— NOTE: This is a corrected version of the original post. It reflects a $27.4 million transfer to the Budget Stabilization Fund in FY 2014 that was omitted from the original post. Thanks to the Legislative Services Office for pointing out that error. This correction reduces the ending balance shown for FY 2014 to $126.9 million. It does not change the estimate of an additional $162 million in General Fund revenue for FY 2013 and FY2014 (assuming May and June 2013 revenues are on target, and the revenue growth rate for FY 2014 remains unchanged at 5.3%), and it does not change the estimate of a $96.1 million positive ongoing funding gap in FY 2014. 

The May 2013 Idaho General Fund Revenue Report opens the possibility Idaho will have $162 million more in revenue on hand (than was expected less than two months ago) when the Legislature convenes in January 2014.

On May 7th, 2013 the Idaho Division of Financial Management (DFM) released April 2013 General Fund revenue results. You can access that report here.

What it shows is overall revenue exceeded the projected amount for the month by $56.4 million (13.2%), and now stands $79.1 million (3.5%) higher than projected for the first ten months of fiscal year 2013. This is a significant departure from the revenue forecasts the FY 2013 and FY 2014 budgets are based on, and it has significant implications for the fiscal condition Idaho’s state budget faces in those two years (and beyond).

FY 2013

Starting with FY 2013, if the months of May 2013 and June 2013 come in exactly on target, FY 2013 will end the year with 5.8% General Fund revenue growth, rather than the 2.7% growth the Executive and Legislative budgets were based on. Assuming there are no unanticipated reversions or rescissions, this will trigger an additional $59.1 million transfer to the Budget Stabilization Fund (per House Bill 345) in FY 2013, a $20 million higher FY 2013 ending balance, and a $27.4 million transfer to the Budget Stabilization Fund in FY 2014 (per Idaho Code 57-814).

These changes can be illustrated using a revised version of the table on page A-26 of the 2013 Legislative Session Budget Activities Summary published by DFM. Instead of comparing the ‘Revised Executive Budget’ and the ‘Legislative Appropriation’ columns, this version compares the ‘Legislative Appropriation’ column (i.e., as of the end of the 2013 Legislative session) and a new ‘Legislative Appropriation With General Fund Revenue Through April 2013′ column. Here’s the revised table:

Because of House Bill 345, the extra $79.1 million in FY 2013 General Fund revenue goes to two places: up to the first $20.0 million of ending balance above the amount provided in the Legislative Appropriation stays in the General Fund and simply increases the ending balance. Any additional amount above $20.0 million is transfered to the Budget Stabilization Fund, in this case $59.1 million.

FY 2014

Shifting to FY 2014, if the forecasted General Fund revenue growth rate of 5.3% that was adopted by both the Executive and Legislative budgets remains unchanged, the resulting amount of General Fund revenue forecast for FY 2014 is $2,882.4 million – an $83.3 million increase over the revenue number that was used in the FY 2014 budget. Also, because FY 2013 General Fund revenue growth is now expected to grow by 5.8%, that triggers a $27.4 million transfer to the Budget Stabilization Fund in FY 2014. When combined with the $20 million higher beginning balance (from FY 2013), this brings the projected FY 2014 ending balance up from $51.0 million to $126.9 million.

These changes can be illustrated using a revised version of the table on page A-30 of the 2013 Legislative Session Budget Activities Summary published by DFM. As above, instead of comparing the ‘Revised Executive Budget’ and the ‘Legislative Appropriation’ columns, this version compare’s the ‘Legislative Appropriation’ column and a new ‘Legislative Appropriation With General Fund Revenue Through April’ column. Here’s the revised table:

The key changes are a higher beginning balance (up $20 million), higher FY 2014 General Fund revenue (up $83.2 million), a $27.4 million transfer to the Budget Stabilization Fund, and a higher ending balance (up $75.9 million). Not shown, because it was transfered to the Budget Stabilization Fund in FY 2013, is the $59.1 million that would have rolled over into the FY 2014 beginning balance were it not for House Bill 345.

The most significant aspect of the April revenue result is its impact on future budget decisions. This can be seen by looking at ongoing revenues versus ongoing expenditures. At the end of the 2013 Legislative session ongoing FY 2014 revenue was expected to be $2,775.3 million: the $2,799.1 base revenue forecast minus $23.8 million in ongoing revenue adjustments (see 2013 Legislative Session Budget Activities Summary page A-17). Most of the revenue adjustments ($20 million) were to pay for new business personal property tax exemptions. Ongoing appropriations were set at $2,762.4 million (see 2013 Legislative Session Budget Activities Summary page A-24), yielding a positive funding gap of $12.9 million. If the base revenue figure increases by an additional $83.2 million, the funding gap grows to $96.1 million. This is an indication of the amount of “surplus” ongoing revenue that could be in play when the legislature returns for the 2014 session in about 8 months.

Conclusion

The April revenue results have profound implications for fiscal decisions that will be made in the next legislative session. While the numbers will change (for example, we don’t yet know actual May and June revenue numbers, and we don’t know what revised forecast growth rate will be used for FY 2014), it is clear there will be substantially more revenue available than policymakers thought less than two months ago. How this additional revenue is utilized will depend on Idaho’s public policy priorities.

A proposal (RS22034) is circulating that would enact the much anticipated personal property tax exemption. In a nutshell, this proposal would be devastating to the funding of Idaho’s public schools. Other state programs (colleges and universities, health and human services, public safety, etc.) would be adversely impacted, but none to the degree of public schools.

RS22034 would completely exempt all business personal property from the property tax, yielding a property tax revenue loss estimated by the Idaho Tax Commission at $140.9 million in FY 2012 dollars (after full phase-in over 6 years). Existing property tax levies across all taxing districts (with the exception of urban renewal districts¹) would be eligible for a combination of a) replacement funding from the state’s General Fund and b) property tax levy rate increases (i.e., a tax shift to real property).

