ADEQUACY

Idaho’s revenue structures should be calibrated to provide sufficient revenue to meet the state’s spending needs, both currently and over time. This applies not only to direct state spending, but also to spending requirements the state imposes on local governments.

Adequacy of revenue goes beyond just achieving balance in the near term; it should also look well into the future and anticipate how the existing revenue system (or proposed changes to the revenue system) impact the ability to fund public services. Changing demands on the revenue stream (through expenditure policies) also bear on the adequacy of the revenue structure.

One example of how adequacy enters the discussion in terms of the existing revenue structures is the sales tax. Idaho’s sales tax is characterized by excluding a great many services from the tax base, and this is responsible for a gradual erosion of the sales tax capacity (relative to the overall economy) as consumption shifts ever more into the realm of services. In 1965, when Idaho enacted the current sales tax, over half of all personal consumption consisted of goods purchases. Today goods purchases account for less than one-third of all personal consumption.

Tax structure changes can also have impacts on adequacy. If a new exemption is granted, it can (and probably will) reduce the capacity of the tax structure to generate revenue. It may be argued that certain types of tax exemptions yield increased economic activity, with corresponding increases in tax revenue from the remaining tax base. In order for this effect to be neutral, the net increase in tax revenue would need to equal the net increase in economic activity. This is a very tall hurdle for most tax exemptions to clear.

Expenditure policies can have a significant bearing on the adequacy of the revenue stream. If the state takes on an expanded or new spending obligation (for example, providing health insurance subsidies to small businesses or mandating reduced public school class sizes), there will be additional demands on the revenue stream. If the revenue system is approximately in balance before the change, either other spending programs will have to be reduced or new revenue sources will have to be obtained to maintain that balance. It is possible to ignore revenue balance issues in the case of relatively small actions, but the effects end up being cumulative over time and balance will be achieved, because the state constitution requires no less.