BOISE - Idaho Gov. Butch Otter rolled out a major tax cut proposal Monday in his 12th and final State of the State message to a joint session of the Legislature.
“It’s true that our tax burden in Idaho is relatively light compared with other states,” the third-term governor told lawmakers. “But our income levels also remain comparatively low, and beneath our own expectations.”
“We must never forget that it’s the people’s money,” he said. “So I will gladly join you in reducing individual and corporate income tax rates with an eye toward stimulating more economic growth. But that must be accomplished while keeping our fiscal house in order and our investments for the future on track.”
Otter proposed a three-pronged approach, centered around conforming Idaho’s state income tax code to the new federal tax bill. The state Tax Commission estimates that if Idaho conforms its laws to the new federal bill, the state would collect $97.4 million more in state income taxes next year. That’s because the doubling of the standard deduction would cause a $340.5 million decrease to Idaho’s general fund, but the removal of the personal exemptions, which taxpayers now get for themselves and each of their dependents, would mean an increase in state tax collections of nearly $412 million. Other changes would add and subtract, finally ending up with the bottom line of plus-$97.4 million.
Idaho’s state income tax is based on the federal system – the state uses federal adjusted gross income as the starting point for state income tax return calculations. That’s why conforming to federal changes has such a big impact.
Elimination of the personal exemption removes any break for larger families. Congress addressed this by doubling the child tax credit to $2,000, but Idaho doesn’t have a child tax credit in its state income tax laws.
Otter proposed two new state tax cuts to offset the federal changes: A nonrefundable $85 dependent credit, which would cost state coffers $42.9 million a year; and a cut in all of Idaho’s income tax rates, both for corporations and individuals, that would add up to $149.2 million a year.
Top rates would drop from 7.4 percent to 6.95 percent. That’s nearly $200 million a year in tax cuts; when offset against federal tax changes, the result would be $94.7 million less in tax collections for Idaho each year.
Rep. Ron Mendive, R-Coeur d’Alene, welcomed the proposal. “Fortunately, Idaho is in a very good place right now – the fastest-growing state,” he noted.
Sen. Shawn Keough, R-Sandpoint, who chairs the Legislature’s joint budget committee, said her preference would be to eliminate the sales tax on groceries rather than cut state income tax rates. Last year, lawmakers passed a bill to eliminate the grocery tax, but Otter vetoed it; the Idaho Supreme Court upheld his veto.
“I just think it’s morally wrong to tax sustenance, food,” Keough said. “I just don’t think it’s right to tax that – that’s just me. And then secondly, it is a tax that everybody pays, whether you’re very wealthy or very poor, and it gives everybody a tax break.”
But Otter maintained his opposition to eliminating the grocery tax, which he maintains would destabilize Idaho’s sales tax revenues. That change would cost the state about $79 million a year.
“The state of Idaho is prosperous, positive, and poised for even better times ahead,” Otter said. “It is my firm belief that over the past 11 years of overcoming natural disasters and man-made challenges, stubborn political divisions and devastating economic recession, together we have constructed a stronger, more durable foundation on which we and the people of Idaho can build.”
Otter also proposed hiring a new higher education CEO to consolidate functions among Idaho’s colleges and universities; funding the fourth year of a five-year plan to improve K-12 school teacher salaries; and granting merit raises averaging 3 percent to state employees. He called for funding a plan to seek federal waivers to cover a portion of those Idahoans who now fall into a health coverage gap; and backed funding for three new behavioral health crisis centers.
House Speaker Scott Bedke, R-Oakley, called Otter’s tax-cut plan “a good idea.” He said, “That should be met with acceptance, because in the Legislature, there is so much we agree on.”
Democratic legislators decried the plan, saying the $85 credit wouldn’t go far enough to offset the loss of the personal exemptions.
“Eighty-five dollars is like one day of a babysitter for most families,” said House Minority Leader Mat Erpelding, D-Boise.
Senate President Pro-Tem Brent Hill, R-Rexburg, a retired CPA who had expressed concern about large families suffering under the federal tax changes, said Otter’s proposal is “very thoughtful.”
“It’s a significant reduction in income taxes, which is where we were struggling to compete,” particularly with some neighboring states.
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