Bill description: HB 463 is a combination of both the major federal-tax-cut conformity legislation, which brings Idaho’s tax code into line with the federal Internal Revenue Code, and a major state tax cut proposal.
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Does it directly or indirectly create or increase any taxes, fees, or other assessments? Conversely, does it eliminate or reduce any taxes, fees, or other assessments?
HB 463 would reduce the state income tax rate for all tax brackets by 0.475 percent. The Fiscal Note for this bill estimates that the reduction would save Idaho taxpayers $144.5 million in FY 2019.
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HB 463 would also reduce the state corporate tax rate by 0.475 percent, which would save Idaho businesses $15.2 million.
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The federal tax code conformity in HB 463 would make the following changes to Idaho tax collections.
For individuals the total increase in tax collections would be $118.8 million, which breaks down as follows:
The standard deduction would be increased from $6,350 to $12,000 for individuals, $12,700 to $24,000 for married couples filing jointly, and $9,350 to $18,000 for heads of households. This nearly doubles the standard deduction and would result in a net savings to Idaho taxpayers of $340.5 million.
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The personal exemption of $4,050 would be eliminated under the new changes. Individual filers are allowed to take one personal exemption, while joint filers can take two. The elimination of the personal exemption would result in a net increase in taxes to Idaho taxpayers of $272.3 million.
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Dependent exemptions would also be eliminated, which would result in a net increase in state taxes of $139.5 million to Idaho taxpayers.
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Under the new federal laws, most itemized deductions would be phased out or capped (e.g., mortgage interest deduction, a deduction for theft or personal loss, job expenses, etc.). This would result in a net increase in state taxes for Idaho taxpayers of $55.3 million.
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The use of 529 Education Savings accounts would be expanded to include expenses made on K-12 education. Currently, these savings accounts can only be used for college expenses. This would save Idahoans $6 million.
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For businesses the total savings would be $21.4 million, which breaks down as follows.
The new provisions would double the amount that business can deduct for immediate depreciation. The deduction would go from $500,000 to $1 million. The total tax savings to Idaho businesses would be $6 million.
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Businesses will have a higher threshold under the new provisions before they are required to use accrual-basis accounting. Accrual-basis accounting requires that businesses match their expenses to their receipts, as opposed to cash basis accounting, in which receipts are filed when they are received, rather than when the expenses were made. Currently, businesses are required to use the more complex accrual-basis method when their total receipts exceed $5 million. The total receipts amount would increase to $25 million under the new federal tax law.
This would have the effect of allowing businesses to take more deductions or expenses as they would not have received the receipts yet, saving Idaho businesses as much as $12.8 million in the next fiscal year.
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The interest expense deduction would be capped at 30% of its total earnings under the new changes. When companies take on debt, this deduction allows them to deduct from their tax liability any expense they make towards interest payments. Currently, there is no hard cap to this interest expense deduction. Eliminating this deduction would cost Idaho businesses $14.2 million in the coming fiscal year.
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The changes to federal tax law would also limit what transactions qualify for exchanges under section 1031 of the IRC. 1031 exchanges allow a taxpayer to delay paying capital gains tax on the sale of an investment by taking the proceeds and putting it immediately towards another like-kind investment. For example, if an investor buys an apartment complex and sells it at a profit, the profit could be put towards buying a different apartment complex or building without paying capital gains tax on the sale of the original apartment.
Under the new federal provision, only the sale of real estate would qualify for 1031 exchanges. This would cost Idaho businesses up to $800,000.
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The conformity changes would also adjust the rules concerning the transition from an S corporation, commonly referred to as pass-thru entities, to a C corporation, such as most large businesses. The new changes would save Idaho businesses as much as $800,000.
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Finally, the state tax law changes made in conforming with the federal Internal Revenue Code would allow most Idaho S corporations to take a flat 20 percent deduction on income generated. This would save the owners of these businesses $30.8 million in the upcoming fiscal year.
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Does it increase government redistribution of wealth? Conversely, does it decrease government redistribution of wealth?
HB 463 would establish a new child tax credit, which would give a $130 credit on taxes for each child in a household. Creating this new credit would favor large families with multiple children over others, and could make it more difficult to make more substantial tax cuts across the board in future years. (-1)
Conforming with the federal tax code would eliminate both the employee entertainment expense deduction, which allows businesses to deduct expenses for items such as recreational membership for their employees, and the employee transportation and parking expense deduction. These deductions skew incentives in the marketplace and benefit certain employers without affecting others. Eliminating these deductions frees up $4.7 million at the state level that could be used for tax relief in areas that more uniformly affect taxpayers.
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Does it transfer a function of the private sector to the government? Examples include government ownership or control of any providers of goods or services such as the Land Board's purchase of a self-storage facility, mandatory emissions testing, or pre-kindergarten. Conversely, does it eliminate a function of government or return a function of government to the private sector?
By allowing 529 Education Savings accounts to be used for K-12 education expenses, HB 463 would reduce the disincentives of private schooling. By putting money into these 529 accounts, which can only be spent on education, families will save paying income tax on the money they spend for their children’s education.
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