The property tax levy rate increases (so-called “3% flooring”) would cover the loss of the first 3% of the total property tax in each district, and is estimated to shift up to $41.2 million of property taxes away from personal property, and on to real property. This shift would apply to all property tax districts (except urban renewal districts), and would result in higher property taxes on homeowners, farmers, timberland, and businesses with relatively small shares of personal property value.

Property tax replacement funding would apply to revenue loss exceeding 3% of a district’s total property tax, and is estimated to cost the state’s General Fund $90.5 million² upon full phase-in. This replacement funding applies only to levies in place as of 2012, is fixed in perpetuity at the 2012 level (except in the case of voter approved levies), and is not available for levies enacted after 2012. In particular, any voter approved levies (school supplemental levies, bond levies, plant facility levies, etc.) that expire during or after the phase-in period lose their replacement funding, and any voter approved levies that are enacted in 2013 or beyond (school supplemental levies, bond levies, plant facility levies, etc.) are not eligible for replacement funding. This means that most non-school district levies (cities, counties, highway districts, etc.) are afforded perpetual replacement, while most school district levies (supplemental, bond, plant facility, etc.) will roll off and their replacement funding will be extinguished³.

Thus the design of RS22034 holds non-school taxing districts relatively harmless (in the near-term) by shifting up to $41.2 million of property tax from personal to real property, and removing up to $90.5 million from the state General Fund (that will not be available to fund education, health care, public safety, and other critical services provided by state programs) to replace revenue lost from the personal property exemption.

Public schools end up the big loser in what amounts to a three-pronged hit:

1)   $90.5 million is removed from the state General Fund, half of which is used to fund public schools. Idaho’s public school funding effort has declined from 4.4% of Idaho personal income in the 1980’s and 1990’s to just 3.4% of Idaho personal income in the 2014 Executive Budget. That’s a 23% decline in a decade and a half, and represents a funding reduction of half a billion dollars. Losing another $90 million of General Fund revenue to fund tax cuts will virtually guarantee continued decline in Idaho’s public school funding effort.

2)   Up to $41.2 million of additional property tax levies are shifted to real property, and will have a high probability of making voters less inclined to support voter approved levies such as school supplemental, school bond, and school plant facility levies. The 2006 swap of increased sales tax for reduced school property tax levies was supposed to shift the responsibility for paying for school operating expenses off the property tax and on to state appropriations, but the reality is Idaho’s school districts have been increasingly driven to raising property taxes to fund operating expenses. In the current school year (2012-13) voter-approved supplemental levies increased by 20%. Almost three-quarters of Idaho’s 115 public school districts now have voter approved supplemental levies for operating purposes. Most will expire in one to two years.

3)   No replacement funding for voter approved levies enacted after 2012 will mean schools are on their own with the reduced property tax base. Property tax base losses will range from less than 2% to over 50% across Idaho’s public school districts (school district detail is shown in the attached Table 6, taken from Tax Commission report EPB0703_01-15-2013). When these districts go to their voters for property tax levies they will have to ask for higher levy rates to raise the same amount of revenue. For example, if a district losses 20% of its property tax base to the personal property tax exemption, it will have to ask for a levy rate that is 25% higher to raise the same amount of revenue. If the property tax base loss is 40%, the levy to raise the same amount of revenue would need to be 67% higher. The current wide disparities in property tax capacity across Idaho’s school districts will be exacerbated.

In summary, RS22034 is notable for the adverse impact it will have on Idaho’s ability to provide funds for public education. It does protect non-school local government from much of the revenue losses associated with full exemption of personal property taxes, but it does so with a significant amount of revenue diverted from the General Fund, and without any apparent analysis of the impact that diversion of funds will have on state programs.

¹ Urban renewal districts are not eligible for replacement funds, but they can receive special shift levies if they can prove to the Idaho Tax Commission they are unable to make bond payments under the exemption of business personal property. Their shift levies would be applied only to the remaining increment values within the urban renewal district.

² This figure does not take into account voter approved levies that lose their replacement funding when they expire.

³ As of the 2011-12 school year, school district property tax levies totaled $393.0 million. $139.6 million was in supplemental M&O levies, $111.0 was in bond levies, and $39.4 million was in plant facility levies. In the 2012-13 school year supplemental levies increased to $169 million.

For a PDF version of this document, click here.

Operating property (utilities, railroads, pipelines) impacts are provided on a statewide basis, with the top 10 companies (by tax exemption) listed separately. Locally assessed company impacts are shown by county, with the top 10 companies (by tax exemption) listed separately (for the full exemption scenario).

One of the key findings of this report is the high degree of concentration associated with the full exemption option. Within the operating property category, the top 10 companies account for 82.5% of the total impact (statewide basis). Within the locally assessed category the top ten companies in each county account for a low of 25.6% (Kootenai County) to a high of 92.5% (Custer County). In 26 Idaho counties the top ten companies account for over half the countywide tax reduction in the full exemption scenario.

The two tables shown for each of Idaho’s 44 counties show, respectively, the impact in terms of a) property tax reduction under a full exemption scenario (IACI’s proposal), and b) property tax reduction under immediate implementation of 2008′s HB599a, the $100,000 exemption for every locally assessed company. The $100k exemption option is currently in statute but waiting to be triggered (under current law General Fund revenue must reach $3.053 billion before the $100k exemption takes effect).

