Idaho doesn’t review its tax exemptions. Billions go uncollected annually, report says.

Several tax exemptions have significantly underestimated values because they’ve been on the books so long

Without property tax exemptions included, the total estimated revenue that went uncollected in Idaho in 2020 through exemptions, deductions and credits is more than $4 billion (Getty Images).

Editor’s note: This is Part I of an ongoing series examining the various aspects of Idaho’s tax exemptions and lack of a legislative review process.

The oldest known tax exemption on the books in Idaho became law in 1931, during the worst years of the Great Depression.

One of the newest is a first-time homebuyer deduction, valued at $2 million, allowing up to a $15,000 tax deduction for contributions into a first-time homebuyer savings account.

Along with at least 164 other tax exemptions, they do not expire and are not subject to a review process, legislative or otherwise.

Though the Idaho Legislature reviews direct spending every year, there is no process for reviewing those policies and their impacts in the years after they’ve been approved. Idaho is one of 16 states without this type of review for tax exemptions — sometimes called preferences.

These facts were part of the findings from a report issued in March by the Office of Performance Evaluations, a nonpartisan office within the Idaho Legislature that determines the efficiency and cost effectiveness of various government programs and agencies. The report was requested in 2020 by Reps. Steve Berch, D-Boise, and Rick Youngblood, R-Nampa, to determine if and how a review process for tax exemptions could be implemented at the Legislature.

The answers? It’s complicated.

Identifying the most important players

Ryan Langrill, principal evaluator for the Office of Performance Evaluations, led the research efforts for the report, and began with determining who the largest stakeholders were and reaching out to them for feedback.

“One of the themes that seems to run through these tax preference reviews is if there’s not buy-in from the policymaking community, one – are they going to trust the findings of your evaluations? And two – it’s good to know what information they want so that you can be helpful,” Langrill said.

In addition to conversations with other legislators, individuals at the Legislative Services Office, the Idaho State Tax Commission and the Idaho Department of Insurance, Langrill said his team pulled sign-in sheets from the last five years of House Revenue and Taxation Committee meetings and identified the organizations and representatives that were present most often. That resulted in a list of contacts who were sent a survey about what they felt were important factors in designing a review process.

“Then we followed up with a couple people who were especially opposed to the idea to find out what the concerns were because we wanted to make sure if the Legislature moved forward with this, it wouldn’t be dead on arrival from the stakeholders,” Langrill said.  

Who was surveyed?

These individuals were sent surveys regarding a review process for tax exemptions in the Legislature. Some represent multiple clients, while others represent one organization:

They were asked:

  1. Do you think a systematic review process for tax preferences is needed in Idaho? Please explain why.
  2. Which tax preferences should be the top priority for review?
  3. What concerns do you have, if any, about the idea of a systematic review of tax preferences?
  4. What could the state do to build your confidence in the review process?
  5. What would you hope to learn from a systematic review of tax preferences?
  6. Is there anything else you would want the Legislature to know as (it is) considering this idea?

Of those surveyed, Langrill said most of the concerns were about whether the Legislature itself would drive the process, not legislative analysts. There was also concern about whether this process would result in the same “waste of time and resources” that it has been in the past, according to Langrill.

In 2007, an interim committee of the Idaho Legislature studied the state’s tax exemptions, deductions and credits and made recommendations for statutory limitations to ensure proper use. The committee was made up of seven senators and seven representatives, including Rep. Mike Moyle, who is now majority leader in the House of Representatives.

The committee identified two credits and exemptions to repeal and drafted legislation that would have achieved that goal. Langrill said the intention was to use the bill hearings to present a checklist to be used in future reviews of tax preferences at the Legislature. However, the bills were printed and never heard in the House Revenue and Taxation Committee, which at the time was chaired by Rep. Dennis Lake, R-Blackfoot.

“If the chair of Revenue and Taxation decided not to go along with it, then it just sort of never happened,” Langrill said.

The approach taken by the committee may have been an issue in that case, according to Langrill, because there is concern about a process that picks “winners and losers” and is not a systematic review of exemptions, deductions and credits according to a predetermined schedule. 

Langrill said 34 states have a systematic review process for tax policies, including Montana, Oregon and Utah. Those processes include standing joint interim committees, sunset clauses (which put an end date on the proposal) and performance measurements.

Rakesh Mohan, director of the Office of Performance Evaluations, said when evaluators spoke with representatives from those states, the holistic approach yielded better results.

