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A sales tax gamble

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When the Idaho Legislature convenes next month, it will have to place its bets on the sales tax, just as the League of Women Voters already has.

The reason is a proposed initiative just released by the Idaho League of Women Voters “reducing the sales tax rate and broadening the sales tax base.” It does that most basically, by reducing the overall rate from six percent to five, and by extending the coverage of the tax to include not just many goods but also many services, which generally have been exempt.

The whole matter of sales tax exemptions has been a heavily chewed-over bone throughout the tax’s half-century in Idaho. When passed amid high controversy in 1965, the sales tax started (originally at three percent) with few exemptions, though it didn’t reach to include services. Over the 50 or so legislative sessions since, few have adjourned without some adjustment to the tax, generally by way of exempting someone or something. Lobbyists have kept busy in Boise on that front for decades.

And just as busy blocking the periodic attempts (they seem to average about one a decade) to scale back some of the exemptions, which from time to time have been the subject of study committees, sometimes legislative. Many legislators over the years have argued that the exemptions are just too many, that almost everyone who comes before the legislature asking to be exempted gets their way. Not everyone has, but the list of happy exemptees is long.

There are good reasons for some exemptions, especially in cases where the same product, because it’s passed along through a supply and delivery chain, might be taxed multiple times. (That is why retailers do not pay a sales tax when they buy from suppliers, though they collect it upon sale to consumers.) There are other rational arguments as well, though you can move quickly into the murky waters of rationalization.

In addition to the risk of advantaging the exempted over the payers in places where they may be in competition, there’s the simple money equation: Exempt a transaction from sales tax and you’re bringing in less money. The League’s proposal, driven by decades of legislative refusal to meaningfully revisit the exemption roster, makes the point. It is able to reduce the tax by one cent on the dollar and still raise an estimated $424 million more than at present, by removing a number of exemptions and covering many services.

That is not all the 20-page initiative does; it is a highly complex piece of tax legislating, and would be one of the more complex initiatives put on the Idaho ballot in many years. If it goes to ballot, a careful parsing will be called for.

If the signatures for it can be obtained – and the guess here is that a competent effort will get them – will it be passed by voters? It can after all be presented as a tax reduction measure (even if it does wind up generating more tax revenue). It might even be presented as property tax relief, if some of the money were used to replace local property tax levies for schools. It would be bitterly opposed, but the chances of passage are not bad.

So, we get to betting time, as the legislature convenes while the initiative petition signature effort begins. The best way the legislature could cut the initiative off at the pass would be to approve substantial sales tax exemption revisions this session. The point of an initiative is to do what a legislature would not; if the legislature shows it can act, the initiative may become moot. If they essentially ignore the initiative, legislators may give it an extra boost.

The League is betting too, on passage: If signatures cannot be gotten, or if the initiative fails at the polls, exemption changes may be dead for another decade, or two.

Some high stakes are emerging here.

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