Idahoans who qualify for the 2022 tax rebate can track the status of the payment online through the Idaho State Tax Commission. (Courtesy of Steve Buissinne from Pixabay)
Editor’s note: This is Part II of an ongoing series examining the various aspects of Idaho’s tax exemptions and lack of a legislative review process. Part I can be found here.
With the exception of Nevada and Wyoming, Idaho is surrounded by states with varying degrees of a state-level review process for tax exemptions and credits. Washington, Oregon, Utah and Montana all have a system of review.
Although the Idaho Legislature reviews direct spending of state budgets every year, Idaho is one of only 16 states without a process for reviewing tax exemptions — sometimes called preferences, to indicate preferential treatment — and their impacts in the years after they’ve been approved. There are 165 known exemptions, which includes deductions and credits, and they do not expire.
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 report found that without property tax exemptions included, the total estimated revenue that went uncollected in fiscal year 2020 was more than $3 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. Researchers also determined 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.
The Idaho Capital Sun spoke with officials in two neighboring states about their review process and why they view it as an important feature of government.
Montana: ‘With limited money, we really need to make sure all of this is still relevant’
Montana’s part-time Legislature adopted a review of all income tax credits in 2019, which is the newest and most limited review in the region noted in the Idaho Office of Performance Evaluations’ report. The task is assigned to a standing interim committee for revenue and taxation, and a new bill passed in the 2021 session ascribes a 10-year maximum to credits before they must be reviewed.
According to Montana Rep. Becky Beard, a Republican from Elliston, the change is intended to solve the issue of credits that received unlimited extensions on sunset clauses, which are built-in expiration dates for legislation. Beard is chairwoman of the Montana House of Representatives’ Taxation Committee and a member of the interim review committee. The interim committee, which is made up of an equal number of Republicans and Democrats, will have its first meeting July 15.
“The process has been kind of willy-nilly (in the past),” Beard said. “… I do appreciate that a lot of times people don’t want to commit to a sunset date because it does bring it back for review, but so often we just extend it without really diving into it.”
One example of a credit that is ending after review is a $500 homeowner tax credit for installing solar panels. Beard said an industry representative told legislators the credit was no longer necessary because solar is now installed on many Montana homes.
A tax exemption is the reduction or removal of the requirement to pay a tax that would otherwise be levied by the government on a person, property, income or transactions.
A tax credit is a type of tax incentive that allows a taxpayer to subtract the amount of the credit from the annual tax owed to the state or federal government.
“And we said great, the tax credit actually did incentivize homeowners to install solar panels on their home and get the credit,” Beard said. “… And that was good, because we have other tax credit policies proposed that really address some of the concerns of our state residents, and we don’t need to rely on some of those old, outdated ones.”
Beard said she’s not a fan of tax credits in general because they are too specific and focused when there are other priorities that would benefit more people, but she understands some are helpful and necessary.
The review process includes six criteria outlined in statute, such as whether the credit changed taxpayer decisions, whether the credit has out-of-state beneficiaries, any adverse impacts of the credit and whether those are outweighed by its benefits, and the extent to which the credit benefits the larger state economy. By statute, the committee is permitted to request the assistance of the Montana legislative fiscal analyst’s office, the legislative auditor, the department of revenue and any other agency with information regarding tax or revenue bases.
Beard said while the process is limited to tax credits, she’d be interested in reviewing exemptions as well.
“With limited money, we really need to make sure all of this is still relevant,” Beard said.
Washington: ‘Having the citizen commission maybe depoliticizes (the process) a little bit’
Washington’s process began in 2006, making it one of the oldest in the region. All of the state’s more than 700 tax preferences are reviewed every 10 years, and the order in which they are reviewed is guided by a five-member volunteer citizen commission. The voting members are made up of one non-legislator appointed by each caucus in each chamber, plus one member appointed by the governor. The state auditor and the chairperson of the Joint Legislative Audit and Review Committee are non-voting members.
The commission is comprised of a chief economist for Avista Corp., a tax lawyer, an associate law professor from the Seattle University School of Law, the president of Edmonds Education Association, and an associate professor of public administration at the University of Washington.
The commission identifies five to 10 tax preferences to review each year and can determine whether a preference receives a full review or expedited review. The chosen preferences are then researched by the Washington State Joint Legislative Audit and Review Committee, which is similar to Idaho’s Joint Legislative Oversight Committee and its relationship to the Idaho Office of Performance Evaluations. It is a bipartisan committee made up of an equal number of House and Senate members that conducts performance audits, program evaluations and other analyses with the help of its nonpartisan researchers and analysts.
Keenan Konopaski, legislative auditor for the committee, said the commission sometimes groups preferences by subject, such as agriculture. This year, seven preferences are under review, including one for the newspaper industry, medical marijuana, nonprofit cancer clinics and nonprofit outpatient dialysis centers. Konopaski’s staff members are conducting the reviews and will report to the commission in August.
“We weigh in with a recommendation with whether or not the preference should be continued or modified, but we always couch it as an audit recommendation,” Konopaski said, meaning it is merely a recommendation based on the findings, not a comment on the policy itself. The members of the commission can comment on that aspect if they choose. “We’re bound by auditing principles, the citizen commission is not.”
Once the commission receives the recommendations, the process is opened to the public for testimony.
“They’ll put an open invitation out to stakeholders and interested parties to comment about the importance of the preference and its impact,” Konopaski said. “They will take that information and draft comments that the commission gives to the Legislature.”
The commission gives its own recommendation for legislative action, if it is necessary. In most cases, the commission agrees with the findings of the evaluation team, but there have been times when public testimony has led them to a different conclusion.
Eric Thomas, audit coordinator for the Audit and Review Committee, said the commission is extremely knowledgeable and collaborates together well.
“Having the citizen commission maybe depoliticizes (the process) a little bit,” Thomas said. “I’m actually very surprised at how you have five very smart, opinionated individuals and how often they land on the same page when it comes to the work we’re doing.”
The Washington Legislature often follows the advice given from the process, Konopaski said. Over the past decade, the Legislature has acted on the guidance in 124 out of 200 preference reviews.
Could these examples work in Idaho?
Ryan Langrill, principal evaluator at the Idaho Office of Performance Evaluations, said his team’s research led them to recommend a systematic approach — like Washington or Montana, on a 10-year basis — to reviews because it is more likely to build trust among those affected by a tax exemption or credit.
“If stakeholders know that all preferences will eventually be reviewed, then stakeholders will be less likely to perceive that they are being targeted when a preference is reviewed that benefits them,” Langrill said. “The systematic approach also helps ensure preferences that may have otherwise been forgotten about are reviewed.”
When it comes to the feasibility of Washington’s model in Idaho, Langrill said the primary concern is about the trust in an appointed commission or a committee made up of legislators. It would depend on which model was most trusted by Idaho’s legislators.
The other concern is staffing, he said. Washington reviewed all of its preferences over a decade with 4.5 full-time equivalent staffers, while Montana had just one staffer to support its revenue committee for its limited tax credit review process.
“Both are good models as long as they meet the Legislature’s expectations,” Langrill said. “You’re not going to get Washington’s system with a single part-time staffer.”
Idaho has about 165 preferences compared to Washington’s 700, so an in-depth review wouldn’t take as much time or resources, but Langrill said the Office of Performance Evaluation has eight staff members — so even with fewer preferences, a review as complete as Washington’s would take most of the office’s resources for 10 years.
“If the Legislature wanted something of Washington’s scale, it would most likely mean new positions,” Langrill said, whether in his office or others.
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