“Things that have worked in other states well are those that have chosen the systematic approach that could be justified and sustainable and sustain the political pushback,” Mohan said.

Exemptions represent billions in uncollected revenue

According to the report, the state of Idaho and its local governments collected more than $7 billion in taxes in fiscal year 2020, of which $6.3 billion came from income, property and sales taxes.

In those categories:

  • There are 42 exemptions for income tax, including deductions, exclusions and credits. The state collected $2.16 billion in income tax last year, and exemptions in this category were valued at $660 million.
  • The sales tax has 80 exemptions, including those for certain buyers, sellers, goods, services and uses. The state collected $2.09 billion in sales tax last year, and exemptions were valued at $800 million.
  • There is also a category of services that are not taxed, such as agricultural and industrial services, information services and social services, which the Office of Performance Evaluations estimated held a value of $1.28 billion in fiscal year 2020.
  • There are 44 exemptions around property tax, including exemptions for hardship or for businesses that move into or otherwise invest in an Idaho community. Local governments collected $1.93 billion in property taxes on an assessed value of $192 billion of property in 2020 – but based on data from 15 of the 44 exemptions, $38.2 billion of property in Idaho was exempted from the available tax base.

The Idaho State Tax Commission told the Office of Performance Evaluations that the following exemptions are currently significantly underestimated:

  • Remotely accessed computer software and digital subscriptions (2013): Exempting purchase of all custom and canned software, as well as subscriptions or license agreements for temporary use of digital media, including streaming services. The Tax Commission told evaluators that while the general fund estimate of this exemption is $9.2 million annually, the value of streaming subscriptions alone is between $7.7 and $20 million per year.
  • State Tax Anticipation Revenue (2007): Exempted sales tax for the costs of building or improving freeway interchanges, valued at $3.05 million.
  • Commercial aircraft (1988): Exempts aircraft purchased by nonresidents for use outside the state, valued at $2.1 million.
  • Vending machines and amusement devices (1990): Exempts money-operated equipment that dispenses goods or services that are taxed – no assigned value.
  • Nonprofit shooting range fees (2006): Exempts fees for use of shooting ranges or membership dues charged by nonprofit shooting ranges – no assigned value.
  • Incidental sales of tangible personal property (1985): Exempts goods such as furnishings or appliances included in the sale of real property, valued at $12,000.

Without property tax exemptions included, the total estimated revenue that went uncollected is more than $4 billion. By contrast, the projected general fund revenue for fiscal year 2021 in Idaho is $4.25 billion, according to the Division of Financial Management.

As noted in the report, the lack of a review process means it is difficult to estimate the value of certain exemptions that have been in Idaho Code for 50 to 60 years, if not longer, and therefore the revenue impacts of the exemptions are considered unknown.

An outline of known and unknown factors determined by the Office of Performance Evaluations in a March 2021 report for the Idaho Legislature (Screenshot).

‘Public dollars are precious’

Alejandra Cerna Rios, director of the Idaho Center for Fiscal Policy, said her nonprofit organization performed a study in 2019 with similar findings – but went further to say policymakers should address the issue in part because it’s a matter of transparency with taxpayers.

“The volume of public dollars that are spent on different types of tax breaks, whether it’s individual income or sales, is really large, so I think policymakers would be really wise to apply the same close eye that they do for other budget processes,” Rios said. “And that’s because public dollars are precious – people contribute and expect a level of core service, so if we’re spending dollars in a way that doesn’t serve those goals is a question your average person who contributes would be interested in learning.”

The exemptions that are part of Idaho law would likely stay the way they are, Rios said, because most policymakers would be wary of retroactively changing existing exemptions.

“But it’s never too late to add a level of transparency moving forward, especially when it comes to a topic that’s so important,” she said.

Rios acknowledged there are several obstacles that would need to be overcome to put a process in place, as outlined in the report. As a part-time body, the Idaho Legislature has limited staff availability, and to institute a review process would likely mean adding staff and the appropriate software to conduct analysis.

“We at the center offer our services to analyze bills where that currently doesn’t exist, so I do understand OPE’s points about ensuring there’s a proper way to staff an effort to review tax breaks,” she said. 

As of 2015, Idaho had 76 legislative staff members for an estimated population of 1.8 million as of 2020. By comparison, Montana has an estimated population of 1.08 million and 136 legislative staffers. 

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