Archive for March 30th, 2010

Wait Until Next Year

idahoA 21st Century State…a 20th Century Tax Structure

The Idaho Legislature stumbled to adjournment on Monday after reducing state spending by 19% over the last two sessions. Now, you might ask, what next?

At some point – in the not too distant future, one hopes – the economy starts to grow at a stronger clip and the revenue streams at the state level start to produce the dollars needed to rebuild an education system and sustain other basic services. Education gets a lot of attention, as it should. For two years running state support has been reduced in real dollars. That has never happened before. At the same time, a number of other agencies – like the Departments of Environmental Quality and Water Resources – that consume a small slice of the budget, have been close to crippled.

Despite election year rhetoric about holding the line, the budget outlook this year and next is nothing less than bleak. The line hasn’t really been held, it has been moved backward.

Even as the session was dominated by the scramble to patch and scratch a budget together, some legislators were seriously floating the notion that taxes, particularly the income tax, should be cut. Others, like the state senate’s budget leader Dean Cameron were more realistically suggesting that the 2011 session will need to find a way a raise revenue. Cameron told the Statesman’s Dan Popkey that next year could “be even more difficult.”

“Our budget is full of places where we have robbed from one fund or another to keep programs or services going,” Cameron said. “Now, we’re at the end of it.”

Here is the reality: even when you account for the many tweaks that have been made to the Idaho tax system over the years – sales and income tax rates have increased over time, for example – the essential structure has gone unchanged since the historic decision in 1965 to create an Idaho sales tax. What has changed is a steady deterioration, made worse by the awful economy, of revenue to support critical services like public and higher education. Public school support, to a substantial degree, has shifted from the more stable property tax to the more volatile sales tax. Meanwhile, sales tax exemptions have grown like noxious weeds with each exemption eating away at the state’s general fund and, by definition, diminishing the state’s ability to support education.

Somewhere on a shelf in the spiffy, remodeled Statehouse is a box full of studies analyzing how the state’s tax structure has become the sick man of Idaho. Every serious look at Idaho’s “three legged stool” of sales, income and property taxes has concluded that the basic structure is badly dated. Those past studies have accumulated dust and not influenced policy and the just adjourned legislature – after two years of slashing spending by 19% – couldn’t even bring itself to study the system one more time.

That famous 1965 legislative session designed a tax structure for its time. Idaho had a resource dependent economy in those days. The timber industry was in full flower and the Coeur d’Alene mining district was producing vast amounts of silver and creating family wage jobs. Agricultural production was the dependable staple of the Idaho economy.

Forty-five years ago, Hewlett-Packard wasn’t in Boise, Micron either. The service economy hardly existed. Idaho’s corporate community, including mainstays like Albertson’s and Morrison-Knudsen, created stability and jobs. Now much of that is gone or at least diminished. Many things about the Idaho economy are vastly different today, yet the tax structure remains pretty much the same. No less an authority, and advocate for Idaho business, than former Idaho Association of Commerce and Industry President Steve Ahrens outlined what needs to be done at a Boise City Club event during the first days of the legislative session back in January. Was anyone listening?

A question for the next Idaho Legislature is how much more cutting can the state really stand? At some point, a 21st Century economy will require new investment and new thinking about a 21st Century education system. Good jobs require better schools and a trained workforce. The millions in revenue lost to Internet sales (at a detriment to hometown businesses) or left untaxed due to exemptions may not represent comfortable rocks to look under, but the alternative, if Idaho wants to grow a 21st Century economy, is unsustainable.

At the federal level, a few smart people know that spending restraint and tax increases are the only way to get the ballooning federal deficit under control. At the state level, lawmakers have done the cutting. It will take real political courage – and a view to the long term – to confront the need for new revenue.

The 2011 Idaho Legislature will need a Pete Cenarrusa, a Perry Swisher, a Cecil Andrus and a Phil Batt. Those guys, and others lost to history, made the tough decisions in 1965 that put in place a tax system that served the state well for a generation and ushered in the modern Idaho. What next?