• Idaho Taxes. Who Pays?

    The Institute for Taxation and Economic Policy has released Who Pays? A Distributional Analysis of the Tax Systems in All Fifty States. The report assesses the fairness of state and local tax systems by measuring the state and local taxes that will be paid in 2015 by different income groups as a share of their incomes. The report examines every state and the District of Columbia. It discusses important features of each state’s tax system and includes detailed state-by-state profiles that provide essential baseline data to help lawmakers understand the effect tax reform proposals will have on constituents at all income levels.

    Click Here to see who pays how much in Idaho.

    Or, read the national report 

  • IDAHO’S NEW SOFTWARE SALES TAX EXEMPTION – BIG HITS ARE COMING TO THE REVENUE STREAM FROM HOUSE BILL 598

    IDAHO’S NEW SOFTWARE SALES TAX EXEMPTION – BIG HITS ARE COMING TO THE REVENUE STREAM FROM HOUSE BILL 598

     

    At first glance the 2014 legislative session looks like there was very little in the way of tax cuts. The Governor earmarked $30 million for unspecified tax cuts in his Executive Budget. Only four pieces of tax legislation were enacted, and combined they had a relatively small “official” impact of minus $9.4 million in FY 2015 according to the Legislative Services Office Sine Die Report.

     

    One bill, HB 546, actually had its Fiscal Note changed mid-stream from a revenue reduction of $3 million to a revenue increase of $7 million (and that Fiscal Note change was NOT related to the Senate amendment). Looking strictly at Fiscal Notes, that change flips the combined revenue impact of these three bills from a loss of $9.4 million in FY 2015 to a gain of $0.6 million in FY 2015. (The LSO Sine Die Report, published in April 2014, had not adopted the revised HB 546 Fiscal Note.)

     

    Unfortunately, the real fiscal impact of enacted 2014 revenue legislation is grossly understated. Sloppy Fiscal Note practices, a lack of rigorous fiscal analysis that addresses (among other things) timing issues, and misleading (bordering on deceptive) statements by proponents combine to put the public in the dark when it comes to the real fiscal impacts of legislation enacted in the 2014 session.

     

    House Bill 598, pushed by the Idaho Technology Council, will exempt all sales of application software in cases where it is delivered electronically (from the so-called “cloud”), or where it is loaded on the user’s computer by the vendor and the distribution media are not left behind (the so-called “load and leave” method). Since electronic delivery is a rapidly growing method of software delivery, this new exemption will have a rapidly growing fiscal impact, i.e., revenue loss.

     

    An analysis of sales tax returns and audits that was done by the Idaho Tax Commission and presented to the House Revenue and Taxation Committee found the immediate revenue loss from just the 28 firms they examined is $5 million. The Commission believes the initial FY 2015 impact will be at least $8 million of lost revenue (compared to $2 million reported by LSO per the Fiscal Note), and reach $40 million in a very short period of time (the LSO General Fund Budget Update as of Sine Die, only reports impacts through FY 2016, with a $5 million estimated revenue loss in the second year).

     

    HB 598 was sold in part on the erroneous statement that it is “consistent with Idaho tax policy excluding services from state sales taxation.” First, Idaho does not exclude services from sales taxation – quite a few services are in fact subject to the sales tax in Idaho. Second, the point is irrelevant – since 1986 Idaho’s sales tax statute has said: “the term ‘tangible personal property’ includes any computer software which is not a custom computer program” (see I.C. 63-3616(b)(i)).

     

    That was changed in the 2013 Legislative session by House Bill 243 that added the following words (shown here in bold): “is not a custom computer program and is not application software accessed over the Internet or through wireless media.” This meant software that was run at the seller’s location and was not loaded and left at the user’s location was exempted from the sales tax, so long as “that same computer software or comparable computer software that performs the same functions” is not available “in a storage media or by electronic download.”

     

    The somewhat convoluted language of HB 243 meant that software exclusively available to run remotely was made newly exempt from the sales tax. That was a new exemption, but it was fairly limited and the fiscal impact estimate of a $700,000 revenue loss was probably reasonable.

     

    HB 598 changes everything when it comes to sales taxation of computer software. Its Statement of Purpose says (referring to HB 243): “this section was amended in 2013…but problems were encountered in the rulemaking process that made further legislation necessary.” That sounds a lot like a technical correction, but the reality is HB 598 goes far, far beyond the new exemption created last year in HB 243.

     

    HB 598 strikes the following language that has been the policy in Idaho Code (see I.C. 63-3616) for almost three decades: “Computer software is deemed to be tangible personal property for purposes of this chapter regardless of the method by which the title, possession or right to use the software is transferred to the user.”

     

    Now, under HB 598, all application software that is delivered electronically (i.e., downloaded) will be exempt, even if it is also available on storage media (i.e., CDs or DVDs). Also, application programs that are loaded by the vendor at the user’s location, but where the storage media is not transferred to the user, will also be exempt.

     

    To understand how significant this change is, consider that most software developers, both large and small, are now offering download versions of their products directly over the Internet. With this new sales tax exemption, Idaho consumers and businesses will have a potent reason (6%) to go the download route when they purchase their various application software programs. And in the case of “apps” that run on smartphones and tablets, download is the only way they are made available. Apps were clearly taxable before HB 598, now they are exempt.

     

    Also, most large enterprise software is delivered under the “load and leave” method, something that has traditionally been taxable (including under HB 243) but under HB 598 becomes exempt. These are large packages that do everything from inventory management, sales and distribution, production planning, accounting, finance, etc., etc., etc. They can easily cost in the millions of dollars. Every large corporation uses them. And up to now, they have been taxable.

     

    It is hard to understand why Idaho, having already given up a substantial part of its revenue stream over the past decade and a half, and having fallen significantly behind on such fundamental obligations as its employee pay and its Constitutional duty to provide “general, uniform and thorough…public free common schools,” would choose instead to provide a massive new sales tax exemption without so much as a thorough examination of that new exemption’s true costs.

     

    Michael Ferguson, Director
    Idaho Center for Fiscal Policy

    May 19, 2014

     

    click here for a pdf version of this post

  • ARE THE RECENT DEPARTMENT OF ADMINISTRATION MISTAKES REASON FOR BUDGET PANIC?

    In a word, no!

     

    A flurry of news stories have reported on the stunning revelation that federal funds – that cover three-fourths of the costs associated with the Idaho Education Network (IEN) – have been withheld for almost a year.

     

    While this clearly warrants shock on the part of the JFAC (and indeed, the entire legislature), it needs to be kept in perspective and not inflict harm where none is warranted. Based on the news reports, the Director of the Department of Administration has failed on multiple levels, and that is a serious situation.

     

    However, there have also been reports that some legislators believe the IEN situation may have spillover effects in the form of Idaho’s ability to fund other state spending priorities. That’s where taking a deep breath and keeping things in perspective is essential. Only if there are unrevealed, massive additional surprises would this incident rise to the level of putting Idaho’s budget priorities at risk.

     

    As reported, the Director of the Department of Administration has asked for a supplemental appropriation of $14.5 million to cover the federal share of the IEN for this year (FY 2014) and next (FY 2015). Let’s put that into perspective. And since the Responsible Alternative to the Executive Budget has higher spending and fewer funds going into reserves than the Executive Budget, let’s use the alternative budget to show even it should not be adversely impacted by Admin’s mistakes.

     

    The Responsible Alternative has a spending level of $2,970.5 million in FY 2015, and reserves of $290.8 million. That’s a reserve level of 9.8%.

     

    The supplemental request is $14.45 million, so it would bring spending up by $7.3 million (the FY 2015 share of the “supplemental”) to $2,977.8 million, and it would bring reserves down by $14.45 million to $275.3 million. That leaves a reserve level of 9.2%. Hardly a reason for panic.

     

     

  • A RESPONSIBLE ALTERNATIVE TO THE EXECUTIVE BUDGET

    Idaho Center for Fiscal Policy proposes a reallocation of available resources to increase investment in Idaho

     

    Idaho needs a responsible, sustainable budget to run our state effectively and efficiently. In addition, the governor’s Task Force on Improving Education has called for an increased investment in our education system of $350 million. To better meet these objectives, the fiscal year (FY) 2015 Executive Budget released last week can be improved in several ways.

     

    The Idaho Center for Fiscal Policy presents an alternative allocation of the state’s resources. It differs from the Executive Budget by:

     

    1)    Rolling over the ending balance from FY 2014, rather than putting those dollars in rainy day funds.  Instead of transferring $71.7 million to the Budget Stabilization Fund, the Public Education Stabilization Fund, and the Higher Education Stabilization Fund, these dollars flow into FY 2015 where they ultimately provide the basis for a $66.1 million ending balance in FY 2015. That $66.1 million is in addition to $224.8 million that is already in the state’s six major reserve funds’ balances as of FY 2014. It is also $16.3 million higher than the Governor’s recommended FY 2015 ending balance.

     

    2)    Restoring $35 million to the Department of Health & Welfare budget. This will restore most of the cuts—primarily to care for persons with serious disabilities—which were made to the FY 2012 budget. The additional $35 million in state dollars allocated for this purpose will yield over $100 million when federal matching dollars are included.

     

    3)    Investing available funds in Idaho rather than relinquishing $30 million for tax reductions. An analysis of Idaho’s long-range fiscal situation indicates the state budget has no capacity for further reductions in the revenue stream, and if anything it will require additional revenue sources to fulfill the Governor’s promise to fully fund his education task force’s recommendations.

     

    4)    Adjusting public school and state employee salaries by 4%. A 4% adjustment in FY 2015 will cost $21.5 million for state employees and $36.8 million for public school employees. FY 2015 marks the sixth consecutive budget the Governor has recommended no adjustments for inflation to the state’s workforce compensation. Current estimates are that state worker wages in Idaho are 19% below market levels, generating unnecessary and costly turnover.

     

    5)    Giving education investment an additional boost of $34.5 million (bringing total increased support for schools to over $70 million). Schools received ‘one-time’ funds in this amount for FY 2014. This $34.5 million is added to the “Maintenance of Effort” section of the FY 2015 budget and made permanent. Other maintenance items and after-maintenance enhancement items in the Governor’s FY 2015 public school budget remain in place. Combined with the public school employee compensation adjustment, the ICFP budget provides an overall increase of 8.3% for public schools, versus the 2.9% increase in the Governor’s budget. This may sound like a large increase, but it only brings the FY 2015 public school budget to a level 3.6% ahead of FY 2008. Inflation alone over that period has been 13.5%.

     

    6)    Taking advantage of federal dollars to increase Medicaid coverage to achieve substantial savings. A private firm found that ‘Medicaid Redesign,’ as it has been dubbed in Idaho, could yield $42.4 million in state savings in FY 2015. The state’s net savings consist of $9 million in increased administrative costs, offset by $40.9 million in reduced CAT program costs, $9.7 million in reduced behavioral health costs, and $0.8 million in reduced public health costs. (This figure does not reflect additional savings of $34.7 million that will occur at the county level, for a combined state and local saving of $77.1 million.)

