Will Idaho’s special interest groups be a barrier to tax code changes?
Some industry representatives say a review is a good idea — others say it’s a waste of time
People talk on the garden level of the Idaho Capitol on April 6, 2021. (Otto Kitsinger for Idaho Capital Sun)
Editor’s note: This is Part III 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, and Part II can be found here.
There are more than 50 categories of goods and services exempt from taxation in Idaho, according to a recent report from the Office of Performance Evaluations.
Goods and services exemptions that benefit nonprofit and public programs, such as food assistance and meals for senior citizens, total about $42 million in value on an annual basis. Goods and services exemptions for businesses and industry in Idaho, such as construction labor and manufacturing equipment, total more than $1 billion in value annually.
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 Idaho Capital Sun examined the role of special interests in the state’s tax code and what one lobbyist and lawmaker think of the idea of a tax preference review process.
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Specific exemptions can turn into ‘self-feeding monster,’ legislator says
One of the busiest committees in the Idaho Legislature each year is House Revenue and Taxation. When a tax exemption, credit or deduction of some kind is proposed, it usually originates in that committee, and many times a special interest group pushes for its passage.
Rep. Greg Chaney, R-Caldwell, has been a member of the committee since 2015. While there are always plenty of pitches for exemptions, he said, many don’t make it to the committee hearing stage. And in the past few years, it has become more difficult for an exemption to make it through the process at all.
“The House especially has been less receptive to creating more exemptions,” Chaney said. “There is growing attention to these exemptions and these carve-outs, and there’s an increased appetite to do more broad tax relief, to cut taxes for broad swaths rather than surgical groups or industries.”
Chaney said those carve-outs can turn into a “self-feeding monster” because if one part of a supply chain in a particular industry receives an exemption, there is likely to be an argument for an exemption in the next step of the chain as a matter of fairness.
On the other hand, there has been more opposition to exemptions in general in recent years from the Idaho Freedom Foundation, a nonprofit organization that advocates for limited government. Staff members of the foundation have written about opposition to exemptions because the process picks winners and losers.
The Idaho Freedom Foundation could not be reached for comment.
As an example, Chaney sponsored a bill in the spring 2020 legislative session creating a sales tax exemption for server equipment at large-scale data centers as a way of attracting businesses to build data centers in Idaho. The exemption requires a capital expenditure of at least $250 million within five years after construction begins and the creation of no fewer than 30 jobs within two years of opening.
Chaney said he had to carry the bill to the floor twice because the first time it failed by a slim margin. He attributes that to a low score of the bill from the Freedom Foundation.
“Their opposition has been a pretty noticeable presence in the conversation of exemptions,” he said.
Interest group feedback was mixed
As part of the research process for the report, the Office of Performance Evaluations surveyed various individuals aligned with associations, businesses and nonprofits in Idaho to gather their feedback on the idea of reviewing tax preferences. Ryan Langrill, principal evaluator at the Office of Performance Evaluations, said the individuals were identified after evaluators reviewed who was most frequently in attendance at House Revenue and Taxation Committee meetings between 2015 and 2020, aside from state agency representatives.
Fourteen people responded to the survey, which asked whether they thought a review process was necessary, what they would hope to learn from such a review process, and any concerns they might have with the idea. The list of those surveyed included the Idaho Association of Counties, Association of Idaho Cities, the Idaho Farm Bureau, Idaho Medical Association and several special interest lobbyists.
Nine responded that a review process is needed, while five said no. The arguments in favor were that it would help avoid a system of choosing winners and losers for Idaho businesses and ensure a more equitable tax code, and others saying the sheer number of exemptions and deductions begged for review.
Those who said no said the Idaho Legislature has been discerning with the preferences it has adopted, and the body has better things to do with its time. They added that if there ever is a problem with an exemption, the Legislature can address it, which is what they were elected to do.
Respondents said they hoped a review process would show if the tax preferences support taxpayer interests, how they impact the economy, the gross amount of dollars that are exempt from taxation, and any that are outdated and should be eliminated. They also hoped it would show if Idaho has become too reliant on one tax type compared to other states.
‘… We need to start with the big lift first’
Kelley Packer, executive director of the Association of Idaho Cities, was one of those surveyed who said she was in favor of a review process. Packer is a former Republican legislator who represented District 28 from 2012 to 2018. Packer said she and other interested parties have been trying to put together a coalition to make a recommendation to Gov. Brad Little on a wider view of tax policy and a thorough review of Idaho’s tax mechanisms and components and how effective they are.
“We have way too many exemptions, in my opinion,” Packer said.
The tendency of the Legislature, she said, is to solve the immediate issue without considering potential ripple effects.
“We basically approached the high priority of the day, we put out the fire of the moment, and it sometimes creates other problems somewhere else in our tax structure,” Packer said. “If you look at it like a balloon, if you push on one part of the balloon to make it smaller and change its presentation or its footprint, then the burden doesn’t go away — it just pops out somewhere else and creates something else we have to address.”
Packer wants the state to slow down and take a broader view of the overall tax structure to determine where it works and where it doesn’t. Her preference is for an outside, unbiased source to conduct that review and report its findings to the Legislature for action. After that complete review, she would like to see another review every five years.
“The environment is always changing … so it would make sense that our policy would need to keep up with that and modernize from time to time, but we need to start with the big lift first,” Packer said.
The end goal in her mind is to create a more equitable way to apply tax policy in Idaho where one group doesn’t get a greater benefit than another. While she understands arguments from business and industry representatives that the cost of removing exemptions would be passed to the consumer, she said that makes more sense than packing more burden into property taxes.
“If I have a fair and equitable property tax across all property taxes, even if it increases what I have to pay for bread or whatever product I’m purchasing, I will make the decision at the cash register whether I want to pay for that product or not,” she said.
Those who benefit from status quo could be ‘awfully jumpy’
Chaney said he supports the idea of the Office of Performance Evaluations, the Idaho State Tax Commission and the Idaho Department of Commerce conducting a review because he thinks a more technical and granular review would be appropriate.
“A handful of testifying witnesses in front of the (legislative) committee is probably not the nuanced perspective we need,” Chaney said.
On top of a review of existing preferences, Chaney would like to see a better articulated tax policy in general, like what situation warrants a sales or income tax exemption. The tax code as written is a bit of a patchwork system, he said.
He also supports sunset clauses, which Idaho does not have on any of its tax preferences.
“I think sunsetting everything every so many years and extending that sunset is a good way to go, because then you need an affirmative by the Legislature and governor rather than a simple lack of action allowing it to continue,” Chaney said. “I think that’s the only way that you make it meaningful.”
But he knows it could be an uphill battle.
“Any interest or industry that has benefitted from the status quo, as it were, is going to be awfully jumpy and probably wouldn’t like the sunset idea,” he said.Supplemental OPE Report
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