EFFICIENCY

Idaho’s revenue structures should minimize the costs associated with collecting those revenues, and should cause the least possible distortion in economic decision making. Costs should be examined from both the tax collector’s and the taxpayer’s perspectives.

“Costs” refers to the economic impact of complying with the tax laws, and can be a burden on either or both the taxpayer and the tax collector. Economic distortions arise when economic units (i.e., households and/or businesses) make production or consumption decisions in a manner inconsistent with the purely economic fundamentals, thereby giving rise to deadweight loss.

For example, having a sales tax with numerous and complicated exemptions can raise the cost of collecting the tax by making audits more difficult (a tax collector cost) and record keeping more complicated (a taxpayer cost). It will also favor the consumption of exempt goods and services (by making their final price lower) and discourage the consumption of taxable goods and services (by making their final price higher). There may be legitimate reasons (often referred to as “externalities” by economists) to encourage or discourage certain types of consumption, but even when justification exists, using the tax structure (as opposed to some alternative means, such as direct spending) may not necessarily be an efficient means of achieving those objectives.

Similar arguments pertain to other revenue sources such as the income tax. In general, granting exemptions, exclusions, credits or deductions from a tax will tend to make it less efficient. The question that needs to always be answered: Is the efficiency loss more than offset by any gains related to the purpose behind the exemption, exclusion, credit or deduction, and are there more effective ways (besides the tax structure) to accomplish the objectives?