     

    The ICFP budget relies on the revenue projections used in building the Executive Budget, and leaves all of the Governor’s other expenditure initiatives intact. The six changes outlined above yield a budget for Idaho that addresses critical funding needs in the areas of public schools, health and human services, and employee compensation levels. The ICFP budget also leaves an estimated FY 2015 ending balance of $66.1 million, an ample cushion for unanticipated contingencies over the next year and a half. Finally, the ICFP budget fully funds the Budget Stabilization Fund to 5% (its statutory upper limit) in FY 2014. When combined with Idaho’s five other reserve funds, this yields a total reserve balance of $224.8 million at the end of FY 2014, a sizeable cushion if serious fiscal problems are encountered.

     

    In addition to the immediate benefits for Idaho and our children, increasing these investments will have long-term positive impacts for our economy. Mike Ferguson, Director of the Idaho Center for Fiscal Policy, said, “In the 1990s, when we collected more of the revenue we needed, our economy grew faster than almost all other states. Today, after more than a decade of reduced investments, that trend has reversed. Idaho is now the second poorest state in the nation with the highest percentage of minimum wage jobs; and we invest substantially less in education than all but one other state.”

     

    FY2014 Table

     

    FY2015 Table

     

    Click the following link for a PDF version of the News Release and budget tables:

    ICFP Responsible Budget News Release 20140113

     

     

  • IDAHO FISCAL UPDATE – SEPTEMBER 2013

     

    Idaho’s state budget is a dynamic, continuously evolving financial framework for the public services provided by state government. August is a significant month in Idaho’s budget process because it brings new information that sheds light on the conditions that underlie the state’s budget.

     

    Since the end of the 2013 legislative session that set the initial FY 2014 state budget, two major things have happened that bear upon the state’s budget: fiscal year 2013 has ended, so we now have actual rather than forecast revenue for that budget year (along with actual rather than budgeted expenditures for that year), and we have an updated FY 2014 General Fund revenue forecast from the Division of Financial Management (DFM, the governor’s budget office).

     

    Relative to the budget that was set during the 2013 legislative session, Idaho now faces a fiscal situation that is characterized by significantly more financial resources than state policymakers (the governor and the legislature) estimated would be available in the current fiscal year. Among other things, this will have considerable consequences for the budget decisions to be made in the 2014 legislative session. The rest of this paper will delineate the changes that have occurred, and put them into the context of Idaho’s overall budget situation.

     

    FY 2013

     

    FY 2013 ended on June 30, 2013 with $98.3 million more in General Fund revenue than was forecast by both the governor and the legislature in the 2013 legislative session. This figure is based on comparing the actual revenue result to the forecasted revenue from the legislative session, with an adjustment for law changes that were not reflected in the revenue forecast but are reflected in the actual revenue result. (The sole law change affecting FY 2013 General Fund revenue is a reduction of $6.0 million associated with HB 001, Tax Conformity.)

     

    This FY 2013 revenue surplus of $98.3 million was reported by the Legislative Services Office (LSO) in the June 2013 General Fund Revenue Monitor. DFM reported in the July 2013 Idaho General Fund Revenue Report that actual FY 2013 revenue exceeded the January 2013 forecast by $92.3 million. The DFM report compares the ‘pre-law change’ forecast from January 2013 to the ‘post-law change’ actual revenue result from June 2013. DFM’s report in effect mixes apples and oranges.

     

    An apples to apples (or oranges to oranges) comparison needs to either adjust the January 2013 forecasted revenue amount to add in the effect of law changes, or adjust the June 2013 actual revenue result to subtract out the effect of law changes. DFM’s report does neither. Unfortunately, news media coverage was based on the DFM report and understated the FY 2013 revenue surplus by $6.0 million.

     

    The details of the FY 2013 year-end outcome are presented in the following table. It uses the format presented on page A-26 of DFM’s 2013 Budget Activities Summary, a document produced each year after the legislative session ends that presents the results of the legislature’s budget decisions.

     

    FY2013

     

    DFM reported actual revenue growth from FY 2012 to FY 2013 was 6.3%, and this is $92.3 million higher than the January 2013 forecast. This is technically correct, but it combines the revenue forecast error of $98.3 million with the $6.0 million revenue adjustment that is due to law changes (i.e., HB 001)

     

    The table above shows 6.5% actual revenue growth (see line 4 under “Revenues:”) based on adjusting the actual FY 2013 revenue outcome for the estimated $6.0 million impact of HB 001.

     

    Several other budget elements changed between the end of the 2013 legislative session and the end of fiscal year 2013. An unanticipated transfer of $3 million into the General Fund from the CAT Fund occurred per the provisions of HB 615 from the 2012 legislative session, $0.5 million of other transfers were made into the General Fund, and year-end reversions reduced expenditures by $3.5 million.

     

    All combined, FY 2013 would have had an ending balance $105.3 million higher than was anticipated were it not for HB 345. Instead, the FY 2013 ending balance is just $20 million higher than was anticipated at the end of the 2013 legislative session. That’s because HB 345 provided that any FY 2013 ending balance above $80 million (i.e., $20 million higher than the expected ending balance) would be swept into the Budget Stabilization Fund. In fact, $111.3 million was swept into the Budget Stabilization Fund in FY 2013 – $25.9 million that was scheduled, plus $85.4 million that was due to the FY 2013 revenue surplus.

     

    FY 2014

     

    The following table presents the changes that have occurred to the FY 2014 Idaho General Fund budget since the end of the 2013 legislative session. Once again, this table is formatted to be consistent with the corresponding table in DFM’s 2013 Budget Activities Summary (see page A-30).

     

     FY2014 

     

    There are four changes reflected in this table. First, the FY 2014 beginning balance is $20 million higher. The beginning balance is the same as the FY 2013 ending balance that was discussed in the previous section on FY 2013. To reiterate, it is only $20 million higher because an extra $85.4 million was transferred into the Budget Stabilization Fund in FY 2013.

     

    Second, the FY 2014 revenue forecast was increased by $33.8 million. Unfortunately, this was not reported in DFM’s August 2013 General Fund Revenue Report that presented the new FY 2014 General Fund revenue forecast, but it was reported in the July 2013 General Fund Budget Monitor produced by LSO.

     

    DFM reported the FY 2014 updated revenue forecast of $2,808.8 million as a 2.1% increase over FY 2013 revenue, and noted it superseded the $2,799.1 million projection from January 2013. To the casual observer this implies the revenue forecast for FY 2014 increased by $9.7 million, but that would be incorrect. Missing is $24.1 million of downward revenue adjustments related to law changes enacted in the 2013 legislative session. That negative $24.1 million is NOT reflected in the $2,799.1 million General Fund revenue forecast from January 2013, but it IS reflected in the $2,808.8 million General Fund revenue forecast from August 2013. The apples to apples forecast comparison is not between $2,808.8 million and $2,799.1 million, but between $2,808.8 million and $2,775.0 million – a $33.8 million difference.

     

    Revenue related law changes also impact revenue growth rates, and need to be properly handled to make valid growth rate comparisons between different revenue forecasts. The 2.1% FY 2014 revenue growth rate reported in the August 2013 General Fund Revenue Report is not directly comparable to the 5.3% FY 2014 growth rate from January 2013.

     

    Again, the August 2013 revenue forecast includes the effects of law changes (i.e., negative $24.1 million), whereas the January revenue forecast does not. In order to compare the August 2013 General Fund revenue forecast to the January 2013 General Fund revenue forecast, one or the other of those forecasts needs to be adjusted for the effects of 2013 legislative session law changes.

     

    This is done on a “pre-law-change” basis in the table above on line 2, where $2,832.9 is shown as the current (i.e., August 2013) General Fund revenue forecast. This is the actual DFM August 2013 forecast with the effects of 2013 legislative session law changes subtracted. It yields a growth rate of 2.8%, which is directly comparable to the January 2013 forecast of 5.3% revenue growth.

     

    The table above does not have a line item for “post-law-change” revenue forecast numbers, but it is a simple matter to subtract $24.1 million from the January 2013 forecast to obtain $2,775.0 million. That represents a 4.6% increase over January’s FY 2013 forecasted revenue (also adjusted for 2013 legislative session law changes), and is directly comparable to the current forecast of 2.1% revenue growth.

     

    Third, there is a small ($2.4 million) transfer out of the General Fund into the Budget Stabilization Fund (BSF). This transfer is considerably less than it would otherwise be because the very large transfer in FY 2013 nearly topped-out the BSF. With the $2.4 million transfer in FY 2014, the BSF reaches a value of $137.1 million, its statutory maximum level.

     

    Fourth, there are $11.9 million in estimated deficiency warrants in FY 2014 that reflect firefighting costs and other unanticipated costs the state must pay. These are treated as nonrecurring costs, and so are not reflected in the End of Session budget.

     

    The bottom line is FY 2014 has a projected ending balance of $90.5 million, which is $39.5 million higher than was expected at the end of the 2013 legislative session.

     

    One final issue related to the updated FY 2014 General Fund revenue forecast is its impact on the structural balance of the FY 2014 budget. At the end of the 2013 legislative session the amount of ongoing revenue estimated in FY 2014 was $2,775,281,100 (see FY 2014 Executive Budget, page A-29; and 2013 Budget Activity Summary, page A-17), and the amount of ongoing expenditures were set at $2,762,445,800 (see 2013 Budget Activities Summary, page A-24), yielding an ongoing General Fund surplus in FY 2014 of $12,835,300, or $12.8 million.

     

    Neither DFM nor LSO has updated their assessment of the structural balance associated with the FY 2014 budget, but assuming the increase to the FY 2014 General Fund revenue forecast consists of ongoing revenue, and treating the deficiency warrants as one-time expenditures (which may not be technically correct, but it is the way deficiency warrants are treated in Idaho’s current budgeting practices), the current estimate of the FY 2014 ongoing General Fund surplus is $46.6 million. That is the amount of ongoing “excess capacity” in the FY 2014 General Fund budget based on the latest DFM revenue forecast.

     

    The Revised FY 2014 Revenue Forecast

     

    The revised FY 2014 General Fund revenue forecast released by DFM in August 2013 contains a substantially weaker growth rate than the forecast it replaces. This section examines the changes in that forecast.

     

    In January 2013 General Fund revenue was forecast to grow 2.7% in FY 2013. In July 2013 we learned FY 2013 revenue actually grew by 6.3%. However, the January 2013 forecast did not include the effects of law changes enacted in the 2013 legislative session, so the two growth rates are not directly comparable. Either the January 2013 forecast must be adjusted to add in the effect of law changes, or the actual growth rate must be adjusted to subtract the effect of law changes. The table below shows the adjusted January 2013 forecast growth rate of 2.5% and the actual revenue growth rate for FY 2013 of 6.3%.

     

    Similarly, the January 2013 forecast of FY 2014 General Fund revenue growth (5.3%) is not directly comparable to the August 2013 forecast of FY 2014 revenue growth (2.1%). Law changes enacted in the 2013 legislative session are included in the August 2013 forecast, but are not included in the January 2013 forecast. One or the other must be adjusted to make them comparable. The table below makes the adjustment to the January 2013 forecast, yielding an adjusted growth rate of 4.6%.

     

    201308RevFcst

     

    Now we have numbers that are comparable, and here’s what they show:

     

    • FY 2013 revenue was forecast to grow 2.5% last January, but six months later came in with actual growth of 6.3%.

     

    • FY 2014 revenue was forecast to grow 4.6% last January, but eight months later in August the FY 2014 revenue growth rate forecast was lowered to 2.1%.