Here’s the link to the report in pdf format:

Personal Property Taxpayer Impacts

Election Over, Now It’s Time To Focus On Resources

Now that the election is behind us, we have an answer from Idaho’s voters on the referenda related to the Students Come First laws (or Luna Laws, depending on your perspective). Both sides in this contentious campaign have now agreed on the need to work toward improving the quality of public education in Idaho. That’s encouraging, not because Idaho’s public schools are broken, but because it’s always going to be the case that there will be room for improvement. Hopefully we will see a renewed commitment to collaboration among the various stakeholders in this most important of our state’s responsibilities.

Two critically important issues need to be factored into this discussion: how much of our financial resources are we devoting to the education of our children, and how are we allocating those resources among those children?

To answer the first question, Idaho is spending less and less on public education. After decades of stable funding at roughly 4.4% of Idaho’s personal income, since fiscal year 2000 Idaho has been devoting progressively fewer resources to its public schools – down to just 3.5% of Idaho’s personal income in the fiscal year 2013 budget. That’s a 20% decline in our effort level, or the share of our resources we devote to public schools. It’s also a factor in Idaho’s decline from 48th among states (and D.C.) in spending per student in fiscal year 2000 to 50th in spending per student in fiscal year 2010.

To answer the second question, Idaho’s spending on public education is becoming more unequal. In 2006 the Idaho Legislature changed the funding sources for public schools by shifting away from the property tax and to the General Fund (i.e., income and sales taxes). An equalized property tax levy of 0.3% was eliminated, and the Idaho sales tax was increased from 5% to 6% to bolster the General Fund. In theory, the state General Fund would now cover the entire cost of a “general, uniform and thorough system of public, free common schools.” Reality is turning out to be much different.

Since the 2006 funding swap, Idaho’s public school districts have dramatically increased their reliance on property taxes to supplement General Fund dollars. In just the past year the use of voter-approved supplemental levies by school districts has increased from $140 million to $169 million, a 20% increase. The problem is school property taxes are now entirely unequalized, meaning that each school district’s property tax capacity is all it has to work with. Property tax capacity per student varies widely across Idaho’s school districts.

At the extremes, in fiscal year 2010 property values varied from $4.696 million per student in the McCall-Donnelly school district, to just $153,437 per student in the Snake River school district. That’s a 30:1 variation in the property tax capacity between these two districts. A levy of 0.1% ($100 per $100,000 of taxable value) would raise $4,696 per student in the McCall-Donnelly school district, while the exact same levy would raise just $153 per student in the Snake River school district.

Small wonder, then, to find that Snake River had no property tax levy. It got by with strictly its state allocation of just $5,362 per student. McCall-Donnelly did have a property tax levy (of 0.142%) that produced an additional $6,657 per student, giving it a total of $13,208 to spend per student.

If we look at Idaho’s six largest school districts the variations are not as dramatic, but no less meaningful. Coeur d’Alene had $889,772 in taxable value per student versus just $261,037 per student in Pocatello – that’s more than a 3:1 ratio in property tax capacity. Coeur d’Alene actually levied 0.092% and raised $820 per student from the property tax. Pocatello actually levied at over twice the rate of Coeur d’Alene (0.199%), but raised less than two-thirds the revenue ($519 per student) from the property tax.

The widest funding disparity among Idaho’s six largest school districts in fiscal year 2010 comes more from the willingness of the district’s patrons to tax themselves. Boise had $713,400 in taxable value per student versus $284,477 in Nampa. Boise levied at a rate of 0.428%, while Nampa levied only 0.039%. Boise had $3,053 in additional funds per student from the property tax (over and above the $5,126 it got from the state), while Nampa had only $110 in additional funds per student from the property tax (over and above the $4,924 it got from the state).

These are just a few examples of the wide variations in resources available to Idaho school children depending on where they live. These examples are not exceptions, they are the rule. The details change from year to year, but the disparities don’t. They remain enormous.

So ask yourself this: If the Idaho Constitution places a duty on the legislature “…to establish and maintain a general, uniform and thorough system of public, free common schools” (and it does, in Article 9, Section 1), how’s that going? My answer is not so well.

Michael Ferguson, Director
Idaho Center for Fiscal Policy

FY 2012

FY 2012 General Fund actual revenue was $35.5 million higher than the DFM (Division of Financial Management) forecast released in January 2012, and $22.4 million higher than the Legislative revenue forecast used in the 2012 Legislative Session. The difference is due to three adjustments to General Fund revenue (HB417, HB661, and HB703) that were reflected in LSO’s end of session budget document (the Legislative Fiscal Report), but were not incorporated into DFM’s FY 2012 post-session revenue monitoring documents (the Idaho General Fund Revenue Report).

The following table summarizes the FY 2012 General Fund revenue results (figures are in millions of dollars):

FY 2012 net General Fund transfers as of the end of session were expected to be $9.8 million in, but ended the year actually $13.5 million out. This difference of negative $23.3 million was primarily due to a $23.6 million transfer out of the General Fund to the Budget Stabilization Fund. The remaining $0.3 million difference in net transfers into the General Fund were comprised of cancelled prior year encumbrances and various other transfers.FY 2012 actual General Fund transfers and expenditures also varied from the amounts expected at the close of the 2012 Legislative session. These, when combined with the actual revenue results, yielded a different FY 2012 General Fund ending balance (and corresponding FY 2013 beginning balance) than was expected at the end of the 2012 Legislative session.

FY 2012 actual General Fund expenditures were $4.3 million lower than the appropriated amount as of the end of the 2012 Legislative session. This was primarily the result of various agency year-end reversions of unexpended FY 2012 General Fund appropriations.

The net effect of the revenue, transfer, and expenditure variances from the 2012 Legislative session budget for FY 2012 is a $3.0 million larger FY 2012 ending balance (and corresponding FY 2013 beginning balance).

