A tax expert believes Idaho lawmakers must ‘go big’ on tax reform to boost the state’s business climate and entice companies to relocate.
But George Mason University’s Adam Millsap, who conducts economic policy research at the school’s Mercatus Center, knows tax reform alone probably won’t do the trick.
“Sometimes, lawmakers think of tax cuts as a magical elixir,” Millsap said Wednesday.
There’s obvious room for legislators to improve the state’s tax structure. Millsap suggested eliminating some of Idaho’s seven income tax brackets to create more fairness and less confusion.
Additionally, he’d close as many tax exemptions as possible to broaden the base and provide space for decisions-makers to lower income taxes, which discourage work and investment.
“Sales taxes are better than income taxes,” he said.
The advice comes as Idaho legislators look to rewrite and reform the state’s progressive tax code. Lawmakers convened a meeting on the topic this week and will hold several more before the 2016 legislative session launches in January.
Millsap offered two key pieces of advice to panel members: Go big and consider the state’s neighbors.
“I would say the worst thing they could do is go too small,” he said. “That would cost them revenue and provides no economic growth. You've just lost the revenue and you've done nothing. Go big or don't really do much.”
His idea of small? Simply lowering the top income tax bracket from 7.4 percent to 6.9 percent, an idea Gov. Butch Otter has pushed in recent years.
The second idea: examine Idaho’s regulatory environment. At a quick glance, Millsap suggested Idaho lower its unemployment insurance tax. “That can discourage businesses from hiring,” he said.
Among the 50 states, The Tax Foundation sees Idaho as the 19th best state for tax burden, a ranking weighed down by the unemployment tax. In that category, Idaho flounders at the bottom with the 46th-worst tax policy.
Lawmakers could also look to cut red tape and regulations, Millsap added. Lawmakers could support free markets by allowing businesses to experiment and innovate without fear of government punishment, fines or other actions.
The Legislature remains a mixed bags on tax policy. Lawmakers, led by Sen. Bert Brackett, R-Rogerson, hiked gas and car registration taxes by $95 million this year and Sen. Jeff Siddoway, R-Terreton, who leads the Senate’s tax panel, doesn’t seem keen to give tax relief anytime soon.
“Any great big tax cuts, I’m probably not supportive of,” said Siddoway, R-Terreton, according to the Idaho Statesman. “But that’s going to be the will of the group, too.”
Siddoway wants starting teacher pay at $40,000 a year and held tax relief hostage this year to move the ball that direction.
Millsap suggested Siddoway and others look at their starting points, too. Siddoway told IdahoReporter.com last week the state needs $3 billion to pay for schools, prisons, Medicaid and state agencies, but Millsap wondered if that’s entirely true.
“Maybe they could fight back on the assumption that Idaho needs $3 billion to run the state,” he said. “Is that even a valid assumption?”
Millsap suggested finding government waste to cut, including business handouts and other ineffective spending.
Idaho might not be able to compete with surrounding states strictly on taxes alone. Wyoming, for one, has no corporate or personal income taxes, plus a 4 percent sales tax rate. Revenues from natural resources buoy the state’s budget, thereby allowing the low tax burden.
Even if Idaho can’t compete directly with its neighbors, Millsap suggested going big anyway.
“People are saving their own money,” he said. “That's the purpose of cutting taxes. That's an end in and of itself.”