     

    • The Individual Income Tax was forecast to grow by 2.6% in FY 2013, actually grew by 6.5%, then the FY 2014 forecast of 5.9% growth was lowered to 2.2% growth.

     

    • The Corporate Income Tax was forecast to decline by 1.7% in FY 2013, actually grew by 6.2%, then the FY 2014 forecast of 5.4% growth was changed to a decline of 2.7%.

     

    • The Sales Tax was forecast to grow by 5.4% in FY 2013, actually grew by 8.0%, then the FY 2014 forecast of 4.5% growth was lowered to 4.2% growth.

     

    These changes to the FY 2014 growth rate forecasts, particularly the Individual Income Tax and the Corporate Income Tax, are quite significant and do not appear to be consistent with the state’s own economic forecast issued in July 2013. (The General Fund revenue forecast issued by DFM in August 2013 is based in part on the July 2013 Idaho Economic Forecast, also issued by DFM.)

     

    Here’s how DFM explained the forecast changes (from the August 2013 General Fund Revenue Monitor):

     

    “Idaho individual income tax receipts are forecast to grow 2.2% to $1,312.6 million in FY 2014. This subdued growth rate results from a filing collections surge in FY 2013, and not from a weak outlook for this fiscal year. April 2013 filing collections topped its forecast by $35.6 million, as taxpayers moved income into CY 2012 from CY 2013 in anticipation of higher federal income tax rates. No major increases to federal income tax rates are foreseen for CY 2013, so the filing collections spike should not be repeated in FY 2014.”

     

    “Idaho corporate income tax receipts are projected to decline 2.7% in FY 2014 to $193.2 million. As with the individual income tax, this drop reflects the unanticipated strength in FY 2013. The corporate income tax receipts expanded 6.2% last fiscal year thanks to refunds that were much lower than expected. Refunds are forecast to return to more historical levels in FY 2014, and this will take a bigger bite out of this category’s bottom line.”

     

    This is DFM’s explanation for taking 3.7 percentage points (equivalent to $47 million) out of the FY 2014 individual income tax forecast, and 8.1 percentage points (equivalent to $16 million) out of the FY 2014 corporate income tax forecast. When sales tax, product taxes and miscellaneous revenues are factored in, the total reduction in the FY 2014 General Fund revenue forecast is 2.5 percentage points (equivalent to $69 million).

     

    There is a well known issue (increased federal income tax rates in 2013) that justifies scaling back a state’s FY 2014 individual income tax growth rate forecast, but it is difficult to obtain concrete information on the magnitude of this effect. Since the beginning of this calendar year most states with individual income taxes have observed unexpectedly strong collections related to the 2012 tax year. To the extent this strength is related to income acceleration (i.e., pulling-forward income that would have otherwise been realized in 2013 and beyond) it should be considered a one-time impact and not be considered a part of the revenue base going into FY 2014. However, to the extent the strength is due to simply under forecasting income tax revenue based on economic factors, that part should be included in the revenue base going into FY 2014. DFM’s August 2013 forecast appears to assume virtually all of the unexpected strength in FY 2013 individual income tax revenue ($47 million) is due to accelerated income, and not to under forecasting of base revenue.

     

    The FY 2014 corporate income tax adjustment (from 5.4% growth in the January 2013 forecast to a 2.7% decline in the August 2013 forecast) is a bit harder to understand. DFM’s explanation is that refunds will be larger in FY 2014 – so much larger that FY 2014 corporate income tax revenue will be lower than the January 2013 forecast. This view is not supported by any other documentation, and in fact appears to be contrary to forecast updates in other states that have the corporate income tax, and with DFM’s own economic forecast update.

     

    Here’s a summary of the Idaho nonfarm personal income and Idaho dividend, rent, interest components of the current DFM economic forecast (July 2013) and several prior forecasts (bold numbers are actual values as of the date the forecast was produced, italics numbers are forecast values):

     

    yp

     

    dri 

     

    Clearly there is a small bump in actual 2012 Idaho Nonfarm Personal Income in the July 2013 Idaho Economic Forecast relative to the January 2013 Idaho Economic Forecast (3.2% vs. 3.0% growth). This was driven by Idaho Dividend, Rent, Interest Income that actually grew 6.2% in 2012, versus the forecast of 4.7% growth in the January 2013 Idaho Economic Forecast. However, it is not at all clear how much of this unexpected increase is due to income acceleration versus plain forecast error. Income acceleration versus forecast error is important because it bears on the issue of how much of the FY 2013 unexpected increase in the individual income tax is one-time versus ongoing.

     

    Also interesting is the change in the 2013 income forecast. Idaho Nonfarm Personal Income growth is down 1 percentage point from the January 2013 forecast (from 4.0% to 3.0%), but it is not due to a change in the forecast of Idaho Dividend, Rent, Interest Income, which is up 0.2 percentage points (from 4.2% to 4.4%). These changes do not seem to correlate with the quite substantial changes to the individual income tax and corporate income tax forecasts.

     

    This apparent inconsistency is important because the forecasted growth rate in FY 2014 General Fund revenue has a major bearing on the real and perceived fiscal health of the State of Idaho. One percentage point of revenue growth in FY 2014 is worth $27.5 million.

     

    In the previous section (FY 2014), it was noted that under the current DFM revenue forecast (2.1% revenue growth in FY 2014, down from 4.6% revenue growth in the January 2013 forecast) the Idaho budget would have a $46.6 million ongoing surplus. At 3.1% revenue growth in FY 2014 the ongoing surplus would be $74.1 million, and at 4.1% revenue growth in FY 2014 the ongoing surplus would be $101.6 million.

     

    Understanding these numbers is important because they represent the “slack” in the FY 2014 budget, the amount of resources available to the state that are not being put to productive use. This slack will roll forward into the FY 2015 budget (to be considered in the upcoming 2014 legislative session) in the form of a new baseline revenue forecast and an MOE (maintenance of effort) baseline spending plan that represents the cost of continuing to provide the public services reflected in the FY 2014 budget.

     

    However, a caution concerning MOE is in order. MOE is a short-term framework for assessing budget decisions, i.e., it only looks at data for a single year. Substantial cuts were made in the state budget in FY 2009 and FY 2010, and very few of these cuts have been restored. The cumulative condition and health of Idaho’s budget, and the public services it reflects, are not represented in the MOE concept, and are not presented in the current budgeting practices of the state of Idaho.

     

    Summary

     

    FY 2013 had $98.3 million more in revenue than was anticipated just four months ago, plus an additional $7 million in combined unanticipated transfers and reduced expenditures, for an unanticipated excess of $105.3 million in General Fund resources available in FY 2013.

     

    When combined with the anticipated FY 2013 ending balance of $60.0 million, this would have brought the actual FY 2013 ending balance to $165.3 million. However, $85.3 million of the FY2013 ending balance was swept into the Budget Stabilization Fund, bringing it to within $2.4 million of its statutory maximum balance of 5% of the prior year’s General Fund receipts. This leaves an actual FY 2013 General Fund ending balance (and FY 2014 beginning balance) of $80.0 million.

     

    The revised FY 2014 General Fund revenue forecast released in August 2013 is just $33.8 million higher than the forecast used to set the FY 2014 expenditure budget. This appears to be unduly pessimistic, but taken at face value it yields FY 2014 General Fund resources that are $53.8 million higher than expected when the FY 2014 budget was set. After allowing for a $2.4 million transfer to the Budget Stabilization Fund and $11.4 million in deficiency warrants, the projected FY 2014 ending balance of $90.5 million is $39.5 million higher than was expected at the end of the 2013 legislative session.

     

    Idaho has an estimated ongoing General Fund surplus in FY 2014 of $46.6 million based on the August 2013 General Fund revenue forecast. This is up considerably from the $12.8 million FY 2014 ongoing surplus estimated during the 2013 legislative session. However, it is based on an FY 2014 revenue growth rate of just 2.1%, which appears to be unduly pessimistic. At 3.1% growth the FY 2014 General Fund ongoing surplus estimate is $74.1 million, and at 4.1% growth the ongoing surplus estimate is $101.6 million.

     

    A pdf version of this report formatted for printing can be found using this link.

     

    This report was produced by the Idaho Center for Fiscal Policy. For further information contact:

    Michael Ferguson, Director

    Idaho Center for Fiscal Policy

    208-297-3974

    mferguson@idahocfp.org

  • APRIL 2013 IDAHO GENERAL FUND REVENUE UPDATE

    — NOTE: This is a corrected version of the original post. It reflects a $27.4 million transfer to the Budget Stabilization Fund in FY 2014 that was omitted from the original post. Thanks to the Legislative Services Office for pointing out that error. This correction reduces the ending balance shown for FY 2014 to $126.9 million. It does not change the estimate of an additional $162 million in General Fund revenue for FY 2013 and FY2014 (assuming May and June 2013 revenues are on target, and the revenue growth rate for FY 2014 remains unchanged at 5.3%), and it does not change the estimate of a $96.1 million positive ongoing funding gap in FY 2014. 

    The May 2013 Idaho General Fund Revenue Report opens the possibility Idaho will have $162 million more in revenue on hand (than was expected less than two months ago) when the Legislature convenes in January 2014.

    On May 7th, 2013 the Idaho Division of Financial Management (DFM) released April 2013 General Fund revenue results. You can access that report here.

    What it shows is overall revenue exceeded the projected amount for the month by $56.4 million (13.2%), and now stands $79.1 million (3.5%) higher than projected for the first ten months of fiscal year 2013. This is a significant departure from the revenue forecasts the FY 2013 and FY 2014 budgets are based on, and it has significant implications for the fiscal condition Idaho’s state budget faces in those two years (and beyond).

    FY 2013

    Starting with FY 2013, if the months of May 2013 and June 2013 come in exactly on target, FY 2013 will end the year with 5.8% General Fund revenue growth, rather than the 2.7% growth the Executive and Legislative budgets were based on. Assuming there are no unanticipated reversions or rescissions, this will trigger an additional $59.1 million transfer to the Budget Stabilization Fund (per House Bill 345) in FY 2013, a $20 million higher FY 2013 ending balance, and a $27.4 million transfer to the Budget Stabilization Fund in FY 2014 (per Idaho Code 57-814).

    These changes can be illustrated using a revised version of the table on page A-26 of the 2013 Legislative Session Budget Activities Summary published by DFM. Instead of comparing the ‘Revised Executive Budget’ and the ‘Legislative Appropriation’ columns, this version compares the ‘Legislative Appropriation’ column (i.e., as of the end of the 2013 Legislative session) and a new ‘Legislative Appropriation With General Fund Revenue Through April 2013′ column. Here’s the revised table:

    May2013UpdateFY2013

    Because of House Bill 345, the extra $79.1 million in FY 2013 General Fund revenue goes to two places: up to the first $20.0 million of ending balance above the amount provided in the Legislative Appropriation stays in the General Fund and simply increases the ending balance. Any additional amount above $20.0 million is transfered to the Budget Stabilization Fund, in this case $59.1 million.

    FY 2014

    Shifting to FY 2014, if the forecasted General Fund revenue growth rate of 5.3% that was adopted by both the Executive and Legislative budgets remains unchanged, the resulting amount of General Fund revenue forecast for FY 2014 is $2,882.4 million – an $83.3 million increase over the revenue number that was used in the FY 2014 budget. Also, because FY 2013 General Fund revenue growth is now expected to grow by 5.8%, that triggers a $27.4 million transfer to the Budget Stabilization Fund in FY 2014. When combined with the $20 million higher beginning balance (from FY 2013), this brings the projected FY 2014 ending balance up from $51.0 million to $126.9 million.

