Mike Ferguson was Idaho’s chief economist for 26 years. He left the post in 2010, and heads the new Idaho Center for Fiscal Policy, a non-profit that analyzes state tax and budget policy. StateImpact asked Ferguson to review the governor’s budget proposal, and the policy priorities it contains.
Q: This seems like a different budget than those we’ve seen in recent years. Do you agree?
A: Well, it has the beginning of a recovery. Instead of dealing with an ever-declining revenue stream, we’re seeing revenues recover. I think one could potentially question how the resources are allocated within that budget.
Q: Right. We start to see what the governor’s spending priorities are now that there’s money to allocate, right?
Q: The $45 million set aside for tax cuts is arguably the biggest news out of the address. The governor isn’t putting forward a plan for those cuts, but there is talk of bringing the top income tax rate down from 7.8 percent to 7.6 percent. As I understand it, that top rate is only paid by people who make $100 thousand or more in annual taxable income. If the aim is job creation, how would this accomplish it?
A: That’s a very good question, and I’m not sure I have an answer for you. What I can do is point to some past experience here in Idaho. In the decade of the 80s, we raised the corporate income tax, the individual income tax, the sales tax. Corporate went from, I believe, 6.5 percent to 8 percent over that decade. Individual went from a top rate of 7.5 to 8.2 and the sales tax went from 3 to 5 percent. Now, one would think that tax increases of that kind would undermine our economic performance. Yet, in the following decade when those higher taxes were in place, we had some of the best economic performance of the state’s history. Those taxes that were collected didn’t go into a black hole. They were raised, basically, to fund education. Education kept pace. And I think it’s really hard to overstate the importance of education in terms of its role in economic development. When companies are looking to locate, they’re concerned about their families, their employees’ families, and having a good education system is really important.
Q: Well, I think the governor would say – his budget allocates more than $30 million to fully fund the mandates from last session. That’s not, I guess, satisfactory?
A: I don’t know what is satisfactory, but I’ve been looking at the amount of money that’s been going to education in Idaho, and you can’t look at the raw dollar amounts. You have to look at it in relative terms. Again, if we go back to the period in the ‘80s and the ‘90s, we basically saw education growing in keeping with the overall budget. We saw some tax adjustments that were made to keep the funding levels for education up. And I’m talking about the total amount of spending, not just the general fund. Over that period, the total amount of money that Idaho was committing to education was about 4.5 percent of Idaho’s personal income. This is K-12. That’s the amount we were investing in our children.
Since 2000, we’ve seen that amount drop by over 20 percent. It has gone from 4.4 percent, on average, from the ’80s and ’90s to 3.5 percent in today’s terms. And if you look at the current executive budget, while there’s a 2.5 percent increase in education funding from the general fund, overall funding is down .9 percent.
Q: Basically you’re saying we can’t look at this and say, “Okay, tax cuts will bring jobs, there’s more money in education, that’s a good thing.”
A: We have to look at what the tax dollars are collected for. People and businesses expect good quality public services. Good education for their children. Good training for their employees. We’ve historically done that, and the data would seem to suggest that we’re basically losing ground.
Q: I want to get back to the tax cuts, because I do think for a lot of people, that’s going to be the big headline today. It’s important to think, when you think about tax cuts, what else might be done with that foregone revenue.
A: I think everybody is in agreement that the state needs economic development. Idaho had been basically outperforming most states for much of the past several decades. That continued up until just before the Great Recession. Idaho went into it earlier than most states, declined farther than most states, and has been slower coming out of the recession than most states. That’s not an economic ranking that we’re accustomed to in Idaho. So the perception that we – we being collectively the state of Idaho – need to do something to try to help turn that around goes without saying. How you go about that is where, I think, the issues lie.
The problem with using the tax structure to try to promote economic development is it’s a very scattershot kind of approach. You end up with a lot of folks getting the benefit of tax reductions – which, of course, who wouldn’t like that? – but it might not necessarily be of value to the state from the standpoint of promoting economic development. If you can have a spending program that does similar kinds of things – targeted economic development trying to leverage the needs of businesses and their employees so it’s a win-win type of situation — you have a couple of things going on.
The tax code, when tax incentives are created, they typically are done under the veil of secrecy associated with the taxes that we levy to raise revenue to fund government. When we have expenditure decisions, those are done in the light of day. Those are held out to public scrutiny, so everyone is able to see what happens in the aftermath, who’s benefitting, and how it’s working. It’s very difficult to know that when we’re talking about tax incentives. And here I’m talking about targeted kinds of tax incentives.
Q: The governor is proposing putting a total of $60 million into the rainy day funds, which were significantly depleted over the last four years. This is a pretty remarkable amount to try to dedicate, after so many years of cutting.
A: It’s certainly great that the state has a surplus rather than a deficit, but if you look at the way the state obtained the surplus, it was through underestimating revenues. And when you build your spending decisions – the provision of public services – on those underestimated revenues, you’ve shorted someone: school kids, people with developmental disabilities, people who are at the bottom of the economic rung and don’t have any other way to obtain healthcare. So there are consequences. I guess it does speak to priorities when we’re in a situation where we’ve had substantial cuts in these public services — rather than taking the available additional resources and putting them into restoring those things, we’re going to sock them away.
Q: Last year the nearly $100 million dollar cut in Medicaid funding was one of the primary issues throughout the session. In 2010, the Department of Health and Welfare had to cut nine state offices out of 29 due to budget cuts. And at the budget briefing, the Department of Health and Welfare wasn’t really a focus. We’ve heard the term “new normal” tossed around quite a bit. Is this one example of that new normal — that we’re not going to talk about putting money back into departments that have been cut severely over the last four years?
A: The problem with sorting out the priorities in this budget are the things that are simply left hanging that we don’t have any real, clear answer to. For example, $45 million of tax relief. Is that seed money that will grow? Are we talking about a phase-in that that’s the first installment? I don’t know. Can the state really afford to give up a significant chunk of its revenue stream? Again, I don’t know. Is it one-time tax relief? Is it ongoing tax relief? I mean these are big questions that we have no answers to.
This interview has been edited and shortened.