State lawmakers and the governor finally are having conversations that should have been had years ago - how to cut the size of government. That's great. Lawmakers have an extraordinary opportunity to get state spending under control, to eliminate waste and excess in every agency. But let's not stop there. Too little is being said about the other side of the spending equation: the state's disproportionately high income tax rates and the effect they have on the state's economy.
Idaho's corporate tax rate, at 7.6 percent, is the highest in the region, according to the Tax Foundation. Montana charges 6.75 percent. Utah is 5 percent. Washington, Wyoming and Nevada have no corporate income tax. Oregon has a two-tiered corporate tax, with the low rate set at 6.6 percent and the rate for those earning above $250,000 set at 7.9 percent.
Idaho has eight personal income tax brackets, with a top marginal rate of 7.8 percent. Montana's top marginal rate is 6.9 percent. Utah has a flat rate of 5 percent. Nevada, Wyoming and Washington state have no personal income tax.
As a contender on the national or regional stage, Idaho's tax policies put the state at a disadvantage.
Tinkering with the state's income tax rates is no small chore. The corporate income tax brought in $139.5 million last year, down 18.4 percent from the year before. The personal income tax brought almost $1.2 billion to the state general fund; the tax collections from personal income were off more than 13 percent from the year before. So the natural inclination of some legislators is to avoid the topic altogether.
Others think now is the time to get the job done. Meridian Rep. Marv Hagedorn is working on legislation that would lower the tax rate gradually over several years.
Historically, cuts to national income tax rates have helped boost money flowing into the federal treasury. Of course, this happens because people and businesses are earning more, which ought to be a key performance benchmark and concern of state policymakers. Cuts at the state level should meet with similar and perhaps more dramatic results. Tax cuts that allow people to spend more would, for example, result in an increase in sales tax revenues.
Back when companies had to locate near a natural resource, states had a lot more flexibility to set tax rates. If you wanted to log timber, you had to be near trees. Now, companies find themselves moving throughout the country and all over the world. They're no longer bound by geography and resources. Businesses go where the business environment is most suitable, and political borders and confiscatory tax policies are as much a determiner of location as proximity to natural resources. If you're looking to relocate a business, the fact that Idaho will make you pay $760,000 on a profit of $10 million might be of concern.
Across the state line in Wyoming, that profit is money that the business can keep - and maybe put toward capital outlay, hire new employees or pay existing employees more.
Idaho's tax structure, then, can only be viewed as a real impediment to the state's efforts to get out of a recession.
Wayne Hoffman is the executive director of the Idaho Freedom Foundation, a nonpartisan, nonprofit think tank. E-mail him at [email protected].
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