percent and the corporate rate to 7.6 percent. Serious state budget problems and a sales tax increase followed.
In Idaho’s longest-ever legislative session in 2003, then-Gov. Dirk Kempthorne kept lawmakers in town for 118 days before they agreed to raising the tax to avoid deep cuts to schools.
In 2012, Idaho cut its top individual income tax rate from 7.8 percent to 7.4 percent, and cut the corporate rate from 7.6 percent to 7.4 percent. Idaho’s economy is now growing, but Boise economist John Church, who teaches at Boise State University and previously was the corporate economist for Idaho Power Corp., said, “The nation was recovering, the state was recovering. … The momentum was already there for growth in the economy at that point of time.”
Idaho State University economist C. Scott Benson said he thinks both the previous tax cuts were “inappropriate.”
“This mentality that we can keep starving government and have a thriving economy seems to fly in the face of everything we know about trying to prepare our young people for the jobs of the future,” Benson said.
He said stability in the tax rate allows businesses to make long-term plans.
“Other states have a lot higher taxes than Idaho and they’re doing well, but again, there’s some consistency there,” he said.
Idaho’s per-capita tax burden ranks 49th among the 50 states and the District of Columbia. It’s the lowest among 11 Western states, according to the state Tax Commission.
Idaho’s relatively simple tax structure, relying largely on sales, income and property taxes to fund government, lacks taxes that generate significant revenue in other states, including annual personal property taxes on the value of motor vehicles and real estate transfer taxes.
Asked their advice for tax changes that could stimulate Idaho’s economy, the three economists had an array of suggestions.
“A tax system needs to be transparent – all the people involved need to know what they’re going to expect in terms of tax rates,” said the UI’s Stuen. “So the fewer exceptions and loopholes and write-offs for this and that that we can have in the tax code is an improvement.”
Church advocates doing away with the sales tax on groceries, saying it would have “a much more stimulative effect than cutting the incremental tax rate in the state of Idaho.”
The grocery tax hits everyone, and removing it “would have more money left in people’s pockets and they would be spending it in a way that probably would be beneficial,” he said. It also would benefit lower- and middle-income people.
Benson, at ISU, advised investing in an educated workforce.
“For a thriving economy, in a lot of ways you need hope,” he said, adding, “that’s not an economic term. You have to have some reasonable expectation that the future is going to create more opportunity than we have now.”
Helping younger people achieve their potential creates optimism, he said. But it’s expensive. Benson compared education to music: “If you’re trying to get a string quartet, it still takes four musicians. Education is much the same way. It’s a very labor-intensive process.”
The Legislature’s Tax Working Group, which includes six senators and six representatives and is chaired by the House and Senate tax chairmen, has its next meeting on Tuesday.
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