    These changes can be illustrated using a revised version of the table on page A-30 of the 2013 Legislative Session Budget Activities Summary published by DFM. As above, instead of comparing the ‘Revised Executive Budget’ and the ‘Legislative Appropriation’ columns, this version compare’s the ‘Legislative Appropriation’ column and a new ‘Legislative Appropriation With General Fund Revenue Through April’ column. Here’s the revised table:

    May2013UpdateFY2014

    The key changes are a higher beginning balance (up $20 million), higher FY 2014 General Fund revenue (up $83.2 million), a $27.4 million transfer to the Budget Stabilization Fund, and a higher ending balance (up $75.9 million). Not shown, because it was transfered to the Budget Stabilization Fund in FY 2013, is the $59.1 million that would have rolled over into the FY 2014 beginning balance were it not for House Bill 345.

    The most significant aspect of the April revenue result is its impact on future budget decisions. This can be seen by looking at ongoing revenues versus ongoing expenditures. At the end of the 2013 Legislative session ongoing FY 2014 revenue was expected to be $2,775.3 million: the $2,799.1 base revenue forecast minus $23.8 million in ongoing revenue adjustments (see 2013 Legislative Session Budget Activities Summary page A-17). Most of the revenue adjustments ($20 million) were to pay for new business personal property tax exemptions. Ongoing appropriations were set at $2,762.4 million (see 2013 Legislative Session Budget Activities Summary page A-24), yielding a positive funding gap of $12.9 million. If the base revenue figure increases by an additional $83.2 million, the funding gap grows to $96.1 million. This is an indication of the amount of “surplus” ongoing revenue that could be in play when the legislature returns for the 2014 session in about 8 months.

    Conclusion

    The April revenue results have profound implications for fiscal decisions that will be made in the next legislative session. While the numbers will change (for example, we don’t yet know actual May and June revenue numbers, and we don’t know what revised forecast growth rate will be used for FY 2014), it is clear there will be substantially more revenue available than policymakers thought less than two months ago. How this additional revenue is utilized will depend on Idaho’s public policy priorities.

  • PROPERTY TAX EXEMPTION PROPOSAL

    Personal Property Tax Exemption Proposal Devastating To Idaho Public Schools

    A proposal (RS22034) is circulating that would enact the much anticipated personal property tax exemption. In a nutshell, this proposal would be devastating to the funding of Idaho’s public schools. Other state programs (colleges and universities, health and human services, public safety, etc.) would be adversely impacted, but none to the degree of public schools.

    RS22034 would completely exempt all business personal property from the property tax, yielding a property tax revenue loss estimated by the Idaho Tax Commission at $140.9 million in FY 2012 dollars (after full phase-in over 6 years). Existing property tax levies across all taxing districts (with the exception of urban renewal districts1) would be eligible for a combination of a) replacement funding from the state’s General Fund and b) property tax levy rate increases (i.e., a tax shift to real property).

    The property tax levy rate increases (so-called “3% flooring”) would cover the loss of the first 3% of the total property tax in each district, and is estimated to shift up to $41.2 million of property taxes away from personal property, and on to real property. This shift would apply to all property tax districts (except urban renewal districts), and would result in higher property taxes on homeowners, farmers, timberland, and businesses with relatively small shares of personal property value.

    Property tax replacement funding would apply to revenue loss exceeding 3% of a district’s total property tax, and is estimated to cost the state’s General Fund $90.5 million2 upon full phase-in. This replacement funding applies only to levies in place as of 2012, is fixed in perpetuity at the 2012 level (except in the case of voter approved levies), and is not available for levies enacted after 2012. In particular, any voter approved levies (school supplemental levies, bond levies, plant facility levies, etc.) that expire during or after the phase-in period lose their replacement funding, and any voter approved levies that are enacted in 2013 or beyond (school supplemental levies, bond levies, plant facility levies, etc.) are not eligible for replacement funding. This means that most non-school district levies (cities, counties, highway districts, etc.) are afforded perpetual replacement, while most school district levies (supplemental, bond, plant facility, etc.) will roll off and their replacement funding will be extinguished3.

    Thus the design of RS22034 holds non-school taxing districts relatively harmless (in the near-term) by shifting up to $41.2 million of property tax from personal to real property, and removing up to $90.5 million from the state General Fund (that will not be available to fund education, health care, public safety, and other critical services provided by state programs) to replace revenue lost from the personal property exemption.

    Public schools end up the big loser in what amounts to a three-pronged hit:

    1)   $90.5 million is removed from the state General Fund, half of which is used to fund public schools. Idaho’s public school funding effort has declined from 4.4% of Idaho personal income in the 1980’s and 1990’s to just 3.4% of Idaho personal income in the 2014 Executive Budget. That’s a 23% decline in a decade and a half, and represents a funding reduction of half a billion dollars. Losing another $90 million of General Fund revenue to fund tax cuts will virtually guarantee continued decline in Idaho’s public school funding effort.

    2)   Up to $41.2 million of additional property tax levies are shifted to real property, and will have a high probability of making voters less inclined to support voter approved levies such as school supplemental, school bond, and school plant facility levies. The 2006 swap of increased sales tax for reduced school property tax levies was supposed to shift the responsibility for paying for school operating expenses off the property tax and on to state appropriations, but the reality is Idaho’s school districts have been increasingly driven to raising property taxes to fund operating expenses. In the current school year (2012-13) voter-approved supplemental levies increased by 20%. Almost three-quarters of Idaho’s 115 public school districts now have voter approved supplemental levies for operating purposes. Most will expire in one to two years.

    3)   No replacement funding for voter approved levies enacted after 2012 will mean schools are on their own with the reduced property tax base. Property tax base losses will range from less than 2% to over 50% across Idaho’s public school districts (school district detail is shown in the attached Table 6, taken from Tax Commission report EPB0703_01-15-2013). When these districts go to their voters for property tax levies they will have to ask for higher levy rates to raise the same amount of revenue. For example, if a district losses 20% of its property tax base to the personal property tax exemption, it will have to ask for a levy rate that is 25% higher to raise the same amount of revenue. If the property tax base loss is 40%, the levy to raise the same amount of revenue would need to be 67% higher. The current wide disparities in property tax capacity across Idaho’s school districts will be exacerbated.

    In summary, RS22034 is notable for the adverse impact it will have on Idaho’s ability to provide funds for public education. It does protect non-school local government from much of the revenue losses associated with full exemption of personal property taxes, but it does so with a significant amount of revenue diverted from the General Fund, and without any apparent analysis of the impact that diversion of funds will have on state programs.

     

    1 Urban renewal districts are not eligible for replacement funds, but they can receive special shift levies if they can prove to the Idaho Tax Commission they are unable to make bond payments under the exemption of business personal property. Their shift levies would be applied only to the remaining increment values within the urban renewal district.

    2 This figure does not take into account voter approved levies that lose their replacement funding when they expire.

    3 As of the 2011-12 school year, school district property tax levies totaled $393.0 million. $139.6 million was in supplemental M&O levies, $111.0 was in bond levies, and $39.4 million was in plant facility levies. In the 2012-13 school year supplemental levies increased to $169 million.

     

    For a PDF version of this document, click here.

     

  • IDAHO PERSONAL PROPERTY TAX EXEMPTION REPORT

    The Idaho Center for Fiscal Policy has released a new report that documents the potential impacts of personal property tax exemption from a taxpayer perspective. This report is complimentary to Idaho Tax Commission report EPB0703_01-15-2013 that was originally released on December 18, 2012. The Tax Commission report documents the potential impacts of personal property tax exemption from a taxing district perspective.

    Operating property (utilities, railroads, pipelines) impacts are provided on a statewide basis, with the top 10 companies (by tax exemption) listed separately. Locally assessed company impacts are shown by county, with the top 10 companies (by tax exemption) listed separately (for the full exemption scenario).

    One of the key findings of this report is the high degree of concentration associated with the full exemption option. Within the operating property category, the top 10 companies account for 82.5% of the total impact (statewide basis). Within the locally assessed category the top ten companies in each county account for a low of 25.6% (Kootenai County) to a high of 92.5% (Custer County). In 26 Idaho counties the top ten companies account for over half the countywide tax reduction in the full exemption scenario.

    The two tables shown for each of Idaho’s 44 counties show, respectively, the impact in terms of a) property tax reduction under a full exemption scenario (IACI’s proposal), and b) property tax reduction under immediate implementation of 2008′s HB599a, the $100,000 exemption for every locally assessed company. The $100k exemption option is currently in statute but waiting to be triggered (under current law General Fund revenue must reach $3.053 billion before the $100k exemption takes effect).

    Here’s the link to the report in pdf format:

    Personal Property Taxpayer Impacts

  • EDUCATION FUNDING OP-ED

    Here’s the text of an op-ed Michael Ferguson submitted to newspapers throughout Idaho concerning the funding of public schools in Idaho:

    Election Over, Now It’s Time To Focus On Resources

    Now that the election is behind us, we have an answer from Idaho’s voters on the referenda related to the Students Come First laws (or Luna Laws, depending on your perspective). Both sides in this contentious campaign have now agreed on the need to work toward improving the quality of public education in Idaho. That’s encouraging, not because Idaho’s public schools are broken, but because it’s always going to be the case that there will be room for improvement. Hopefully we will see a renewed commitment to collaboration among the various stakeholders in this most important of our state’s responsibilities.

    Two critically important issues need to be factored into this discussion: how much of our financial resources are we devoting to the education of our children, and how are we allocating those resources among those children?

    To answer the first question, Idaho is spending less and less on public education. After decades of stable funding at roughly 4.4% of Idaho’s personal income, since fiscal year 2000 Idaho has been devoting progressively fewer resources to its public schools – down to just 3.5% of Idaho’s personal income in the fiscal year 2013 budget. That’s a 20% decline in our effort level, or the share of our resources we devote to public schools. It’s also a factor in Idaho’s decline from 48th among states (and D.C.) in spending per student in fiscal year 2000 to 50th in spending per student in fiscal year 2010.

    To answer the second question, Idaho’s spending on public education is becoming more unequal. In 2006 the Idaho Legislature changed the funding sources for public schools by shifting away from the property tax and to the General Fund (i.e., income and sales taxes). An equalized property tax levy of 0.3% was eliminated, and the Idaho sales tax was increased from 5% to 6% to bolster the General Fund. In theory, the state General Fund would now cover the entire cost of a “general, uniform and thorough system of public, free common schools.” Reality is turning out to be much different.

    Since the 2006 funding swap, Idaho’s public school districts have dramatically increased their reliance on property taxes to supplement General Fund dollars. In just the past year the use of voter-approved supplemental levies by school districts has increased from $140 million to $169 million, a 20% increase. The problem is school property taxes are now entirely unequalized, meaning that each school district’s property tax capacity is all it has to work with. Property tax capacity per student varies widely across Idaho’s school districts.

    At the extremes, in fiscal year 2010 property values varied from $4.696 million per student in the McCall-Donnelly school district, to just $153,437 per student in the Snake River school district. That’s a 30:1 variation in the property tax capacity between these two districts. A levy of 0.1% ($100 per $100,000 of taxable value) would raise $4,696 per student in the McCall-Donnelly school district, while the exact same levy would raise just $153 per student in the Snake River school district.