The following table summarizes the FY 2012 General Fund budget results (figures are in millions of dollars):

FY 2013

Due primarily to stronger than anticipated General Fund revenue growth in FY 2012, the FY 2013 General Fund budget year opened with a beginning balance of $99.6 million. That was $3.0 million higher than was anticipated at the end of the 2012 Legislative session. A number of other changes have occurred in the FY 2013 General Fund budget as a result of a) revised revenue forecast (released by DFM in August 2012) and b) updated transfer estimates.

DFM released its new General Fund revenue forecast for FY 2013 in August 2012. At $2,670.7 million it is $3.9 million higher than the original Executive revenue forecast released in January 2012 adjusted for 2012 Legislative session law changes ($2,700.3 – $33.5 = $2,666.8). It is also $36.6 million higher than the adjusted Legislative forecast used during the 2012 Legislative session for FY 2013 budgeting purposes ($2,667.6 – $33.5 = $2,634.1). There were almost a dozen law changes that impacted FY 2013 General Fund revenue, but the bulk of the change in the revenue stream is due to HB563, an income tax rate cut that reduces FY 2013 revenue by an estimated $35.7 million. The other ten bills with revenue impacts yielded a combined net increase in FY 2013 General Fund revenue of $2.2 million.

General Fund transfers expected in FY 2013 have changed from $24.2 million out to $33.0 million out. This $8.8 million increase in transfers out consists of $2.4 million associated with an increase in the estimated Budget Stabilization Fund transfer (from $23.5 million to $25.9 million) and $6.4 million associated with an increase in estimated deficiency warrants (from $0 to $6.4 million). Deficiency warrants are transfers made to pay for unexpected expenses such as firefighting costs, agricultural pest eradication, etc.

Estimated FY 2013 General Fund expenditures remain unchanged at $2,702.1 million. At this stage there are no identified expenditure adjustment (i.e., supplemental appropriation) needs for FY 2013.

Combined, the changes to the FY 2013 beginning balance, revenues, and transfers yield an estimated General Fund ending balance that is $35.2 million. That is $30.7 million higher than the $4.5 million FY 2013 ending balance expected as of the end of the 2012 Legislative session.

The following table summarizes the FY 2013 General Fund budget as of August 2012 (figures are in millions of dollars):

As a final note, the FY 2013 General Fund appropriation consists of $2,694.7 million in ongoing spending and $7.4 million in one-time spending. The FY 2013 revenue forecast consists of $2,665.7 million in ongoing revenue and $5.0 million of one-time revenue. This yields a current short-term structural imbalance (i.e., deficit) in the FY 2013 General Fund budget of $29.0 million ($2,665.7 million in ongoing revenue less $2,694.7 million in ongoing appropriations).

To download a PDF version of this post, click here

Corporate income tax rate reduction

Idaho’s corporate income tax rate is reduced from 7.6% to 7.4%. This rate reduction is estimated to reduce Idaho General Fund revenue by $4.8 million in FY 2013, $5.0 million in FY 2014, $5.1 million in FY 2015, $5.3 million in FY 2016, and $5.4 million in FY 2017.

For context, Idaho’s baseline corporate income tax forecast for FY 2013 (before considering the impact of HB 563) is $182.4 million. HB 563 represents a 2.6% reduction in the Idaho corporate income tax.

Because of the interaction between state and federal income taxes, a portion of the reduction in Idaho corporate income tax will be offset by increased federal income tax. Federal income tax rates vary from 15% to 35%, depending on the corporation’s taxable income. A corporation facing a 35% federal rate would lose 35% of its Idaho tax saving to higher federal income tax. A corporation facing a 15% federal rate would lose 15% of its Idaho tax saving to higher federal income tax.

Individual income tax rate reduction

Idaho’s individual income tax has its top income tax bracket of 7.8% reduced to 7.4%. This rate reduction is estimated to reduce Idaho General Fund revenue by $30.9 million in FY 2013, $32.6 million in FY 2014, $34.1 million in FY 2015, $35.4 million in FY 2016, and $36.8 million in FY2017.

For context, Idaho’s baseline individual income tax forecast for FY 2013 (before considering the impact of HB 563) is $1,295.0 million. HB 563 represents a 2.4% reduction in the Idaho individual income tax.

Unlike the Idaho corporate income tax, where every corporation receives the same 0.2 percentage point reduction, the Idaho individual income tax rate reduction only impacts taxpayers in the top income bracket. Idaho indexes its income tax brackets for inflation, so the income levels associated with the brackets change over time. For tax year 2011 the top income tax bracket (7.8%) applied to taxable income over $26,760 in the case of single taxpayers and married taxpayers filing separately, and to taxable income over $53,520 for single head-of-household taxpayers and married taxpayers filing jointly. The Idaho Tax Commission has not issued the taxable income brackets for tax year 2012.

Taxable income does not represent a taxpayer’s actual gross income, but rather gross income less deductions and personal exemptions. In tax year 2011 the personal exemption amount was $3,700. The standard deduction varied depending on filing status, $5,800 for single taxpayers, $8,500 for single head of household, and $11,600 for married filing jointly. Idaho routinely adopts the federal amounts for personal exemptions and standard deductions. For a married couple with two children claiming the standard deduction the top bracket starting taxable income level of $53,520 corresponds to gross income of $79,920. If a taxpayer claims itemized deductions the taxable income brackets would correspond to a higher level of gross income.

Although the overall reduction in the individual income tax, at 2.4%, is smaller than the 2.6% overall reduction in the corporate income tax, it is not spread uniformly. It is concentrated at upper income levels. Specifically, any single taxpayer with gross income below $36,260 and any married (filing jointly) taxpayer with gross income below $72,520 receives no tax reduction. Taxpayers with more dependents (and therefore more personal exemptions) would have higher gross income before receiving an impact from HB 563. In practice this means over 80% of Idaho individual income taxpayers receive no tax reduction from HB 563. According to the fiscal analysis by DFM, just 17% of Idaho individual income taxpayers will receive any tax reduction from HB 563.

