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Don’t confuse low tax collections with low tax rates

Don’t confuse low tax collections with low tax rates

Fred Birnbaum
October 16, 2014
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October 16, 2014

Does Idaho have a “revenue gap?” Are people in Idaho are undertaxed? If you measure Idaho’s state and local tax collections on a per capita basis, it has one of lowest rankings of all states. However, if you measure the state and local tax burden as a percent of state income, Idaho ranks No. 24. That tax burden falls on the people.

Idaho’s top income tax rate of 7.4 percent is effective at a marginal taxable income of $10,567 for individuals. Three adjacent states, Washington, Nevada and Wyoming, have no individual income tax. Oregon is the only adjacent state with a higher top income tax rate, at 9.9 percent, but the state has no sales tax. Every other Western state’s rate is lower than Idaho except California.

Idahoans surely don’t want to trade places with California, which now has the highest percentage of people living in poverty, on a cost-of-living adjusted basis, of any state in the union.

Idaho’s general sales tax at 6 percent ranks No. 16, but the rating does improve when you factor in the lack of local sales tax in most of the state. However, we are one of only seven states to tax groceries at the general sales tax level.

Idaho ranks No. 27 for gasoline tax, and is competitive regionally, but hardly an indication that we are undertaxed. On other excise taxes, Idaho is No. 41 on cigarette taxes but a much steeper No. 10 on the state’s spirits tax. Perhaps the only area where Idaho shines, relative to other states, in that the effective rate of property tax puts us at No. 38 overall.

So how does one explain the gap between Idaho’s per capita tax collections, which are low in dollar terms, and the relatively high tax rates?

The missing variable is the tax base or lack of one in Idaho. Wyoming mines around 400 million tons of coal annually and generates royalties that are essentially paid by out-of-state consumers of that coal. Nevada does the same with gaming. Washington has the huge wealth effect of the technology sector in the Seattle corridor. Idaho’s public lands, particularly the federally owned lands, contribute less than they once did because logging is down 90 percent from its peak in the 1970s on federal lands.

How do we create a tax system that helps the people of Idaho?

Let’s start by making the state attractive to businesses and individuals with a competitive tax structure that would parallel other states with solid income growth. Eliminating the sales tax on groceries would help working families. A flat income tax with fewer special interest “carve outs” would be another good starting point. Idaho would also benefit from stability and predictability in its property tax structure.

It is time for some creative, pro-growth thinking on taxes that grows our economy and benefits Idahoans.

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