Taxes this session
Some big bills hide the sheer number of tax proposals.
Tax policy was always going to be a big feature of this session, with a $1.9 billion surplus and Brad Little making tax cuts a central part of his State of the State.
And House Bill 436 blasted through the Legislature at a breakneck pace, and is now enrolled as Session Law Chapter 1.
House Bill 436
I guess I should talk about the 800-pound gorilla in the room, just in case people forgot it was there.
At an estimated cost of $350 million of one-time relief and $251 million ongoing, the $601 million total this year represents about 23% of the $2.55 billion in net individual income taxes collected in 2021.1
The three parts of the bill were:
Reducing the individual income tax rate between $1,000 and $3,000 from 3.1% to 3%, combining the $3,000-$4,000 and $4,000-$5,000 bracket into a single bracket at 4.5% (rather than 4.5% and 5.5%), and lowering the rate on $5,000+ to 6%.2
Reducing the corporate income tax rate to 6%.
Providing a one-time rebate of about 12% of the 2020 Idaho personal income tax or $75 per taxpayer, whichever is greater.
The first two parts are just a standard tax cut. The state wants lower taxes so people keep more of what they earn and the state has a more friendly business environment. The cost is less state revenue. Maybe there’s a better way to do it, but at least the logic is there.
Tax rebates, however, don’t make sense in this context. People and businesses are forward looking: they don’t care what Idaho’s tax rate was in the past, but what it is now and will be in the future. So in 2020, people made decisions based on a higher tax rate, but (since the state is giving the money back) the state doesn’t get the revenue.
It would be like if Netflix charged $12/month in 2020 and then gave subscribers $2/month back. If they had charged $10/month people could have kept the money and Netflix would have more subscribers. It just doesn’t make economic sense.
And one final comment on the rebate. A lot of discourse revolved around the $75 going to households not paying income taxes. It’s a lot like when Mitt Romney said 47% of Americans don’t pay federal income taxes. It’s true in the narrow sense but highly misleading. The households that didn’t pay any state income taxes still paid sales taxes, gas taxes, and product taxes that went into the general fund. But since we don’t track those payments to individuals like we do with the income tax, people don’t get credit for all those taxes they paid (or much of a rebate, it seems). If we wanted to give people money back because we overtaxed them, we shouldn’t look only at the most progressive of the taxes. (Rant over).
Eliminating the residential property tax
As reported in Eye on Boise, there’s a bill in the works to increase the sales tax and the grocery tax credit and eliminate most property tax on owner-occupied residential property.
Not having seen the exact details I don’t want to comment too much. But my initial observations:
Property taxes drive down the value of property.
Look at it this way. If you have a plot of land worth $100,000 and there’s a new tax imposed on owning that land of $1,000/year, you’re no longer going to be able to sell the land for $100,000. Just how much value you lose isn’t set in stone. But one way to think about it is, for someone to buy the land for $100,000 you would have to offer them an an annuity (annual payment) of $1,000 per year to cover the taxes. Such an annuity might cost $16,000.3 If you don’t provide the annuity you could only get $84,000 for the land.
(Conversely, local government services drive up the value of property. If the value of the services exceeds the cost of the taxes, your land will go up in value. But this proposal doesn’t seek to change local government services.).
What this means is lowering property taxes will increase the value of property. Because the lower taxes only apply to owner occupied housing, properties that are now rentals are more likely to be converted to owner occupied housing. Current homeowners benefit, because their property will be worth more. Current landlords benefit, because they can convert rental properties into more valuable owner-occupied housing. Renters suffer, because renters now have fewer choices. New homebuyers aren’t any better off; what they would save in taxes is offset by higher housing prices.
Now, living in the state with the highest sales tax might decrease property values. But I’ll compare sales and property taxes more elsewhere.
Washington’s tax on exported gasoline
Now this is an interesting development. Washington state is proposing to impose a 6-cent tax on every gallon of gasoline refined in Washington but shipped to other states. Gov. Little and AG Wasden wrote a letter condemning this.
Historically, nations have sought to raise revenue through taxes on imports. Tariffs were among the first ways the new United States raised revenue. Taxes on exports? That’s new (well, pretty new). The US Constitution prohibits such a tax on the federal level.
Apparently, last time Washington tried this, Alaska suggested imposing an export fee for crude oil shipped to Washington for refinement. Trade war between states. Fun!
Federal courts have generally frowned on retaliatory taxes. Idaho can’t, for example, tax someone’s Oregon-based income that they’ve already been taxed on. If a state collects income tax, it has to allow a credit for income taxes paid to another state. States can, generally, only tax economic activity that takes place in their state. And state’s can’t, for example, tax Washington businesses more than Idaho businesses.
The one odd exception to this is insurance premium taxes. States take a portion of every insurance contract written in the state—health, property, auto. But there isn’t just one rate. Almost every state has a ‘retaliatory’ tax. States have one rate for in-state insurers. But if, for example, California would tax an Idaho insurance company more than Idaho would, Idaho imposes a special retaliatory tax on California insurance companies equal to California’s tax on Idaho insurers.
Why? If I had to guess, it’s because it’s based on really old jurisprudence. We were taxing insurance premiums well before we taxed individual income or corporate income.
But imagine the same regime for income taxes. Idaho would have its 6% corporate income tax for Idaho businesses and an 11.5% tax for a New Jersey business. And Idaho businesses would pay 6% in Utah while Utah businesses paid 4.95%. Heck, if someone was paid to give a speech in Idaho and lived in California, they’d give Idaho 13.3% of the earnings but a Montanan would only owe 6.75%.
If Washington wanted to impose a 6c/gallon fee on gas refined in Washington, that would fly. But by imposing the tax only on exports, Washington’s entering the land of treating different buyers differently. Thus lies the road to retaliatory taxes.
More
You can tell I haven’t rambled on about taxes for quite a while and I didn’t get to everything I wanted to.
Next time, new proposals for tax exemptions and credits. Mostly going to businesses that already get lots of them!
I’ve been thinking a lot about government legitimacy, particularly with Russia’s war on Ukraine based on Putin’s delusions about Ukraine’s legitimacy. Taxes play a role both in establishing legitimacy—in creating a sense of ‘us’—but also, taxes rely on the legitimacy of the taxing government in the eyes of the taxpayers. Maybe I won’t fully explore this topic, but it seems to be both abstract and fundamental to a functional social order.
Spectating until next time.
Calculated from the December 2021 and July 2021 Comparative Statements on page 3. Not a perfect comparison because some of HB 436’s fiscal impact comes from reduced corporate income tax revenues.
These are the statutory tax brackets for an individual’s taxable income. Since 2001 these brackets have been adjusted for inflation. The number is doubled for married couples filing jointly.
These numbers are just for illustration. A 30 year annuity of $1,000 per year, assuming a 5% growth rate, would cost $16,141. https://www.bankrate.com/calculators/investing/annuity-calculator.aspx