Idaho lawmakers are finally taking the bold approach to the state’s confiscatory tax policies that I’ve been hoping to see for years. Sadly the proposal being floated lacks the polish necessary to actually pass. It cuts taxes on some but raises it on others.
The proposal would lower the state’s top marginal income tax rate from 7.4 percent to around 6.5 percent. That’s way more aggressive than Gov. Butch Otter’s milquetoast 0.1 percent a year for four years. If the proposal manages to get out of the House, I predict it is dead on arrival in the Senate, where the tax committee will probably frown on a plan that has anyone facing an increased tax burden.
The plan under consideration would raise all the other income tax brackets in the state’s progressive income tax structure. That means people who pay as little as 1.6 percent up to 6.1 percent and everything in between would see their taxes rise.
Some lawmakers are likely to have a tough time accepting a plan that results in some Idahoans paying more, especially as they’re contemplating other big tax and fee increases for highways and bridges. Compelling people to pay higher gas taxes, higher registration fees as well as higher income taxes is probably unfathomable. Indeed, the tax increase on lower income people is entirely unnecessary; it is driven entirely by the Idaho Legislature’s unwillingness to constrain spending. Without the high spending increases, the top rate could be cut this year to 6.9 percent without changing other tax rates.
The desire to flatten or even eliminate Idaho’s income tax is a good one. Idaho’s progressive income tax produces an artificially higher top marginal rate, making Idaho appear to have significantly unfavorable confiscatory taxes compared to our neighboring states. Upward pressure on the top rates means wealth creators tend to inject less money in the economy than they otherwise could, hurting people who settle into lower income brackets, even though lower income people are supposed to benefit from a lower overall income tax rate.
Even with strong components, this proposal doesn’t get all the way to gold. Yes, the plan valiantly flattens the marginal income tax rates to the advantage of earners in the top two brackets now fixed at 7.4 percent and 7.1 percent.
But flatten the income tax, this proposal does not. The measure would leave in place millions of dollars of special interest and anti-free market tax breaks that clutter Idaho’s tax code. Protected in perpetuity are things like the investment tax credit ($37 million), the youth and rehabilitation credit ($9 million) and the research activity credit ($4.4 million).
It’s too bad, because getting rid of such breaks would create a super low, super flat rate of around 5 percent for everyone. That would be an amazing policy achievement. But such a proposal has other political consternations. Special interest tax breaks get put in place and stay there because they are feverishly guarded by special interests.
I hate to say it again, but I will: Removing the sales tax on groceries and providing instant tax relief to Idaho families at the grocery checkout line would help blunt considerable criticism likely to be associated with a necessarily aggressive income tax reform proposal like this.
Simply stated, repeal of the grocery tax is the only proposal that potentially that gives this plan a pulse. Otherwise, it’s likely to collapse from its own weight, leaving the unambitious Otter plan the only game in town.