It’s a race that has no winners.
It’s a race that should not even be run.
It’s stoked by the philosophy that Idaho must lower its tax rates to undercut tax rates in neighboring states. If we don’t, we will pay a steep economic penalty.
The governor subscribes to this philosophy, particularly regarding income taxes. In the State of the State address he talked about “further ratcheting down our marginal income tax rates — both individual and corporate.”
The Boise Metro Chamber of Commerce CEO Bill Connors is a believer as well. He says the state’s income tax rate dissuades companies from relocating to Idaho. “Clearly, this is one of those hurdles we have in terms of economic development,” he told the Idaho Statesman.
That’s odd. Because a recent report showed Idaho has one of the lowest per capita tax burdens of any state in the nation.
So what’s the truth? How does Idaho compare to its neighboring states, and how are we doing in this race to the bottom?
Idaho is losing to Montana
To keep up with Montana, Idaho will have to lower its top personal income tax rate by six-tenths of one percent. But there’s a problem. Montana has a $300 million budget surplus (think Bakken oil) and its legislature is working to lower it’s top rate to 6.3 percent. If Idaho wants to keep up with Montana, it will have to sustain serious cuts to revenues. A gradual reduction from 7.4 to 6.9 percent will reduce revenues $100 million by 2020. And Idaho still wouldn’t be as low as Montana. Remember, Idaho is a state the struggles to fully fund its school system. It will also be hard to keep up with Montana with a sub-par schools
Idaho is losing to Wyoming and Nevada
If Idaho wants to compete with them, it will have to make its corporate rate zero.
Interestingly, Oregon has the region’s highest corporate tax rate, yet its economy is growing faster than Idaho’s according to Business Insider.
Idaho is losing to Washington
Wyoming and Nevada are unique — one is the Saudi Arabia of the West, while the other has Vegas — yet Washington has a more traditional economy. Why doesn’t it have a corporate income tax?
Idaho is losing to…oh wait, we’re winning
In other words, when it comes to dollars and cents, the average tax burden in Idaho is less than all the other regional states with income taxes. What’s more, the state’s per capita tax burden is 30 percent lower than the national average.
Even though Idaho has a relatively low sales tax, it’s not zero. Yet if you’re a crusader for low taxes, Idaho’s sales tax should make you happy. That being said, it’s odd how rarely Idaho lawmakers talk about the state’s relatively low sales tax. Instead, they deride income taxes, which place a higher burden on wealthy people.
Here’s something you never hear
Ever heard a conservative lawmaker tout the low state and local sales taxes? Me neither. But on this front, Idaho is doing quite well. So why do lawmakers only focus on the taxes that have a greater impact on the wealthy? A cynic would say “because the wealthy can afford lobbyists.”
What’s more, don’t expect this to hold steady. There is a plan in the works to raise the sales tax by a penny.
States must collect revenue
Without revenues, states cannot provide the necessary services for a modern, first-world society. However, each state has it’s own way of collecting revenues. No two are identical.
- Corporate income tax revenues are very low in every state
- Oregon makes up for no sales tax revenue with individual income tax revenues
- Montana makes up for no sales tax revenue with property and excise tax revenues
- Washington makes up for no individual income tax revenues with sales tax revenues
- Nevada makes up for no income tax revenue with excise tax revenues
In other words, states make up for low taxes in one category with higher taxes in a different category. So when Idaho lawmakers tell us we have to win a tax-cutting race against our neighbors, they’ll always find a lower rate to compete against.
Stop the race
Idaho should do something bold. It should establish a tax code that is fair to all income brackets. This means more progressive taxes, such as income taxes and fewer regressive taxes, such as sales taxes. It also means we should fully fund the obligations of the state.
The state’s tax policy should be based on fairness, not Keeping Up with the Joneses. Allowing politicians or business leaders to frame our tax system as a competition against every state with a lower tax rate belies what our real goals should be: a fair tax system that fully provides for the citizens of Idaho.