EQUITY

Idaho’s revenue structures should strive to be as fair as possible. Two broad ways of looking at fairness are horizontal equity and vertical equity. Horizontal equity means that taxpayers in similar economic circumstances should face similar tax burdens. Vertical equity refers to the idea that the relative tax burden across taxpayers of differing economic means (i.e., across income categories) should be related to their ability to pay.

When looking at state and local fiscal systems, there is usually more to these equity concepts than meets the eye. For example, when considering horizontal equity it may be necessary to look at more than aggregate income categories. The geographic distribution of fiscal costs and benefits may matter. Local option sales tax is a case in point. People who live in small communities with limited retail opportunities may do much of their shopping in larger communities, so a local option sales tax can represent a cost to the small community dweller without a corresponding benefit.

In questions of vertical equity, it’s important to consider the level of aggregation we’re ultimately concerned with. Sales taxes are widely held to be regressive, and are often disliked for that reason. Income taxes can be highly progressive, and are often disliked for that reason. When you combine the impacts of sales and income taxes it is possible to have a tax structure that is closer to proportional (that is, neither progressive nor regressive), which can yield a happy middle ground.

Idaho’s revenue structures should strive to be as fair as possible. Two broad ways of looking at fairness are horizontal equity and vertical equity. Horizontal equity means that taxpayers in similar economic circumstances should face similar tax burdens. Vertical equity refers to the idea that the relative tax burden across taxpayers of differing economic means (i.e., across income categories) should be related to their ability to pay.

When looking at state and local fiscal systems, there is usually more to these equity concepts than meets the eye. For example, when considering horizontal equity it may be necessary to look at more than aggregate income categories. The geographic distribution of fiscal costs and benefits may matter. Local option sales tax is a case in point. People who live in small communities with limited retail opportunities may do much of their shopping in larger communities, so a local option sales tax can represent a cost to the small community dweller without a corresponding benefit.

In questions of vertical equity, it’s important to consider the level of aggregation we’re ultimately concerned with. Sales taxes are widely held to be regressive, and are often disliked for that reason. Income taxes can be highly progressive, and are often disliked for that reason. When you combine the impacts of sales and income taxes it is possible to have a tax structure that is closer to proportional (that is, neither progressive nor regressive), which can yield a happy middle ground.