Some believe that Idaho is sitting on a goldmine of forgone taxes through “wasteful” tax preferences. There were comments made to that effect during the last legislative session, with the argument made that billions in sales tax revenue should go to public schools instead of staying in the possession of taxpayers via targeted tax preferences. Is that true? According to Idaho’s tax experts, more than $6 billion is expected to remain in taxpayers' hands instead of being collected for new spending. Why is this happening and what exactly are those tax preferences?
Here is how the state of Idaho defines this process:
“We define these departures from the tax base as tax preferences – noting that they derive from the Idaho legislature. The most common forms they take in the codification of taxes are exemptions, credits, exclusions, and deductions. The result is always the same: a tax that is defined based on a broad economic concept (income, consumption, wealth, etc.) is not applied uniformly against the broad base of the tax. Herein, a tax preference is any provision of Idaho law that excludes some portion of the tax base on a selective basis . . . These tax preferences can be thought of as foregone revenue the state could be collecting if the expenditure is repealed or thought of as tax relief currently provided to Idaho consumers and businesses.”
For Idaho’s state income tax:
“The principal Idaho income tax credits are:
Grocery Credit
Elderly Dependent Credit
Other States Tax Credit
Schools, Libraries, and Museums Credit
Investment Tax Credit
Youth and Rehabilitation Credit
Research Activity Credit
Broadband Investment Credit
Child Income Tax Credit
Reimbursement Incentive Credit
The principal Idaho income tax deductions and exclusions are:
Social Security Exclusion
Retirement Benefit Exclusion
Energy Efficiency Upgrades Deduction
Alternative Energy Device Deduction
Child Care Deduction
Capital Gains Exclusion
Medical Savings Account Deduction
Government Interest Exclusion
College Savings Deduction
Health Insurance Deduction
Long–Term Care Insurance Deduction
Indigenous Earnings on Reservation Exclusion
First–time Homebuyer Deduction
Idaho Lottery Winnings Exclusion”
Here is how Idaho tax officials explain the impact of these income tax savings for taxpayers:
“Income tax credit preferences are expected to be worth no more than $619 million in calendar year 2023 or $637 million in 2024. The largest contributors are the grocery tax credit and other states tax credit. The grocery tax credit increased $20 per person in tax year 2023 which explains the large jump. The investment tax credit is also expected to continue to be worth more than $100 million each year going forward.
Income tax deductions and exclusions are expected to be worth no more than $316 million in 2023 or $326 million in 2024. Deductions and exclusions may have a smaller impact because they reduce taxable income rather refund actual taxes. Many of the deductions are expected to stall or slow down in 2023 because of the tax cuts passed in HB1 of the 2022 special session. Social security remains the largest exclusion although capital gains may be competitive if corporate profits and stock prices continue to grow.”
As for sales tax savings in Idaho:
“Sales tax preferences relating to specific uses and entities are expected to be worth no more than $1.5 billion in 2023 or 2024. The overwhelming bulk of these sales tax exemptions are for equipment and supplies used in industry, mining, agriculture, and irrigation. Sales tax preferences relating to goods and services are expected to be worth no more than $3.7 billion in 2023 or $3.8 billion in 2024, the majority coming from services rather than goods. Health care and professional services are expected to make up half of this amount.”
The Idaho tax preference report notes:
“Together these preferences are expected to be worth no more than $6 billion in 2023 or $6.2 billion in 2024.”
So, are these targeted sales tax preferences for things like construction, agriculture, irrigation, production, hospital purchases, and professional services wasteful? Your answer may depend on whether you think that consumers should pay more in Idaho and the cost of doing business be increased to allow state spending to grow faster. Or instead, if you view these tax preferences as critically important and economically vital “tax relief currently provided to Idaho consumers and businesses.”
Idaho’s Tax Preferences
(Source: General Fund Revenue Book; Dollars in thousands)
