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A sales tax update

weatherby JAMES

Idaho is one of only two states that taxes Girl Scout cookies. How could a heartless legislature turn its back on a tax relief request from this very worthy organization? And how could they deny a tax exemption on goods purchased by homeless shelters?

In 1988, the Governor’s Tax Study Committee expressed its concern about the growth of exemptions whether they were serving a public interest or just providing “favors to various special interest groups”. In 2003, that “concern” was again addressed by a legislative task force that scrutinized exemptions. Despite the optimism expressed in several editorials around the state, substantive action did not follow. Though there seemed to be significant support for reform, there was little appetite for taking on entrenched interests who benefited from the tax breaks.

Fast forward to 2013. Both sales tax exemption bills were strongly endorsed in the House committee and easily passed on the House floor. Even with opposition from some members of Senate leadership, it was widely believed that at least the Girl Scout cookies bill would pass on the floor of the Senate and become law. But both bills died without even a Senate hearing.

In a few months we’ll have another legislative session and no doubt the Girl Scouts will be back. Will the cookie crumble in the Senate – in an election year? Maybe. But how long can some Senate leaders assert their opposition to what seems to be reasonable bills? Virtually every legislative session in modern memory has considered one or more bills granting sales tax exemptions, so how can lawmakers deny exemptions to the Girl Scouts and to homeless shelters when the law is riddled with tax breaks to possibly less worthy organizations but ones who have far more political muscle? They may be coming late to the party, but the senators position is that until the sales tax is reformed or a well developed criteria for exemptions is established, more exemptions should not be granted.

Enacted in the 1960s, the sales tax is outdated. It was designed for a manufacturing based economy, not the service based economy we have today. Extending the sales tax to services has been a much debated policy option for about 30 years, but to enact an extension to services would involve a tax increase for many current tax-break beneficiaries. Tax reform bills are often supported in concept but shredded beyond recognition in the messy process of lawmaking.

Tax reform that is more likely, is to apply the sales tax to Internet purchases. Nationally, this approach is gaining momentum in Congress. The United States Senate just passed an Internet sales tax bill allowing states to force Internet retailers to collect and remit taxes to state and local governments. Meanwhile, back in Idaho, a majority of House tax writers expressed their opposition to the federal Internet sales tax legislation. They even opposed joining the 24 state consortium that is working on an implementation measure to simplify tax structures and clarify tax definitions if the federal legislation is enacted. They not only opposed broadening the base, they wanted to further narrow it.

What’s their argument? They claim that an Internet sales tax would be a tax increase. Bogus. Under the Idaho Sales and Use Tax legislation adopted in 1965, taxes on Internet purchases are due and payable. (On our honor, we’re supposed to compute sales tax on our Internet purchases and file such on our state income tax returns.) Influential Idaho business and local government groups are in support of enforcing the Use Tax. Many brick and mortar businesses oppose the current system that requires them to collect taxes on their Main Street sales while online providers enjoy the competitive advantage of tax-free transactions. It’s the fairness issue: treat Internet retailers the same way we treat Main Street. If congressional action succeeds and corresponding state implementation steps are taken, additional annual revenues for Idaho are anticipated to be approximately $60 million.

Enacting an Internet sales tax would be a significant step forward, but it is not the complete answer. Increased erosion of the sales tax base by way of the arbitrary pick-and-choose-approach to tax exemptions calls for in-depth analysis of the long-term effects on the state’s revenue stream. A comprehensive overhaul of the state sales tax is badly needed. It will require of our elected officials careful evaluation and courageous implementation to redesign a tax code that is equitable and effective for all of Idaho.

Jim Weatherby is a political analyst, emeritus professor and former lobbyist who lives in Boise, Idaho.

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