Idaho legislators are considering a major tax reform proposal that would eliminate both the sales tax and the tax credit for groceries, establish a flat tax for upper-income earners, and institute a 7 cent fuel tax increase. The proposal would also increase transportation funding.
Idahoans currently pay a 6 percent sales tax on groceries and receive a grocery tax credit of $100 per person ($120 for seniors) on their state income taxes. The sponsors estimate the state would lose $115 million in fiscal year 2016 by removing the grocery sales tax but that removing the tax credit will increase tax receipts by $141.5 million.
The Idaho Freedom Foundation (IFF) has long criticized the grocery sales tax because it says the tax forces families to wait until tax season to recover the funds from grocery taxes while unnecessarily increasing their food bills. In addition, because people on food stamps are not required to pay sales taxes on their grocery purchases, the tax encourages lower-income families to go on food stamps to lower their food costs. IFF supports the change, arguing elimination of the tax will keep dollars in the state’s economy and help Idaho border towns near Oregon and Washington State, where food is sold without a sales tax.
The second major tax change would be a 7 cent increase in the state’s gasoline and diesel tax, from 25 cents per gallon to 32 cents per gallon. Idaho’s gas tax currently ranks 26th nationally, and the increase could move Idaho as high as 13th, still lower than Washington State but higher than Oregon. Sixty percent of the new revenue would be distributed to the state’s highway account and 40 percent would go to the highway distribution account (payments to local governments). In addition, a one-time $5 million distribution from the state refund account would be added into these accounts at the same ratio. According to The Idaho Press-Tribune, the fuel tax increase would raise $42.5 million in the 2016 fiscal year and $65 million in each year thereafter.
Gas taxes place a relatively large burden on low-income households, and the predicted revenues from the tax are far from assured. In recent years, the rise of fuel-efficient cars has cut into motor fuel tax revenues and disproportionately shifted the burden to low-income drivers, who typically own older, less fuel-efficient vehicles.
The final component of the tax reform plan is the institution of a flat tax for upper-income households. According to the nonpartisan Tax Foundation, Idaho’s personal income tax system currently consists of seven brackets and a top rate of 7.4 percent, the 11th highest rate among states levying an individual income tax. The new plan would tax all those in the top bracket at 6.7 percent. Income tax rates for all other income levels would stay the same.
Reducing income taxes is one of the best ways to improve a state’s economy. Personal and corporate income taxes are generally considered the most destructive levies because economic growth arises from production, innovation, and risk-taking, which are stunted when government takes dollars away from businesses and individuals. IFF argues Idaho’s 7.4 percent marginal income tax rate has long been an impediment to the state’s economic growth and businesses have chosen not to move or expand in Idaho because of it. The Idaho tax reform proposal as a whole takes several steps toward making Idaho a more competitive state.
The following articles provide information about tax reform.
Income, Grocery Tax Proposal Deserves Support
http://idahofreedom.org/income-tax-plan/
The Idaho Freedom Foundation examines the proposed tax reform plan and argues the lowering of the top marginal income tax rate and elimination of the hated grocery tax would be a net positive for Idaho taxpayers: “For too long, Idahoans have suffered under a tax policy that hurts people and holds our economy back. For once, state lawmakers are considering a bill that has the potential to do our state tremendous good. Hopefully, state lawmakers will recognize the proposal for the potential that it holds.”
End the Sales Tax on Groceries
http://idahofreedom.org/grocerytax/
The Idaho Freedom Foundation argues for repeal of the state’s sales tax on groceries: “Eliminating the grocery tax credit and simply making groceries sales tax exempt for everyone would simplify the state’s tax code, stop the state from unnecessarily taking money from people only to give it back later and would very likely cost the state nothing to accomplish. It might even save money, because tax auditors would no longer have to figure out whether Idahoans are improperly applying for the grocery tax credit.”
Ten Principles of State Fiscal Policy
https://heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”
Tip Sheet: State Income Tax Reform
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.
Rich States, Poor States
http://www.alec.org/publications/rich-states-poor-states/
The sixth edition of this publication from the American Legislative Exchange Council and authors Arthur Laffer, Stephen Moore, and Jonathan Williams offers both individual-state and comparative accounts of the negative effects of income taxes.
State Income Taxes and Economic Growth
http://heartland.org/policy-documents/state-income-taxes-and-economic-growth
Barry W. Poulson and Jules Gordon Kaplan explore the impact of tax policy on states’ economic growth through an endogenous growth model. The researchers used regression analysis to estimate the impact of taxes on economic growth in the states from 1964 to 2004. They found higher marginal tax rates inflict significant reduction of economic growth.
Fuel Taxes, Tolls Pay for Only One-Third of Road Spending
https://heartland.org/news-opinion/news/fuel-taxes-tolls-pay-for-only-one-third-of-road-spending?source=policybot
Joseph Henchman of the Tax Foundation examines how states acquire transportation funds and finds highway user taxes and fees make up just 32 percent of state and local spending on roads; financing for the rest of the projects comes out of general revenues, including federal aid.
Paying at the Pump: Gasoline Taxes in America
http://taxfoundation.org/article/paying-pump-gasoline-taxes-america
Jonathan Williams argues gas taxes can be an effective means of funding transportation improvements; in many cases, however, governments exploit the taxes for political reasons, spending them on projects other than their intended uses.
Reconsider the Gas Tax: Paying for What You Get
https://heartland.org/publications-resources/publications/reconsider-the-gas-tax-paying-for-what-you-get?source=policybot
Jeffrey Brown of the University of California-Los Angeles notes the gasoline tax was created as a user fee to raise money for roads, but many politicians and the general public seem to have lost sight of that purpose and lump it together with other unpopular taxes. He argues the challenge for policymakers is to restore the connection in the public’s mind between the tax and the roads it provides and to reassert the gasoline tax’s original rationale as a user fee.
The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates
Examining the historical results of income tax cuts, Daniel Mitchell of The Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy’s growth rate improves and living standards increase.
Institute Brief – No Income Tax: The Key to Economic Growth
http://heartland.org/policy-documents/institute-brief-no-income-tax-key-economic-growth
The Public Interest Institute compares the economic performance of states with no income tax and those with income taxes: “Studies show that states without an income tax have greater economic growth rates than states with an income tax, including greater rates of income growth, population growth, and job growth, and are more attractive to businesses looking for locations to build or expand.”
Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Economy News website at https://heartland.org/topics/economy/index.html, The Heartland Institute’s website at http://heartland.org, and PolicyBot, Heartland’s free online research database, at www.policybot.org.
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Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance.
