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From Governing’s
Then the state decided to press its luck. In 2001, with the budget still showing a surplus of $350 million, the legislature approved a package that included cuts in the individual and corporate income taxes estimated to cost the treasury about $100 million annually. The idea was appealing, but the timing couldn’t have been much worse. To make up for the funds lost through this tax reduction, the state needed an increase in its overall revenue by about 2.5 percent in the following fiscal year. What it got — thanks to a sharp drop in individual income tax receipts and essentially flat sales taxes — was a revenue decrease of 14.5 percent, or $245 million. State leaders were left scrambling for cash, and many wondered why they had given up so many tax dollars in the first place.
Numbers are looking slightly better right now: Revenues are actually tracking a bit ahead of predictions for the rest of the current fiscal year. “We hope we’ve hit bottom and we’re starting to climb,” says Jeff Youtz, the legislative budget director. But even if the state’s economy — largely based on agriculture and technology — holds steady, Idaho will be between $160 million and $200 million short for its next budget. Fortunately, the state’s fiscal problems are more cyclical than structural. The tax system is reasonably balanced among income, sales and property taxes, with property tax stability mitigating the income tax volatility that accompanies economic downturns. “It’s been pretty much the same for a long time, and we are really careful to keep it that way,” says state Representative Dolores Crow, who chairs the House Revenue and Taxation Committee. The one significant structural problem is more a function of geography than it is of tax policy. Idaho is bordered by three neighbor states that don’t charge any sales tax — Montana, Nevada and Oregon — and that makes it very tempting to jump across the line when residents want to buy televisions, computers and other big-ticket items. Nobody knows exactly how much money leaks out of the state in this way, but it’s widely acknowledged to be a significant percentage of potential receipts. Expanding the sales tax base to more services would help to make up for this problem, as would closing some of the other $500 million in tax breaks the state doles out annually. The politically popular investment tax credit alone costs Idaho $30 million a year. Last year, Governor Dirk Kempthorne established a Blue Ribbon Commission to examine the tax structure, as well as other aspects of state government. This group will deliver its recommendations by the end of 2003. Whether they are taken seriously will depend as much on the condition of the economy at that time as it will on the substance of the proposals. For years, Idaho legislators were stingy when it came to funding the tax collection process, even though they knew that scofflaws were costing the state millions of dollars. But, when the Tax Commission guaranteed in 1999 that it could find $13 million more a year in exchange for more resources, the legislature came through. Every year since, the Tax Commission has surpassed its goal, bringing in a high of $21 million in FY2002. All told, says Dewey Hammond, the Tax Commission chairman, an extra $10 million in compliance efforts since 1999 has generated about $70 million in additional revenue. “Bringing non-filers into the system is the real focal point,” Hammond says. Much of the success can be attributed to improved use of technology. Since 1999, Idaho tax collectors have expanded their technological capacity to identify federal filers who were skirting their state liabilities. New software currently being tested will allow auditors to compare additional databases and generate names of potential non-filers. An integrated tax information system, which went online early last year, should also help identify delinquent payments that overlap individual and corporate accounts. In the past few years, the Tax Commission has stepped up its taxpayer education efforts. Face-to-face tax training isn’t easy in a state of 1.3 million people spread over more than 83,000 square miles. But with the extra funds, the state has hired college interns and semi-retired accountants to teach small businesses about their tax responsibilities and the filing process. Just getting the mom-and-pop shops on board brought in improved tax recoveries the first year. You’d think that all of these successes would have demonstrated beyond much doubt the value of investing resources in revenue management. But that underestimates the unfortunate proclivity of state legislatures to forgo long-term benefits in favor of short-term solutions. In the current budget crunch, the hiring of much-needed auditors has been placed on hold. The Senate Appropriations Committee voted down a proposal to add money for this purpose last year. Still, Hammond is hopeful that his staff’s track record will support the awarding of additional funds in the future. “If those positions were filled,” he says, “revenues would be higher.” Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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daho has been lucky. Unlike most states, it was barely touched by the recession of the early 1990s. New companies and the influx of employees they brought with them kept the state’s economy aloft while others foundered. In fact, the state’s revenue grew by an impressive average of 7.5 percent a year over the past 20 years.