    Small wonder, then, to find that Snake River had no property tax levy. It got by with strictly its state allocation of just $5,362 per student. McCall-Donnelly did have a property tax levy (of 0.142%) that produced an additional $6,657 per student, giving it a total of $13,208 to spend per student.

    If we look at Idaho’s six largest school districts the variations are not as dramatic, but no less meaningful. Coeur d’Alene had $889,772 in taxable value per student versus just $261,037 per student in Pocatello – that’s more than a 3:1 ratio in property tax capacity. Coeur d’Alene actually levied 0.092% and raised $820 per student from the property tax. Pocatello actually levied at over twice the rate of Coeur d’Alene (0.199%), but raised less than two-thirds the revenue ($519 per student) from the property tax.

    The widest funding disparity among Idaho’s six largest school districts in fiscal year 2010 comes more from the willingness of the district’s patrons to tax themselves. Boise had $713,400 in taxable value per student versus $284,477 in Nampa. Boise levied at a rate of 0.428%, while Nampa levied only 0.039%. Boise had $3,053 in additional funds per student from the property tax (over and above the $5,126 it got from the state), while Nampa had only $110 in additional funds per student from the property tax (over and above the $4,924 it got from the state).

    These are just a few examples of the wide variations in resources available to Idaho school children depending on where they live. These examples are not exceptions, they are the rule. The details change from year to year, but the disparities don’t. They remain enormous.

    So ask yourself this: If the Idaho Constitution places a duty on the legislature “…to establish and maintain a general, uniform and thorough system of public, free common schools” (and it does, in Article 9, Section 1), how’s that going? My answer is not so well.

    Michael Ferguson, Director
    Idaho Center for Fiscal Policy

  • IDAHO FALLS CITY CLUB – SEPT 21, 2012

    Click here to download a pdf version of the slides Mike Ferguson used in the presentation he gave on September 21, 2012 to the Idaho Falls City Club on Idaho Public School funding.

  • IDAHO GENERAL FUND – AUGUST 2012 UPDATE

    This is an update of Idaho’s General Fund budget as of August 2012. It reflects changes that have occurred since the end of the 2012 Idaho Legislative Session. The primary documents used to produce this update are the Legislative Fiscal Report, the Budget Activities Summary, the Idaho General Fund Revenue Report, and the Idaho General Fund Budget Monitor. Additional unpublished information was obtained from LSO (Legislative Services Office).

    FY 2012

    FY 2012 General Fund actual revenue was $35.5 million higher than the DFM (Division of Financial Management) forecast released in January 2012, and $22.4 million higher than the Legislative revenue forecast used in the 2012 Legislative Session. The difference is due to three adjustments to General Fund revenue (HB417, HB661, and HB703) that were reflected in LSO’s end of session budget document (the Legislative Fiscal Report), but were not incorporated into DFM’s FY 2012 post-session revenue monitoring documents (the Idaho General Fund Revenue Report).

    The following table summarizes the FY 2012 General Fund revenue results (figures are in millions of dollars):

    FY 2012 net General Fund transfers as of the end of session were expected to be $9.8 million in, but ended the year actually $13.5 million out. This difference of negative $23.3 million was primarily due to a $23.6 million transfer out of the General Fund to the Budget Stabilization Fund. The remaining $0.3 million difference in net transfers into the General Fund were comprised of cancelled prior year encumbrances and various other transfers.FY 2012 actual General Fund transfers and expenditures also varied from the amounts expected at the close of the 2012 Legislative session. These, when combined with the actual revenue results, yielded a different FY 2012 General Fund ending balance (and corresponding FY 2013 beginning balance) than was expected at the end of the 2012 Legislative session.

    FY 2012 actual General Fund expenditures were $4.3 million lower than the appropriated amount as of the end of the 2012 Legislative session. This was primarily the result of various agency year-end reversions of unexpended FY 2012 General Fund appropriations.

    The net effect of the revenue, transfer, and expenditure variances from the 2012 Legislative session budget for FY 2012 is a $3.0 million larger FY 2012 ending balance (and corresponding FY 2013 beginning balance).

    The following table summarizes the FY 2012 General Fund budget results (figures are in millions of dollars):

     

    FY 2013

    Due primarily to stronger than anticipated General Fund revenue growth in FY 2012, the FY 2013 General Fund budget year opened with a beginning balance of $99.6 million. That was $3.0 million higher than was anticipated at the end of the 2012 Legislative session. A number of other changes have occurred in the FY 2013 General Fund budget as a result of a) revised revenue forecast (released by DFM in August 2012) and b) updated transfer estimates.

    DFM released its new General Fund revenue forecast for FY 2013 in August 2012. At $2,670.7 million it is $3.9 million higher than the original Executive revenue forecast released in January 2012 adjusted for 2012 Legislative session law changes ($2,700.3 – $33.5 = $2,666.8). It is also $36.6 million higher than the adjusted Legislative forecast used during the 2012 Legislative session for FY 2013 budgeting purposes ($2,667.6 – $33.5 = $2,634.1). There were almost a dozen law changes that impacted FY 2013 General Fund revenue, but the bulk of the change in the revenue stream is due to HB563, an income tax rate cut that reduces FY 2013 revenue by an estimated $35.7 million. The other ten bills with revenue impacts yielded a combined net increase in FY 2013 General Fund revenue of $2.2 million.

    General Fund transfers expected in FY 2013 have changed from $24.2 million out to $33.0 million out. This $8.8 million increase in transfers out consists of $2.4 million associated with an increase in the estimated Budget Stabilization Fund transfer (from $23.5 million to $25.9 million) and $6.4 million associated with an increase in estimated deficiency warrants (from $0 to $6.4 million). Deficiency warrants are transfers made to pay for unexpected expenses such as firefighting costs, agricultural pest eradication, etc.

    Estimated FY 2013 General Fund expenditures remain unchanged at $2,702.1 million. At this stage there are no identified expenditure adjustment (i.e., supplemental appropriation) needs for FY 2013.

    Combined, the changes to the FY 2013 beginning balance, revenues, and transfers yield an estimated General Fund ending balance that is $35.2 million. That is $30.7 million higher than the $4.5 million FY 2013 ending balance expected as of the end of the 2012 Legislative session.

    The following table summarizes the FY 2013 General Fund budget as of August 2012 (figures are in millions of dollars):

    As a final note, the FY 2013 General Fund appropriation consists of $2,694.7 million in ongoing spending and $7.4 million in one-time spending. The FY 2013 revenue forecast consists of $2,665.7 million in ongoing revenue and $5.0 million of one-time revenue. This yields a current short-term structural imbalance (i.e., deficit) in the FY 2013 General Fund budget of $29.0 million ($2,665.7 million in ongoing revenue less $2,694.7 million in ongoing appropriations).

     

    To download a PDF version of this post, click here

  • HB 563 – IMPACT AND ASSESSMENT

    HB 563 makes permanent reductions to Idaho’s top individual income tax rate and the corporate income tax rate, effective 1/1/2012. The Division of Financial Management (DFM) estimates the amount of foregone General Fund revenue to be $35.7 million in FY 2013, $37.5 million in FY 2014, $39.2 million in FY 2015, $40.6 million in FY 2016, and $42.3 million in FY2017. Estimates are not available beyond FY 2017.

    Corporate income tax rate reduction

    Idaho’s corporate income tax rate is reduced from 7.6% to 7.4%. This rate reduction is estimated to reduce Idaho General Fund revenue by $4.8 million in FY 2013, $5.0 million in FY 2014, $5.1 million in FY 2015, $5.3 million in FY 2016, and $5.4 million in FY 2017.

    For context, Idaho’s baseline corporate income tax forecast for FY 2013 (before considering the impact of HB 563) is $182.4 million. HB 563 represents a 2.6% reduction in the Idaho corporate income tax.

    Because of the interaction between state and federal income taxes, a portion of the reduction in Idaho corporate income tax will be offset by increased federal income tax. Federal income tax rates vary from 15% to 35%, depending on the corporation’s taxable income. A corporation facing a 35% federal rate would lose 35% of its Idaho tax saving to higher federal income tax. A corporation facing a 15% federal rate would lose 15% of its Idaho tax saving to higher federal income tax.

    Individual income tax rate reduction

    Idaho’s individual income tax has its top income tax bracket of 7.8% reduced to 7.4%. This rate reduction is estimated to reduce Idaho General Fund revenue by $30.9 million in FY 2013, $32.6 million in FY 2014, $34.1 million in FY 2015, $35.4 million in FY 2016, and $36.8 million in FY2017.

    For context, Idaho’s baseline individual income tax forecast for FY 2013 (before considering the impact of HB 563) is $1,295.0 million. HB 563 represents a 2.4% reduction in the Idaho individual income tax.

    Unlike the Idaho corporate income tax, where every corporation receives the same 0.2 percentage point reduction, the Idaho individual income tax rate reduction only impacts taxpayers in the top income bracket. Idaho indexes its income tax brackets for inflation, so the income levels associated with the brackets change over time. For tax year 2011 the top income tax bracket (7.8%) applied to taxable income over $26,760 in the case of single taxpayers and married taxpayers filing separately, and to taxable income over $53,520 for single head-of-household taxpayers and married taxpayers filing jointly. The Idaho Tax Commission has not issued the taxable income brackets for tax year 2012.

    Taxable income does not represent a taxpayer’s actual gross income, but rather gross income less deductions and personal exemptions. In tax year 2011 the personal exemption amount was $3,700. The standard deduction varied depending on filing status, $5,800 for single taxpayers, $8,500 for single head of household, and $11,600 for married filing jointly. Idaho routinely adopts the federal amounts for personal exemptions and standard deductions. For a married couple with two children claiming the standard deduction the top bracket starting taxable income level of $53,520 corresponds to gross income of $79,920. If a taxpayer claims itemized deductions the taxable income brackets would correspond to a higher level of gross income.

    Although the overall reduction in the individual income tax, at 2.4%, is smaller than the 2.6% overall reduction in the corporate income tax, it is not spread uniformly. It is concentrated at upper income levels. Specifically, any single taxpayer with gross income below $36,260 and any married (filing jointly) taxpayer with gross income below $72,520 receives no tax reduction. Taxpayers with more dependents (and therefore more personal exemptions) would have higher gross income before receiving an impact from HB 563. In practice this means over 80% of Idaho individual income taxpayers receive no tax reduction from HB 563. According to the fiscal analysis by DFM, just 17% of Idaho individual income taxpayers will receive any tax reduction from HB 563.

    Although no distributional analysis has been released by the State of Idaho, it is relatively simple to illustrate the disproportionate impact of HB 563 via the following two tables:

     

     

    These tables show that the highest percentage reductions (up to a 5.1% reduction in Idaho individual income tax) are reserved for the highest income Idaho taxpayers. A family of four with gross income at or below $79,920 receives no tax reduction, at $100,000 in gross income the reduction is 1.6%, and at $1,000,000 in gross income the reduction is 4.9%. And yes, there are Idaho taxpayers with gross income above $10,000,000 who will enjoy the maximum percentage savings of 5.1%.

    The situation is similar for single taxpayers, with the difference being that the minimum gross income for any tax savings is lower ($36,260), and the percentage reduction in Idaho individual income tax ramps up faster (1.6% at gross income of $46,260 and 3.8% at gross income of $100,000). This is due to the smaller standard deduction and fewer personal exemptions.