Although no distributional analysis has been released by the State of Idaho, it is relatively simple to illustrate the disproportionate impact of HB 563 via the following two tables:

These tables show that the highest percentage reductions (up to a 5.1% reduction in Idaho individual income tax) are reserved for the highest income Idaho taxpayers. A family of four with gross income at or below $79,920 receives no tax reduction, at $100,000 in gross income the reduction is 1.6%, and at $1,000,000 in gross income the reduction is 4.9%. And yes, there are Idaho taxpayers with gross income above $10,000,000 who will enjoy the maximum percentage savings of 5.1%.

The situation is similar for single taxpayers, with the difference being that the minimum gross income for any tax savings is lower ($36,260), and the percentage reduction in Idaho individual income tax ramps up faster (1.6% at gross income of $46,260 and 3.8% at gross income of $100,000). This is due to the smaller standard deduction and fewer personal exemptions.

There is also an interaction between Idaho’s state individual income tax and the federal individual income tax, but it is complicated by the federal alternative minimum tax (AMT). Idaho taxpayers who itemize their deductions may see a portion of their savings from HB 563 offset by higher federal income tax (due to the lower itemized deduction associated with the lower Idaho income tax), but this is cancelled by the AMT as the taxpayer’s income increases since the AMT does not allow a deduction for state income taxes.

The net effect of the AMT is an exemption phase-out (for married filing jointly) that starts at about $150,000 in gross income and is complete at about $440,000 in gross income. What this means is that Idaho itemizing taxpayers with income below $440,000 will lose some of their Idaho tax savings associated with HB563 to higher federal income tax. Idaho itemizing taxpayers with income above $440,000 will not have an increased federal income tax bill as a result of savings associated with HB 563.

Eliminating Idaho’s top individual income tax bracket will make Idaho’s income tax less progressive and Idaho’s overall tax structure more regressive. The following two tables illustrate Idaho’s tax incidence for the major taxes across income categories, before and after considering the impacts of HB 563:

These tables show the high degree of regressivity of Idaho sales and excise taxes, the more moderate regressivity of Idaho property taxes, and the progressivity of Idaho income taxes. Idaho’s overall tax incidence (including the federal offset due to the partial deductibility of state taxes) is moderately regressive. The changes embodied in HB 563 will make Idaho’s income tax less progressive, and overall taxes more regressive.

There is no change in the share of income paid in taxes for the bottom 80% of Idaho families (the second 20% from the bottom remain at 8.7%), and within the top 20% the largest decreases occur at the highest income levels (the top 1% of Idaho families see a decrease from 6.3% of their income paid in taxes to 6.1%). Before HB 563 families in the second 20% from the bottom paid 38% more of their income in taxes than families in the top 1% of the income distribution. After HB 563 families in the second 20% from the bottom will pay 43% more of their income in taxes than families in the top 1% of the income distribution.

Assessment

HB 563 was pitched as a way of making Idaho more competitive in attracting jobs and economic growth to the state by reducing the top income tax rates. There is no credible evidence to support this claim. If anything, the evidence points in the other direction – on the whole, higher tax rate states do as well or better than low tax rate states. Regardless, it will be impossible to isolate the impact of HB 563 on Idaho’s future economic progress (or lack thereof). There are simply too many factors all in play to make such a determination.

HB 563 will become another datapoint available to future researchers examining questions of state tax rates and state economic performance. Quite a few states are making adjustments to their tax structures in the wake of the Great Recession, with movements occurring in both directions (some increasing taxes, some decreasing taxes). Given the lags involved in going from law changes to economic responses to analysis of outcomes, it will probably be a decade or more before this round of policy actions appears in credible research studies and reports.

It is possible to assess HB 563 in terms of how it affects Idaho’s tax and revenue structure from a fiscal policy standpoint. The Idaho Center for Fiscal Policy (ICFP) uses a set of principles derived from the National Conference of State Legislature’s “Principles of a High-Quality Revenue System” (NCSL Principles) to assess tax and revenue related issues. ICFP has condensed the NCSL Principles into four broad categories: efficiency, equity, adequacy, and stability.

HB 563 does not have a material impact in terms of efficiency or stability of Idaho’s tax and revenue structure. It does impact the equity and adequacy of Idaho’s tax and revenue structure. As previously shown, HB 563 makes Idaho’s income tax less progressive and Idaho’s overall tax structure more regressive. This makes Idaho’s tax structure less equitable.

HB 563 also impacts the adequacy of Idaho’s tax and revenue structure. It removes an estimated $35.7 million in General Fund revenue in FY 2013, and the impact grows over time as Idaho taxable income increases. Idaho has made significant cuts to a wide array of public services in recent years, ranging from education to public health to general government.

As examples, the past two fiscal years (FY 2011 and FY 2012) have seen the first ever cuts in overall K-12 education funding since WWII, higher education General Fund levels in FY 2012 were below the level of funding in FY 2001, almost $35 million in General Fund cuts to Medicaid were made in FY 2012 (yielding almost $100 million in total cuts when reductions in federal matching funds are factored in), and 4 years after overall General Fund cuts began in FY 2009 the FY 2013 General Fund budget remains over 5% below the FY 2008 level.

It is widely acknowledged that Idaho had a relatively frugal spending policy prior to the Great Recession, and the cuts that were made in response to the revenue collapse were characterized as necessary, regrettable, and temporary. HB 563, by cutting income taxes without providing any revenue offset, ensures that a portion of the spending cuts will not be reversed. It reduces the adequacy of Idaho’s revenue stream relative to the public services Idaho has historically provided.

