Copyright: Marty Nelson, Shutterstock
Copyright: Marty Nelson, Shutterstock
State Budgets

Idaho State of the State: Governor Otter Celebrates Economic Strength, Advocates for Modest Tax Cuts in Final Year

In his twelfth and final state of the state address, Governor C.L. “Butch” Otter celebrated Idaho’s continued strengths. “Our State government is leaner, more fiscally responsible, more transparent, more responsive, and better prepared than ever…Our books are balanced. Our fiscal obligations are being met. Our credit is strong. We are planning wisely, working collaboratively and investing sustainably,” he said. In the ALEC-Laffer State Economic Competitiveness Index ranks Idaho 10th best nationally in economic outlook and the state’s pension system is 6th best funded in the nation.

Governor Otter’s healthcare plans may prove more controversial. Idaho is one of 17 states not adopting Medicaid expansion under the Affordable Care Act (ACA) provisions. The proposed Idaho Health Care Plan would allow “those with the most costly, medically complex conditions to move their coverage to Medicaid during the course of their illness.” The intended outcome is enabling health insurers to lower premiums on the relatively healthier plan holders as those in need of the most care transfer to Medicaid. The governor claims this is “not expanding Medicaid.” These eligibility changes would be unrelated to the ACA, Medicaid eligibility technically does expand under the proposal with federal dollars funding more than 70 percent of the expansion. The debate over Medicaid expansion likely will continue even after the legislative session with a possible Medicaid Expansion Initiative on the ballot in November.

Modest education proposals were brought forward to “ensure employers have enough educated, trained and skilled workers to meet the needs of Idaho’s growing economy, especially in healthcare and other STEM fields.” This included a continued shift to include student outcomes in determining teacher pay rather than merely considering tenure. He also proposed additional funds for professional development, school technology, college and career advising, literacy intervention, educational assistance for high school dropouts and low-income scholarships. Unfortunately, none of the governor’s education proposals promised to open up school choice. Although Idaho’s state education policy ranks 19th overall, the state’s lack of private school choice programs hampers opportunity.

On the agenda for 2018 is “adding to the more than $1.2 billion in tax relief we have provided Idaho citizens over the past decade.” The governor tempered his embrace of tax cuts with goals including to meet “constitutional and statutory obligations” and “sustainably advancing our education and other policy priorities.”

“Job one” in 2018, according to the governor is “unemployment tax relief.” Thanks to the strong state economic recovery, the unemployment compensation fund has more cash on hand than recommended by the federal government. Policymakers could have reduced the unemployment tax to reflect this surplus but failed to do so in 2017. The current rate represents “$115 million in higher-than-necessary taxes that Idaho businesses will pay over the next three years.”

In an attempt to counter arguments that government spending is growing too fast, the governor noted that “personal income in Idaho is up about 40 percent since 2008 while general fund revenue has increased less than 25 percent.” This is an incomplete picture because 2008 fell during a period of relatively restrained post-Great Recession spending growth. Second, personal income is only one potential yardstick by which to compare spending growth. A better standard is comparing spending growth to population and inflation growth. Over the past 10 years, the population increased roughly 12 percent with total inflation of 16.5 percent. Since 2003, general fund spending soared 79 percent, far eclipsing the 59 percent growth in population (26 percent) plus inflation (33 percent). Only tax reductions will stem the long-term excessive spending growth.

The governor promised to propose a “plan to enable Idaho’s substantial conformance with the new federal tax code without putting our State revenues or Idaho taxpayers at risk.” This will include “reducing individual and corporate income tax rates with an eye toward stimulating more economic growth.” Federal tax reform eliminated or curtailed many tax deductions in exchange for lower income tax rates. As a result, the vast majority of individuals and businesses will pay lower total federal taxes on their Adjusted Gross Income (“AGI”)—gross income after certain adjustments. Many states impose an income tax based on the federal definition of AGI. Without a similar lowering of state income tax rates, some taxpayers will experience an increase in state income taxes due to their higher AGI. The governor appears eager to ensure Idaho taxpayers avoid such a conformity-related tax increase.

Cronyism in the form of tax credits and exemptions continue to detract from Idaho’s sterling free-market reputation. Governor Otto contrasted the “targeted, performance-based incentives” with the decision by other states to “mortgage” the future by “throwing money at business attraction.” Broad-based rate reductions, rather than special carve-outs for “qualifying” entities would better promote economic growth.

Overall, Governor Otter exhibited zeal to ensure Idaho remains “among the most stable, business-friendly tax and regulatory climates in the country.” Lower taxes, returning excess unemployment insurance funds to businesses, federal tax code conformity, and education innovation all conspire to perpetuate opportunities.

In Depth: State Budgets

Smart budgeting is vital to a state’s financial health. The ALEC State Budget Reform Toolkit offers more than 20 policy ideas for addressing today’s shortfalls in a forthright manner, without resorting to budget gimmicks or damaging tax increases. One way to stabilize budgets over time is to embrace…

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