    There is also an interaction between Idaho’s state individual income tax and the federal individual income tax, but it is complicated by the federal alternative minimum tax (AMT). Idaho taxpayers who itemize their deductions may see a portion of their savings from HB 563 offset by higher federal income tax (due to the lower itemized deduction associated with the lower Idaho income tax), but this is cancelled by the AMT as the taxpayer’s income increases since the AMT does not allow a deduction for state income taxes.

    The net effect of the AMT is an exemption phase-out (for married filing jointly) that starts at about $150,000 in gross income and is complete at about $440,000 in gross income. What this means is that Idaho itemizing taxpayers with income below $440,000 will lose some of their Idaho tax savings associated with HB563 to higher federal income tax. Idaho itemizing taxpayers with income above $440,000 will not have an increased federal income tax bill as a result of savings associated with HB 563.

    Eliminating Idaho’s top individual income tax bracket will make Idaho’s income tax less progressive and Idaho’s overall tax structure more regressive. The following two tables illustrate Idaho’s tax incidence for the major taxes across income categories, before and after considering the impacts of HB 563:

    These tables show the high degree of regressivity of Idaho sales and excise taxes, the more moderate regressivity of Idaho property taxes, and the progressivity of Idaho income taxes. Idaho’s overall tax incidence (including the federal offset due to the partial deductibility of state taxes) is moderately regressive. The changes embodied in HB 563 will make Idaho’s income tax less progressive, and overall taxes more regressive.

    There is no change in the share of income paid in taxes for the bottom 80% of Idaho families (the second 20% from the bottom remain at 8.7%), and within the top 20% the largest decreases occur at the highest income levels (the top 1% of Idaho families see a decrease from 6.3% of their income paid in taxes to 6.1%). Before HB 563 families in the second 20% from the bottom paid 38% more of their income in taxes than families in the top 1% of the income distribution. After HB 563 families in the second 20% from the bottom will pay 43% more of their income in taxes than families in the top 1% of the income distribution.

    Assessment

    HB 563 was pitched as a way of making Idaho more competitive in attracting jobs and economic growth to the state by reducing the top income tax rates. There is no credible evidence to support this claim. If anything, the evidence points in the other direction – on the whole, higher tax rate states do as well or better than low tax rate states. Regardless, it will be impossible to isolate the impact of HB 563 on Idaho’s future economic progress (or lack thereof). There are simply too many factors all in play to make such a determination.

    HB 563 will become another datapoint available to future researchers examining questions of state tax rates and state economic performance. Quite a few states are making adjustments to their tax structures in the wake of the Great Recession, with movements occurring in both directions (some increasing taxes, some decreasing taxes). Given the lags involved in going from law changes to economic responses to analysis of outcomes, it will probably be a decade or more before this round of policy actions appears in credible research studies and reports.

    It is possible to assess HB 563 in terms of how it affects Idaho’s tax and revenue structure from a fiscal policy standpoint. The Idaho Center for Fiscal Policy (ICFP) uses a set of principles derived from the National Conference of State Legislature’s “Principles of a High-Quality Revenue System” (NCSL Principles) to assess tax and revenue related issues. ICFP has condensed the NCSL Principles into four broad categories: efficiency, equity, adequacy, and stability.

    HB 563 does not have a material impact in terms of efficiency or stability of Idaho’s tax and revenue structure. It does impact the equity and adequacy of Idaho’s tax and revenue structure. As previously shown, HB 563 makes Idaho’s income tax less progressive and Idaho’s overall tax structure more regressive. This makes Idaho’s tax structure less equitable.

    HB 563 also impacts the adequacy of Idaho’s tax and revenue structure. It removes an estimated $35.7 million in General Fund revenue in FY 2013, and the impact grows over time as Idaho taxable income increases. Idaho has made significant cuts to a wide array of public services in recent years, ranging from education to public health to general government.

    As examples, the past two fiscal years (FY 2011 and FY 2012) have seen the first ever cuts in overall K-12 education funding since WWII, higher education General Fund levels in FY 2012 were below the level of funding in FY 2001, almost $35 million in General Fund cuts to Medicaid were made in FY 2012 (yielding almost $100 million in total cuts when reductions in federal matching funds are factored in), and 4 years after overall General Fund cuts began in FY 2009 the FY 2013 General Fund budget remains over 5% below the FY 2008 level.

    It is widely acknowledged that Idaho had a relatively frugal spending policy prior to the Great Recession, and the cuts that were made in response to the revenue collapse were characterized as necessary, regrettable, and temporary. HB 563, by cutting income taxes without providing any revenue offset, ensures that a portion of the spending cuts will not be reversed. It reduces the adequacy of Idaho’s revenue stream relative to the public services Idaho has historically provided.

     

    PDF of this post:  HB 563 – IMPACT AND ASSESSMENT

  • IDAHO’S ECONOMIC CHALLENGES – ARE TAX CUTS THE ANSWER?

    There’s been much talk of the need for jobs in Idaho. The Gem State’s economy has gone from several decades of being one of the best performing in the nation, to the last half decade of being one of the worst. Today we hear numerous calls for tax cuts in Idaho, on the mistaken belief they are the answer to our economic problems.

    Let’s examine this more closely.

    When the U.S. and global economies were struck by the Great Recession, Idaho policy makers had already embarked on cutting our taxes for nearly a decade. Although a late boom in Idaho’s housing sector masked the weakness that was forming in Idaho’s economy, the onslaught of the recession in late 2007 laid bare Idaho’s mounting weaknesses.

    Serendipity had provided Idaho with large budget surpluses and cash reserves going into the downturn, but the economic hits our state took in the Great Recession were gigantic. In 2010, unwilling to make temporary adjustments to the revenue structure, Idaho’s policy makers made what were reported to be the deepest cuts in public sector jobs in the nation.

    In 2011, with a nascent recovery underway, the Governor and legislature ignored the advice of economists both inside and outside state government, and cut some more. Now, in 2012, with surplus funds once again mounting, the call is for more tax cuts. Big tax cuts.

    Offered under the promise they will bring desperately needed economic opportunity to hurting Idahoans, tax cuts are a dubious policy choice in good times. They are a disastrous policy choice when times are bad.

    Here’s why: there is no reliable evidence that state-level tax cuts boost the economy. Lots of anecdotal evidence is bandied about, but serious studies are inconclusive at best, and show the opposite at worst. Idaho’s own recent tax history provides an extremely sobering lesson for anyone who thinks tax cuts are the answer to all our economic problems.

    In the decade of the 80’s Idaho had difficulty meeting its spending needs (a severe recession in the early 80’s hit Idaho particularly hard) but instead of embarking on an all-cuts fiscal strategy, Idaho policy makers chose to make increased revenue part of the mix. They did this by increasing the corporate income tax from 6.5% to 8%, the individual income tax from a top rate of 7.5% to 8.2%, and the sales tax from 3% to 5%. These increases didn’t happen all at once, they were spread out from 1983 to 1987. They were painful to implement, but what followed is nothing short of amazing.

    In late 1987 Idaho’s economy recovered from a nearly decade-long slump and put in motion economic performance year after year that was spectacular. This Idaho boom period powered through the nation’s 1990-91 recession as though it wasn’t happening, and only ended with the nation’s 2001 recession. Even then, although Idaho’s economy dipped, it was minor in comparison to the nation and most other states.

    The tax increases that were put in place during the 80’s were left intact during the entire boom decade of the 90’s. Then in the following decade the process of reducing Idaho’s taxes began. In 2000 Idaho’s individual income tax bracket rates were each lowered by 0.1 percentage point, and the brackets themselves began being indexed for inflation each year. In 2001 the individual income tax bracket rates were each lowered by another 0.3 percentage points, thereby yielding a top rate of 7.8% that exists to this day. Also in 2001, the corporate income tax rate was cut from 8% to 7.6%, where it stands today.

    This tax cutting was interrupted briefly with a temporary sales tax rate increase from 5% to 6% that was in effect from May 2003 to June 2005. This temporary increase came out of Idaho’s longest legislative session ever, and was pressed by a governor who famously said in his budget message “I will not preside over the dismantling of state government.” Governor Dirk Kempthorne initially pressed for a 1.5 cent increase in the sales tax for three years, but ended up settling for 1 cent for two years. In view of the remarkable economic boom that occurred in Idaho following Kempthorne’s sales tax increase, 1 cent for two years turned out to be enough, and it even put Idaho’s fiscal reserves in very good shape for the financial meltdown and mega-recession that were soon to come.

    But before the downturn hit, Idaho policy makers returned to cutting taxes. Next was the property tax’s turn. In August 2006 the Idaho legislature held a special session that passed a single bill. House Bill 1 provided $50 million in net tax relief by cutting $260 million from the property tax and partially replacing it with a $210 million increase in the sales tax, from 5% to 6%.

    In 2008 Idaho cut some more, this time by increasing the grocery tax credit from $20 to $100. Although this is being phased-in and won’t be complete until 2015, the cost when fully implemented (in 2008 dollars) is estimated to be $122.2 million.

    Finally, also in 2008, Idaho policy makers enacted legislation that will exempt each business’ first $100,000 of personal property from the property tax. This applies in each county a business has personal property, but it has a trigger that needs to be met before it takes effect. It currently looks like it will be triggered in about 2015. At the time it was passed, this measure had an estimated impact of $17.4 million. Its actual impact when it finally takes effect is what the state will be required to pay to local governments to reimburse them for their lost property taxes.

    Taken together, the tax cuts that have already been enacted since 2000 will have a total annual fiscal impact that approaches a quarter of a billion dollars once they are all fully implemented. So how’s it working for the economy? The simple answer is not so well. There are a great many ways to describe an economy’s performance, but a careful examination of just this one chart reveals a rather compelling story:

    Source: U.S. Bureau of Labor Statistics and Idaho Department of Labor

    For almost two decades after big tax increases enacted from 1983 to 1987, Idaho’s employment growth was spectacular. More recently, after almost a decade of serious tax cutting starting in 2000, Idaho’s economy looks like it went into the ditch.

    How can this be? The simple truth is taxes pay for public services. Public services are consumed by businesses and households, and the vast majority are things (like education and transportation systems) that make people and businesses more productive. When we cut taxes we cut public services, and we make that part of our economy less productive. This is a good bargain only if the resources left in private hands (the reduced taxes) are more productive in the economy than the resources taken out of public services. The evidence does not support such a bargain.

    So when someone tells you tax cuts are what we need to fix our sick economy, ask them: Where’s the proof? Good luck finding it…

     

    PDF of this post:  Idaho’s Economic Challenges

  • IDAHO GENERAL FUND REVENUE – A PEEK BEHIND THE CURTAIN

    One of the most anticipated parts of the Executive Budget each year is the General Fund revenue forecast. This is the set of numbers that establish, for budgeting purposes, how much money the state will have to support its spending priorities.

    By convention, the revenue forecast is based on existing law and represents the amount the state’s economists believe will actually be collected and deposited into the General Fund. The key numbers in the recently released FY 2013 Executive Budget are $2.553 billion in FY 2012 (4.4% growth over FY 2011 actual revenue), and $2.700 billion in FY 2013 (5.8% growth over FY 2012 projected revenue).

