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

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  1. mikew says:

    I like this commentary.

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