PDF of this post:  HB 563 – IMPACT AND ASSESSMENT

Let’s examine this more closely.

When the U.S. and global economies were struck by the Great Recession, Idaho policy makers had already embarked on cutting our taxes for nearly a decade. Although a late boom in Idaho’s housing sector masked the weakness that was forming in Idaho’s economy, the onslaught of the recession in late 2007 laid bare Idaho’s mounting weaknesses.

Serendipity had provided Idaho with large budget surpluses and cash reserves going into the downturn, but the economic hits our state took in the Great Recession were gigantic. In 2010, unwilling to make temporary adjustments to the revenue structure, Idaho’s policy makers made what were reported to be the deepest cuts in public sector jobs in the nation.

In 2011, with a nascent recovery underway, the Governor and legislature ignored the advice of economists both inside and outside state government, and cut some more. Now, in 2012, with surplus funds once again mounting, the call is for more tax cuts. Big tax cuts.

Offered under the promise they will bring desperately needed economic opportunity to hurting Idahoans, tax cuts are a dubious policy choice in good times. They are a disastrous policy choice when times are bad.

Here’s why: there is no reliable evidence that state-level tax cuts boost the economy. Lots of anecdotal evidence is bandied about, but serious studies are inconclusive at best, and show the opposite at worst. Idaho’s own recent tax history provides an extremely sobering lesson for anyone who thinks tax cuts are the answer to all our economic problems.

In the decade of the 80’s Idaho had difficulty meeting its spending needs (a severe recession in the early 80’s hit Idaho particularly hard) but instead of embarking on an all-cuts fiscal strategy, Idaho policy makers chose to make increased revenue part of the mix. They did this by increasing the corporate income tax from 6.5% to 8%, the individual income tax from a top rate of 7.5% to 8.2%, and the sales tax from 3% to 5%. These increases didn’t happen all at once, they were spread out from 1983 to 1987. They were painful to implement, but what followed is nothing short of amazing.

In late 1987 Idaho’s economy recovered from a nearly decade-long slump and put in motion economic performance year after year that was spectacular. This Idaho boom period powered through the nation’s 1990-91 recession as though it wasn’t happening, and only ended with the nation’s 2001 recession. Even then, although Idaho’s economy dipped, it was minor in comparison to the nation and most other states.

The tax increases that were put in place during the 80’s were left intact during the entire boom decade of the 90’s. Then in the following decade the process of reducing Idaho’s taxes began. In 2000 Idaho’s individual income tax bracket rates were each lowered by 0.1 percentage point, and the brackets themselves began being indexed for inflation each year. In 2001 the individual income tax bracket rates were each lowered by another 0.3 percentage points, thereby yielding a top rate of 7.8% that exists to this day. Also in 2001, the corporate income tax rate was cut from 8% to 7.6%, where it stands today.

This tax cutting was interrupted briefly with a temporary sales tax rate increase from 5% to 6% that was in effect from May 2003 to June 2005. This temporary increase came out of Idaho’s longest legislative session ever, and was pressed by a governor who famously said in his budget message “I will not preside over the dismantling of state government.” Governor Dirk Kempthorne initially pressed for a 1.5 cent increase in the sales tax for three years, but ended up settling for 1 cent for two years. In view of the remarkable economic boom that occurred in Idaho following Kempthorne’s sales tax increase, 1 cent for two years turned out to be enough, and it even put Idaho’s fiscal reserves in very good shape for the financial meltdown and mega-recession that were soon to come.

But before the downturn hit, Idaho policy makers returned to cutting taxes. Next was the property tax’s turn. In August 2006 the Idaho legislature held a special session that passed a single bill. House Bill 1 provided $50 million in net tax relief by cutting $260 million from the property tax and partially replacing it with a $210 million increase in the sales tax, from 5% to 6%.

In 2008 Idaho cut some more, this time by increasing the grocery tax credit from $20 to $100. Although this is being phased-in and won’t be complete until 2015, the cost when fully implemented (in 2008 dollars) is estimated to be $122.2 million.

Finally, also in 2008, Idaho policy makers enacted legislation that will exempt each business’ first $100,000 of personal property from the property tax. This applies in each county a business has personal property, but it has a trigger that needs to be met before it takes effect. It currently looks like it will be triggered in about 2015. At the time it was passed, this measure had an estimated impact of $17.4 million. Its actual impact when it finally takes effect is what the state will be required to pay to local governments to reimburse them for their lost property taxes.

Taken together, the tax cuts that have already been enacted since 2000 will have a total annual fiscal impact that approaches a quarter of a billion dollars once they are all fully implemented. So how’s it working for the economy? The simple answer is not so well. There are a great many ways to describe an economy’s performance, but a careful examination of just this one chart reveals a rather compelling story:

Source: U.S. Bureau of Labor Statistics and Idaho Department of Labor

For almost two decades after big tax increases enacted from 1983 to 1987, Idaho’s employment growth was spectacular. More recently, after almost a decade of serious tax cutting starting in 2000, Idaho’s economy looks like it went into the ditch.

How can this be? The simple truth is taxes pay for public services. Public services are consumed by businesses and households, and the vast majority are things (like education and transportation systems) that make people and businesses more productive. When we cut taxes we cut public services, and we make that part of our economy less productive. This is a good bargain only if the resources left in private hands (the reduced taxes) are more productive in the economy than the resources taken out of public services. The evidence does not support such a bargain.

So when someone tells you tax cuts are what we need to fix our sick economy, ask them: Where’s the proof? Good luck finding it…

PDF of this post:  Idaho’s Economic Challenges

By convention, the revenue forecast is based on existing law and represents the amount the state’s economists believe will actually be collected and deposited into the General Fund. The key numbers in the recently released FY 2013 Executive Budget are $2.553 billion in FY 2012 (4.4% growth over FY 2011 actual revenue), and $2.700 billion in FY 2013 (5.8% growth over FY 2012 projected revenue).