    These revenue numbers (at the time they are produced, in this case early December 2011) are the best estimate of what will actually be deposited in FY 2012 and FY 2013. These revenue numbers are usually the only numbers legislators, the media, and the public focus on when it comes to the revenue side of the budget.

    There is much more information behind these revenue numbers that largely goes unnoticed. Some of that information would be very beneficial if it were taken into consideration when the state’s budget policies (i.e., spending priorities) are established.

    Footnote 1 on page A-18 of the FY 2013 Executive Budget contains absolutely crucial information for understanding the General Fund revenue forecast. It breaks the revenue forecast down into three key components: the ongoing amount of revenue each fiscal year, the one-time amount of revenue each fiscal year, and the actual amount of revenue each fiscal year (in the footnote this last component is called Base General Fund revenue).

    These three components of the General Fund revenue forecast are linked by the following identity: ongoing revenue plus one-time revenue equals actual revenue. Please note that in this case actual revenue does not mean historical actuals, it means the amount of revenue that is forecasted to actually be collected. It is the number that is highlighted as the revenue forecast in the budget documents, and it is often considered the limiting factor on how much the state can afford to spend in a particular fiscal year.

    Given that the three components of the revenue forecast are linked by an identity, it only requires that two components be estimated – the third then comes out of the identity. That third component is known as a residual. In revenue forecasting the two components that are estimated are ongoing revenue and actual revenue. One-time revenue is the residual. Here’s the restated identity: actual revenue minus ongoing revenue equals one-time revenue.

    In essence, the state’s economists are producing two revenue forecasts: a forecast of actual revenue, and a forecast of ongoing revenue. The forecast of actual revenue is produced using very detailed structural models of the U.S. and Idaho economies, and detailed components of the General Fund revenue stream. This forecast is intended to capture the cyclical dynamics of the economy and the revenue stream, i.e. the full implications of booms and busts.

    The forecast of ongoing revenue is produced using a very simple model that relates total Idaho General Fund revenue to a very broad measure of Idaho’s economy – smoothed Idaho Personal Income. This forecast is intended to ignore the cyclical dynamics of the economy and revenue stream, and capture the long-term relationship between the size of Idaho’s economy and the amount of General Fund revenue the Idaho economy produces. Think of this forecast as the amount of revenue Idaho would collect if there were no business cycles.

    Although the one-time revenue forecast is not produced directly, it is a direct measure of the amount that actual revenue (historical or forecasted) is above or below the ongoing revenue stream. In boom times the one-time revenue amount will be positive, and in bust times the one-time revenue amount will be negative. As a general rule, the revenue cycle tends to lag the economic cycle, so when the economy is in the early stages of a cyclical turning point the revenue stream will take some time to reach its own turning point.

    Here is the current Idaho ongoing, one-time, and actual (Base) General Fund revenue forecasts from page A-18 of the FY 2013 Executive Budget:

     

    General Fund Revenue, $m

    FY 2012

    FY 2013

    FY 2014

    FY 2015

    FY 2016

    Ongoing Revenue

    $2,800.7

    $2,856.9

    $2,945.4

    $3,070.0

    $3,209.0

          % change

    3.1%

    2.0%

    3.1%

    4.2%

    4.5%

    One-Time Revenue

    ($248.0)

    ($156.6)

    ($68.8)

    ($16.8)

    $8.6

    Actual (Base) Revenue

    $2,552.7

    $2,700.3

    $2,876.6

    $3,053.2

    $3,217.6

          % change

    4.4%

    5.8%

    6.5%

    6.1%

    5.4%

     

    There’s a lot going on in this table, and it makes a great deal of difference in how the revenue forecast is interpreted. Kudos to the Governor for including this important information in his budget documents.

    One observation is the difference in the annual rate of change in ongoing versus actual revenue. Actual revenue is projected to grow 4.4% in FY 2012 and 5.8% in FY 2013, but ongoing revenue is projected to grow only 3.1% in FY 2012 then 2.0% in FY 2013. What gives?

    Ongoing revenue growth reflects the overall weakness in the national and state economic recovery. In fact, although ongoing revenue growth is positive over the entire forecast horizon, ongoing revenue growth is projected to slow in FY 2013 before gradually strengthening in FY 2014 through FY 2016. This is a reflection of relatively modest gains projected for Idaho Personal Income over the immediate years ahead.

    Actual revenue growth is stronger than ongoing revenue growth for one simple reason: the magnitude of the cyclical bust is diminishing. This is a process whereby the magnitude of the negative one-time revenue shrinks as the actual revenue stream recovers to its more normal relationship to the broader economy. As housing, business investment, consumer spending, and other cyclical components of the economy that were particularly hard hit by the Great Recession return to more normal levels, so does the level of actual revenue.

    It’s not in the table above (or the FY 2013 Executive Budget), but the nadir of one-time revenue in the Great Recession occurred in FY 2010 at just over negative $400 million. As the recovery from that trough continues actual revenue growth will exceed ongoing revenue growth. That’s exactly what the table above quantifies.

    An important aspect of this more detailed look at the Executive revenue forecast is things may not always be as they seem. When the Economic Outlook and Revenue Assessment Committee (EORAC) members made their individual projections of actual General Fund revenue for FY 2012 and FY 2013, they did not have the benefit of knowing the numbers and analysis produced by the Governor’s budget office. They did not know the ongoing revenue forecast for FY 2013 has a lower growth rate than FY 2012.

    Concerns that 5.8% growth projected for actual FY 2013 revenue is too strong may be tempered when looked at with a full understanding of how the revenue forecast is produced. Of the $147.6 million in revenue increase from FY 2012 to FY 2013, only $56.2 million is due to strengthening of Idaho’s economy (the ongoing component). The other $91.4 million of revenue gain is due to the gradual return of revenue to more normal levels, a process that has been underway since FY 2010 and is expected to continue until FY 2016.

    A second observation related to the distinction between ongoing and one-time revenue is what it says about spending policy. When one-time revenue is positive, it means actual revenue exceeds ongoing revenue. That’s a good indication ongoing spending should be held in check, so that unsustainable levels of spending are avoided. The magnitude of the one-time component of the revenue stream is a quantitative measure of how much ongoing spending should be either held back (say, deposited in reserve funds) or used for one-time purposes (say, building replacement or other forms of capital investment).

    When one-time revenue is negative, as it is in FY 2012 and FY 2013, it means that actual revenue falls short of ongoing revenue. This is when one-time funds, if available, can and should be used to fill-in ongoing spending needs until actual revenue returns to the ongoing level. This is where idle balances, reserve fund balances, and yes, even temporary revenue increases come into play.

    Today in Idaho the Executive Budget tells us the current fiscal year’s actual forecasted revenue is almost $250 million below its normal (i.e., ongoing) level. And while the gap improves in FY 2013, actual forecasted revenue in the budget year is still $156 million below the normal level. This means it is appropriate to spend up to that amount in one-time funds to support ongoing public services.

     

    PDF of this post:  Idaho General Fund Revenue – A Peek Behind The Curtain

     

  • MEDICAID FUNDING – EXAMINING THE FY 2012 CUTS

    In 2011 the Idaho Legislature made very large cuts to Idaho’s medical assistance (Medicaid) programs.  These cuts were the result of forecasted revenue that was insufficient to maintain medical assistance and other state programs at a constant level of service without some form of revenue increase. It now turns out the revenue forecasts used to justify those significant cuts to Medicaid and other programs were incorrect, and the cuts were unnecessary.

    Once again Medicaid is a major topic of discussion, this time in the 2012 Legislative session. Numerous calls have been made to restore the cuts that were enacted in 2011. The Governor’s latest revenue forecast issued January 9, 2012 could easily support immediate restoration of medical assistance services, but there are no indications that the Governor will recommend any restoration of last year’s medical assistance program cuts.

    Let’s take a closer look at the major components of Idaho’s medical assistance programs, how the 2011 cuts were spread across those programs, and how Idaho’s revenue has performed since those cuts were made.

    There are four distinct programs within Idaho’s budget that make up what we call Medicaid. Here are brief descriptions of each of those programs:

    Medicaid Administration & Medical Management (MAMM) is the program that provides for the administration of Medicaid, including managing provider payments, medical management, drug utilization reviews, and licensing and inspecting health facilities.

    Basic Medicaid Plan (BMP) is the program that primarily covers low income children and pregnant women. These beneficiaries tend to have average levels of health and disease.

    Coordinated Medicaid Plan (CMP) is the program that primarily covers low income beneficiaries who are 65 and older. All individuals eligible for both Medicaid and Medicare, regardless of age, may elect coverage under this plan.

    Enhanced Medicaid Plan (EMP) is the program for children and adults with disabilities or other special needs. This program tends to have relatively high costs per beneficiary.

    In FY 2011 Idaho’s actual total spending on Medicaid (all four programs, all fund sources) was $1.882 billion, or 30.7% of total state spending. Here’s the breakdown within Medicaid:

    MAMM            $  48.2 million, 2.6% of total

    BMP                $495.6 million, 26.3% of total

    CMP                $340.5 million, 18.1% of total

    EMP                $997.8 million, 53.0% of total

    The budget cuts made during the 2011 Legislative session included $66.1 million in what were called “Omnibus Decisions.” This amount was cut from the General Fund across all agencies. The Medicaid programs’ share of those General Fund cuts totaled $34.5 million, but when all fund sources were factored in the total cuts to Medicaid were $89.7 million.

    It is fair to say that Medicaid took a disproportionate share of the “Omnibus Decisions” cuts that were made in the 2011 legislative session. The FY 2012 General Fund appropriated amount for Medicaid (i.e., before the “Omnibus Decisions” cuts) was $470.7 million, or 18.1% of the total General Fund. The Medicaid share of the “Omnibus Decisions” cuts ($34.5 million) was 52.2%, or almost three times Medicaid’s share of the total General Fund portion of the budget.

    A comparison of the “Omnibus Decisions” cuts across all state programs to the cuts within the programs that make up Medicaid demonstrates the concentration. Here’s the FY 2012 breakdown (the General Fund amounts shown are before factoring in the “Omnibus Decisions” cuts):

      General Fund “Omnibus Decisions” cuts % cut
    All State Programs $2,595.0m -$66.1m -2.6%
    MAMM $    15.0m  $  0     0%
    BMP $  100.8m -$ 8.2m -8.1%
    CMP $  143.5m -$ 7.1m -5.0%
    EMP $  211.3m -$19.2m -9.2%

    The legislative appropriation bill with the Medicaid program cuts shown above was sent out of the Joint Finance-Appropriations Committee (JFAC) to the House on March 31, 2011 and was signed into law by the Governor on April 11, 2011.

    On July 12, 2011 actual FY 2011 revenue was announced and it was $85.3 million higher than the forecast the Legislature used for budgeting purposes just three months earlier, a sure sign the FY 2012 revenue forecast would be revised upward. It was also a very strong indication the “Omnibus Decisions” cuts had been unnecessary. No action was undertaken to reverse those cuts.

    On August 11, 2011 the Governor’s budget office released a new FY 2012 revenue forecast that was $161.6 million higher than the forecast used by the legislature to set budgets for FY 2012. That new revenue forecast clearly indicated the $66.1 million in “Omnibus Decisions” cuts were unnecessary. No action was undertaken to reverse those cuts.

