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Idaho Freedom Index analysis: RS29902

Idaho Freedom Index analysis: RS29902

by
Parrish Miller
August 31, 2022
Parrish Miller
August 31, 2022

Rating: -2

Bill description: RS29902, Gov. Brad Little's proposed legislation for the September 2022 special legislative session, would replace Idaho's graduated income tax, which has a top rate of 6%, with a flat rate of 5.8%. It would also reduce the corporate income tax from 6% to 5.8%. It would dedicate $410 million to government-run schools and a newly created "in-demand careers fund" for fiscal year 2024. It also would mandate a 3% annual budgetary increase for those schools, regardless of how much revenue the state takes in or the impact the increase would have on other priorities. Finally, it would add an "advisory question" to the November ballot, essentially asking voters to approve what the bill already does.

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?

RS29902 repeals and replaces Section 63-3024, Idaho Code, to replace Idaho's graduated income tax brackets with a flat rate of 5.8%. This shift would also add indexed exemptions for the first $2,500 in income for single filers and $5,000 for joint-married filers. Based on the projected Index Formula for 2023 (1.791), these exemptions would be worth approximately $4,478 and $8,955 once implemented, and they would be adjusted annually based on the Consumer Price Index.

This tax shift should result in a net reduction in income taxes collected, and a reduction for all or nearly all filers.

(+1)

RS29902 would repeal and replace Section 63-3025, Idaho Code, to reduce the state's corporate income tax from 6.0% to 5.8%.

(+1)

Does it increase government redistribution of wealth? Examples include the use of tax policy or other incentives to reward specific interest groups, businesses, politicians, or government employees with special favors or perks; transfer payments; and hiring additional government employees. Conversely, does it decrease government redistribution of wealth?

It is worth noting that the indexed exemptions implemented by RS29902 would result in many lower income earners (and current taxpayers) paying zero in income taxes while offering only small tax reductions for many middle class filers. Many people regard a flat income tax as fairer than a graduated one, but the exemptions called for in this bill would lead to an amount of redistribution similar to that provided by the current system of graduated rates.  Eliminating the exemptions and moving to an even lower flat rate income tax would reduce the redistributive aspects of the current system. 

The next major provision of RS29902 is amending Section 63-3024B, Idaho Code, to implement yet another "onetime, nontaxable income tax rebate." (This would be the third such rebate in two years.) This rebate would  be 10% of the tax amount reported on the 2020 state income tax form. The minimum rebate would be $300 per individual return and $600 per joint return.

The rebate implemented earlier this year was 12% of the tax amount reported on the 2020 state income tax form, and the minimum rebate was $75 per taxpayer and dependent.

Notably, the rebate percentage called for in RS29902 is lower than that while the minimum rebate is markedly higher. This means a much larger share of the rebate would be directed to those in lower income brackets, many of whom paid even less in income tax than their rebate, making their effective rebate percentage greater than 100%. Approximately 80,000 filers in Idaho pay no income tax at all, yet they too would  receive another significant tax rebate under this proposal.

While this tax rebate program is presented as tax relief, a significant portion of it is more accurately characterized as wealth redistribution. With up to $500 million allocated to the program, this would likely be one of the most significant wealth redistribution efforts ever implemented in Idaho.

(-1)

Does it create, expand, or enlarge any agency, board, program, function, or activity of government? Conversely, does it eliminate or curtail the size or scope of government?

RS29902 creates a new "in demand careers fund" in the state treasury. This represents an expansion of government.

(-1)

Does it increase government spending (for objectionable purposes) or debt? Conversely, does it decrease government spending or debt?

RS29902 would amend Section 63-3638, Idaho Code, which deals with sales tax distribution. This amendment would require that, beginning in fiscal year 2024, $330 million be distributed to the "public school income fund." The amendment further requires that, beginning in fiscal year 2025 and each fiscal year thereafter, the amount transferred to the fund increases  by 3% each year.

This would be a massive increase in spending, which is inherently problematic. It also would set up the state for future economic turmoil as the automatic spending increase is not tied to revenue increases and, in fact, will apply even during a recession or revenue reduction.

(-1)

RS29902 further amends Section 63-3638, Idaho Code, to require that, beginning in fiscal year 2024, $80 million be distributed to the newly created "in demand careers fund." This new spending is also linked to an automatic 3% annual increase, and has the same problems as discussed above.

In times of economic contraction, automatic spending increases will inevitably require either tax increases or sharp spending decreases for other priorities.

(-1)

It should be noted how quickly automatic spending increases compound. The $410 million for FY24 proposed here will cost $4.7 billion over the first 10 years and will have compounded to $551 million in the program’s eleventh year (FY34).

ANALYST’S NOTE: Another aspect of this bill worth considering is its constitutionality, both in a strict sense and with respect to the spirit of Idaho’s constitutional requirements. 

Article III, Section 16 of the Idaho Constitution contains a requirement that “Every act shall embrace but one subject and matters properly connected therewith. …” While the courts have historically given great deference to the Legislature when it comes to stretching the boundaries of “one subject,” the spirit of the requirement is clear. 

There are no doubt lawmakers who support tax cuts but who oppose massive spending increases such as those contained in RS29902. Were the proposed legislation to follow the spirit of the Idaho Constitution, these distinct subjects would be separated into independent bills, allowing each lawmaker to vote his or her conscience without compromise.

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