These revenue numbers (at the time they are produced, in this case early December 2011) are the best estimate of what will actually be deposited in FY 2012 and FY 2013. These revenue numbers are usually the only numbers legislators, the media, and the public focus on when it comes to the revenue side of the budget.

There is much more information behind these revenue numbers that largely goes unnoticed. Some of that information would be very beneficial if it were taken into consideration when the state’s budget policies (i.e., spending priorities) are established.

Footnote 1 on page A-18 of the FY 2013 Executive Budget contains absolutely crucial information for understanding the General Fund revenue forecast. It breaks the revenue forecast down into three key components: the ongoing amount of revenue each fiscal year, the one-time amount of revenue each fiscal year, and the actual amount of revenue each fiscal year (in the footnote this last component is called Base General Fund revenue).

These three components of the General Fund revenue forecast are linked by the following identity: ongoing revenue plus one-time revenue equals actual revenue. Please note that in this case actual revenue does not mean historical actuals, it means the amount of revenue that is forecasted to actually be collected. It is the number that is highlighted as the revenue forecast in the budget documents, and it is often considered the limiting factor on how much the state can afford to spend in a particular fiscal year.

Given that the three components of the revenue forecast are linked by an identity, it only requires that two components be estimated – the third then comes out of the identity. That third component is known as a residual. In revenue forecasting the two components that are estimated are ongoing revenue and actual revenue. One-time revenue is the residual. Here’s the restated identity: actual revenue minus ongoing revenue equals one-time revenue.

In essence, the state’s economists are producing two revenue forecasts: a forecast of actual revenue, and a forecast of ongoing revenue. The forecast of actual revenue is produced using very detailed structural models of the U.S. and Idaho economies, and detailed components of the General Fund revenue stream. This forecast is intended to capture the cyclical dynamics of the economy and the revenue stream, i.e. the full implications of booms and busts.

The forecast of ongoing revenue is produced using a very simple model that relates total Idaho General Fund revenue to a very broad measure of Idaho’s economy – smoothed Idaho Personal Income. This forecast is intended to ignore the cyclical dynamics of the economy and revenue stream, and capture the long-term relationship between the size of Idaho’s economy and the amount of General Fund revenue the Idaho economy produces. Think of this forecast as the amount of revenue Idaho would collect if there were no business cycles.

Although the one-time revenue forecast is not produced directly, it is a direct measure of the amount that actual revenue (historical or forecasted) is above or below the ongoing revenue stream. In boom times the one-time revenue amount will be positive, and in bust times the one-time revenue amount will be negative. As a general rule, the revenue cycle tends to lag the economic cycle, so when the economy is in the early stages of a cyclical turning point the revenue stream will take some time to reach its own turning point.

Here is the current Idaho ongoing, one-time, and actual (Base) General Fund revenue forecasts from page A-18 of the FY 2013 Executive Budget:

There’s a lot going on in this table, and it makes a great deal of difference in how the revenue forecast is interpreted. Kudos to the Governor for including this important information in his budget documents.

One observation is the difference in the annual rate of change in ongoing versus actual revenue. Actual revenue is projected to grow 4.4% in FY 2012 and 5.8% in FY 2013, but ongoing revenue is projected to grow only 3.1% in FY 2012 then 2.0% in FY 2013. What gives?

Ongoing revenue growth reflects the overall weakness in the national and state economic recovery. In fact, although ongoing revenue growth is positive over the entire forecast horizon, ongoing revenue growth is projected to slow in FY 2013 before gradually strengthening in FY 2014 through FY 2016. This is a reflection of relatively modest gains projected for Idaho Personal Income over the immediate years ahead.

Actual revenue growth is stronger than ongoing revenue growth for one simple reason: the magnitude of the cyclical bust is diminishing. This is a process whereby the magnitude of the negative one-time revenue shrinks as the actual revenue stream recovers to its more normal relationship to the broader economy. As housing, business investment, consumer spending, and other cyclical components of the economy that were particularly hard hit by the Great Recession return to more normal levels, so does the level of actual revenue.

It’s not in the table above (or the FY 2013 Executive Budget), but the nadir of one-time revenue in the Great Recession occurred in FY 2010 at just over negative $400 million. As the recovery from that trough continues actual revenue growth will exceed ongoing revenue growth. That’s exactly what the table above quantifies.

An important aspect of this more detailed look at the Executive revenue forecast is things may not always be as they seem. When the Economic Outlook and Revenue Assessment Committee (EORAC) members made their individual projections of actual General Fund revenue for FY 2012 and FY 2013, they did not have the benefit of knowing the numbers and analysis produced by the Governor’s budget office. They did not know the ongoing revenue forecast for FY 2013 has a lower growth rate than FY 2012.

Concerns that 5.8% growth projected for actual FY 2013 revenue is too strong may be tempered when looked at with a full understanding of how the revenue forecast is produced. Of the $147.6 million in revenue increase from FY 2012 to FY 2013, only $56.2 million is due to strengthening of Idaho’s economy (the ongoing component). The other $91.4 million of revenue gain is due to the gradual return of revenue to more normal levels, a process that has been underway since FY 2010 and is expected to continue until FY 2016.

A second observation related to the distinction between ongoing and one-time revenue is what it says about spending policy. When one-time revenue is positive, it means actual revenue exceeds ongoing revenue. That’s a good indication ongoing spending should be held in check, so that unsustainable levels of spending are avoided. The magnitude of the one-time component of the revenue stream is a quantitative measure of how much ongoing spending should be either held back (say, deposited in reserve funds) or used for one-time purposes (say, building replacement or other forms of capital investment).