    On January 9, 2012 the Governor’s FY 2013 Executive Budget was released. The revised FY 2012 General Fund revenue forecast has been lowered, but it is still $113.0 million higher than the FY 2012 revenue forecast the “Omnibus Decisions” cuts had been based on nine months earlier. No action has been taken to reverse those cuts.

    On February 7, 2012 the Governor’s budget office released the February 2012 Idaho General Fund Revenue Report. In two months under the new revenue forecast a positive cushion of $13.2 million has developed. On February 10, 2012 the Associated Press reports the Governor “remains adamant about not restoring $35 million in funds cut from Medicaid last year.”

    Next week (February 20, 2012) the legislature’s budget committee (JFAC) is scheduled to begin setting budgets. One of the first decisions they will need to make is the number to use for FY 2013 General Fund revenue. The legislature’s Economic Outlook and Revenue Assessment Committee (EORAC) met at the beginning of the legislative session and picked an FY 2013 revenue number $33 million lower than the Governor’s. Nonetheless, in the month and a half since the release of the FY 2013 Executive Budget most economic indicators have pointed to improving conditions. 

    The bottom line is this — even if JFAC adopts the EORAC’s lower revenue number, there is still sufficient revenue capacity to restore the medical assistance cuts. It’s no longer a matter of revenue. It’s about the legislature’s spending priorities.

  • JANUARY 2012 IDAHO GENERAL FUND REVENUE

    The Division of Financial Management reports that January revenue exceeded expectations by $6.3 million, or 2.4%. That’s a little less than the 2.9% excess in December, but it makes two for two months under the new DFM forecast that revenue has exceeded the predicted amount. Idaho now has a $13.2 million buffer to make its current forecast of $2.553 billion over the remaining 5 months of the fiscal year.

    A lot can happen during income tax filing season, so there are no guarantees the positive results will continue. Nonetheless, broader economic indicators suggest the national economy is strengthening, and hopefully Idaho will share in the gains. The most recent updates to the Philadelphia Federal Reserve Bank’s Coincident and Leading Indicator series suggest Idaho is coming out of its downturn, and that positive performance should continue for the next six months.

    Here’s the map of Coincident Indexes showing Idaho among the fastest growing states over the past three months (October-December, 1.4%, rank = 7)):

     

    Here’s the map of Leading Indexes showing Idaho also in the upper range of growth for the next six months (2.3%, rank = 16):

     

    These are clearly positive indicators that, among other things, suggest Idaho is in a position to begin reversing the cuts that have been made to essential public services over the past several years. Idaho now has an opportunity to both enhance the well-being of its citizens and reinforce the positive economic metrics we are seeing.

     

     

  • IS IT TIME TO REPLENISH RESERVES?

    When we look at the FY 2013 Executive Budget, one notable feature is the allocation of $60 million for replenishing several of the state’s reserve funds. Reserves are an important part of sound budgeting practices. Primarily because of revenue volatility, it’s important to have a savings account to carry the state budget through tough times. Opinions differ on the optimal size of those reserves, but the general range considered prudent is from 3% to 10% of the total budget.

    Going into the Great Recession Idaho had reserves that exceeded 10% and that definitely helped Idaho weather the storm. In the current fiscal year reserve balances are at $34.9 million, or 1.4% of estimated General Fund expenditures.

    Today we find Idaho General Fund revenue on the mend. After declining by 15.2% in FY 2009 and another 8.2% in FY 2010, revenue grew by 7.9% in FY 2011, and the current projected growth rates for FY 2012 and FY 2013 are 4.4% and 5.8%, respectively. Faster than expected revenue growth, combined with larger budget cuts than were necessary, have led to an expected surplus of over $100 million in FY 2012.

    The Executive Budget carries that surplus over into FY 2013. It then allocates $60 million to restoring various reserve funds in FY 2013. $9.5 million of that $60 million is required by Idaho Code §57-814(2)(a). The rest ($50.5 million) is discretionary. Is it prudent to put an extra $50.5 million back in the bank in FY 2013? Let’s explore that question.

    The nickname for a reserve fund is “rainy day account.” The idea is that these types of accounts are funded when the sun is shining (times are good) and they are drawn down when it’s raining (times are bad). So today, is the sun shining or is it raining?

    From a fiscal perspective, it’s still raining. In FY 2008 Idaho’s actual General Fund expenditures were $2,799 million, or 5.4% higher than the Governor’s Executive Budget recommendation of $2,655 million in FY 2013. That gap is without considering the effects of inflation and increased demand (public school enrollment, college and university enrollment, medical assistance caseloads, etc.) over the past 5 years. It’s a fairly safe bet the real gap between the FY 2008 actual expenditure level and the Executive Budget’s proposed FY 2013 expenditure level is at least 15%. That kind of gap is a fairly strong indication it’s still raining.

    In their presentations to JFAC, both Idaho Superintendent of Public Instruction Tom Luna and University of Idaho President Duane Nellis have gone on record saying it is a higher priority to restore funding levels for programs that have been cut than it is to restore reserve account balances. So how does that view comport with today’s fiscal reality?

    In the Governor’s FY 2013 Executive Budget the base level is $2,530 million. An additional $97 million in maintenance expenses and $24 million in ongoing enhancements bring the FY 2013 recommended ongoing appropriation to $2,650 million. That is in contrast to the current FY 2013 revenue estimate of $2,700 million.

    At first glance it appears $50 million is available but unused to support ongoing public services. It turns out there is really even more.

    On page A-18 of the FY 2013 Executive Budget the General Fund revenue forecast is broken down into its ongoing and one-time components. For FY 2013 the breakdown is $2,857 million of ongoing revenue minus $157 million of one-time revenue, for a net revenue forecast of $2,700 million. The first number ($2.857 million) is the amount of revenue Idaho could expect to collect in FY 2013 if it was a normal year, while the second number ($157 million) is the amount FY 2013 is below that normal amount due to the lingering effects of the recession (in boom times the one-time component is positive, meaning there is extra revenue beyond a normal, or ongoing, amount).

    In essence, this means the state could put more than $50 million into restoring programs if one-time funds were available (and they are). That’s what it means to use a reserve fund: during temporary revenue troughs, one-time funds from reserves (or carryovers) are used to support essential public services. When revenues recover to normal levels and beyond, reserve funds are replenished. This process is intended to smooth out the revenue valleys and peaks, and stabilize the provision of public services.

    The Executive Budget not only doesn’t use the available one-time funds (the $103 million carryover from FY 2012) to restore previously cut public services, it takes $50 million from the net revenue forecast off the table (and into a bank account).

    Budgets are about priorities, and many, including Superintendent Luna and President Nellis, have weighed in with their priorities. Theirs are quite different than the Governor’s and are more in keeping with stabilizing the provision of essential public services.

  • BUDGETS ARE ABOUT PRIORITIES

    Anyone who spends much time around Idaho’s legislative session quickly realizes the state’s budget is an enormous part of the work that gets done. The state’s budget is a clear expression of the priorities of the state’s policy makers. What gets funded and how it’s funded has huge implications for all Idahoans.

    So what does the FY 2013 Executive Budget suggest about the Governor’s priorities? We’ll explore that question in this and a series of subsequent comments on the proposed budget.

    One prominent feature of the Governor’s FY 2013 budget is the beginning balance of $103 million. This is the “carryover” from FY 2012 based on the Governor’s most recent forecast of FY 2012 revenue.

    Having a $103 million surplus in the bank to start the next fiscal year may seem to be a good thing. However, upon closer examination of the way that surplus was obtained and how it is being handled, it may not be so good after all.

    For the past two years the Governor and Legislature have significantly underestimated the state’s revenues. Those underestimates led to substantial cuts in public services. Last year, in the FY 2012 budget, a $66 million “Omnibus Decision” reduction included a $34.5 million cut in the General Fund portion of the Medicaid budget, a $13.3 million cut in the Public Schools budget (that’s just the Omnibus Decision portion), and $8.9 million in cuts to higher education budgets.

    A year later we are seeing those cuts were unnecessary. Nonetheless, today there is no effort to restore any of those cuts. Instead the Governor has chosen to “park” over $100 million in “surplus” dollars for six months, effectively keeping those dollars out of circulation in the economy, keeping them from matching federal dollars, and keeping them from putting Idaho businesses and people to work.

    In the case of Medicaid, immediate restoration of previous cuts would bring substantial federal matching dollars (on average, each dollar of General Fund brings $2.33 of federal match, for a total of $3.33). Together with state funds those federal dollars would provide a quite large and immediate boost to Idaho’s economy and jobs picture. Restoring just half of the $34.5 million cut from the General Fund in the last legislative session would immediately put almost $60 million back to work in Idaho’s economy.

    In the case of education the cuts that were made have a large impact on staffing – college professors, K-12 teachers, administrators, and support staff. Cutting the funds used to support those positions, then failing to restore those funds when it is evident the money is available, does nothing to boost the economy.

    Collecting tax revenue and putting it into an idle account for half a year is arguably a net negative for Idaho’s economy. In the short term we are taking money that could be working and circulating in the economy and parking it. In the long term we are undermining our own well being by short-changing our investment in human capital – better health for our most vulnerable populations, K-12 education for our kids, and higher education for our young adults and older workers in need of retraining.

    It’s easy to say the economy and jobs are high priorities. Taking $103 million (that’s 4% of the entire budget) out of circulation for the next six months does not help the economy or workers in need of jobs.

  • WELCOME TO THE IDAHO CENTER FOR FISCAL POLICY WEBSITE!

    This corner of the site is where you’ll find periodic posts from the director (that’s me, Mike Ferguson) on topics pertinent to Idaho’s public finances. Other parts of the site you may want to check often are the NEWS & OPINION section (a compilation of links to news stories and opinion pieces that relate to Idaho’s budget and tax structure) and the ICFP IN THE NEWS section (a subset of NEWS & OPINION items that relate directly to the Idaho Center for Fiscal Policy). We’ll do our best to keep these sections updated on a daily basis.

    We’ll also update the other sections of the site as new reports are issued (either by us or others) and as other information becomes available.

    Obviously the big focus in the world of Idaho public finance is the legislative session that will establish the FY 2013 Idaho state budget over the next several months. Currently JFAC (the Joint Finance-Appropriations Committee) is hearing presentations from agencies. JFAC is scheduled to start setting budgets in about a month (February 20th) and is scheduled to complete their budget setting on March 9th. JFAC sets budgets by passing appropriation bills that must then be approved by both chambers of the Legislature. Appropriation bills that are approved by the Legislature then face a final hurdle, possible veto by the Governor. Idaho appropriation bills are also subject to a possible line-item veto.

    The next big event coming up in terms of Idaho’s budget is the meeting tomorrow of the EORAC (Economic Outlook and Revenue Assessment Committee) to consider the revenue numbers the Legislature will use for budgeting purposes. The EORAC will look at both the FY 2012 and FY 2013 General Fund revenue numbers and make a recommendation on how much they believe will be available. Those numbers will be forwarded to legislative leadership and presented to JFAC.

    The Governor’s Executive Budget is built on 4.4% General Fund revenue growth in FY 2012, and 5.8% growth in FY 2013. Those may or may not end up being the revenue growth numbers used by JFAC. Tomorrow will provide the first clue to the legislative revenue numbers, but they won’t be final until JFAC decides.

    The next post in this commentary section will begin a series of closer looks at the details behind Governor’s Executive Budget.

    MF