When one-time revenue is negative, as it is in FY 2012 and FY 2013, it means that actual revenue falls short of ongoing revenue. This is when one-time funds, if available, can and should be used to fill-in ongoing spending needs until actual revenue returns to the ongoing level. This is where idle balances, reserve fund balances, and yes, even temporary revenue increases come into play.

Today in Idaho the Executive Budget tells us the current fiscal year’s actual forecasted revenue is almost $250 million below its normal (i.e., ongoing) level. And while the gap improves in FY 2013, actual forecasted revenue in the budget year is still $156 million below the normal level. This means it is appropriate to spend up to that amount in one-time funds to support ongoing public services.

PDF of this post:  Idaho General Fund Revenue – A Peek Behind The Curtain

Once again Medicaid is a major topic of discussion, this time in the 2012 Legislative session. Numerous calls have been made to restore the cuts that were enacted in 2011. The Governor’s latest revenue forecast issued January 9, 2012 could easily support immediate restoration of medical assistance services, but there are no indications that the Governor will recommend any restoration of last year’s medical assistance program cuts.

Let’s take a closer look at the major components of Idaho’s medical assistance programs, how the 2011 cuts were spread across those programs, and how Idaho’s revenue has performed since those cuts were made.

There are four distinct programs within Idaho’s budget that make up what we call Medicaid. Here are brief descriptions of each of those programs:

Medicaid Administration & Medical Management (MAMM) is the program that provides for the administration of Medicaid, including managing provider payments, medical management, drug utilization reviews, and licensing and inspecting health facilities.

Basic Medicaid Plan (BMP) is the program that primarily covers low income children and pregnant women. These beneficiaries tend to have average levels of health and disease.

Coordinated Medicaid Plan (CMP) is the program that primarily covers low income beneficiaries who are 65 and older. All individuals eligible for both Medicaid and Medicare, regardless of age, may elect coverage under this plan.

Enhanced Medicaid Plan (EMP) is the program for children and adults with disabilities or other special needs. This program tends to have relatively high costs per beneficiary.

In FY 2011 Idaho’s actual total spending on Medicaid (all four programs, all fund sources) was $1.882 billion, or 30.7% of total state spending. Here’s the breakdown within Medicaid:

MAMM            $  48.2 million, 2.6% of total

BMP                $495.6 million, 26.3% of total

CMP                $340.5 million, 18.1% of total

EMP                $997.8 million, 53.0% of total

The budget cuts made during the 2011 Legislative session included $66.1 million in what were called “Omnibus Decisions.” This amount was cut from the General Fund across all agencies. The Medicaid programs’ share of those General Fund cuts totaled $34.5 million, but when all fund sources were factored in the total cuts to Medicaid were $89.7 million.

It is fair to say that Medicaid took a disproportionate share of the “Omnibus Decisions” cuts that were made in the 2011 legislative session. The FY 2012 General Fund appropriated amount for Medicaid (i.e., before the “Omnibus Decisions” cuts) was $470.7 million, or 18.1% of the total General Fund. The Medicaid share of the “Omnibus Decisions” cuts ($34.5 million) was 52.2%, or almost three times Medicaid’s share of the total General Fund portion of the budget.

A comparison of the “Omnibus Decisions” cuts across all state programs to the cuts within the programs that make up Medicaid demonstrates the concentration. Here’s the FY 2012 breakdown (the General Fund amounts shown are before factoring in the “Omnibus Decisions” cuts):

The legislative appropriation bill with the Medicaid program cuts shown above was sent out of the Joint Finance-Appropriations Committee (JFAC) to the House on March 31, 2011 and was signed into law by the Governor on April 11, 2011.

On July 12, 2011 actual FY 2011 revenue was announced and it was $85.3 million higher than the forecast the Legislature used for budgeting purposes just three months earlier, a sure sign the FY 2012 revenue forecast would be revised upward. It was also a very strong indication the “Omnibus Decisions” cuts had been unnecessary. No action was undertaken to reverse those cuts.

On August 11, 2011 the Governor’s budget office released a new FY 2012 revenue forecast that was $161.6 million higher than the forecast used by the legislature to set budgets for FY 2012. That new revenue forecast clearly indicated the $66.1 million in “Omnibus Decisions” cuts were unnecessary. No action was undertaken to reverse those cuts.

On January 9, 2012 the Governor’s FY 2013 Executive Budget was released. The revised FY 2012 General Fund revenue forecast has been lowered, but it is still $113.0 million higher than the FY 2012 revenue forecast the “Omnibus Decisions” cuts had been based on nine months earlier. No action has been taken to reverse those cuts.

On February 7, 2012 the Governor’s budget office released the February 2012 Idaho General Fund Revenue Report. In two months under the new revenue forecast a positive cushion of $13.2 million has developed. On February 10, 2012 the Associated Press reports the Governor “remains adamant about not restoring $35 million in funds cut from Medicaid last year.”

Next week (February 20, 2012) the legislature’s budget committee (JFAC) is scheduled to begin setting budgets. One of the first decisions they will need to make is the number to use for FY 2013 General Fund revenue. The legislature’s Economic Outlook and Revenue Assessment Committee (EORAC) met at the beginning of the legislative session and picked an FY 2013 revenue number $33 million lower than the Governor’s. Nonetheless, in the month and a half since the release of the FY 2013 Executive Budget most economic indicators have pointed to improving conditions. 

The bottom line is this — even if JFAC adopts the EORAC’s lower revenue number, there is still sufficient revenue capacity to restore the medical assistance cuts. It’s no longer a matter of revenue. It’s about the legislature’s spending priorities.