Bringing the Economy Home

Mike Ferguson: The Math Doesn’t Work On Gov. Otter’s Plan To Repeal Business Property Tax

Joe JASZEWSKI / Idaho Statesman

Gov. C.L. "Butch" Otter delivering his State of the State address, Jan. 7, 2013.

Governor C.L. “Butch” Otter’s State of the State speech yesterday shed light on his agenda for the 2013 legislative session. Otter doesn’t want to commit to expanding Medicaid eligibility for low-income Idahoans, he didn’t set a clear path on education reform.  And he strongly advocated for getting rid of Idaho’s business personal property tax.

Idaho Center for Fiscal Policy director Mike Ferguson says Gov. Otter’s budget proposal doesn’t put the state’s “priorities in the right place.” The governor’s suggested budget spends about $84 million more in fiscal year 2014 than in fiscal year 2013, bumping total state general fund spending to $2.78 billion. That’s a 3.1 percent increase. To get there, the Otter administration assumes Idaho’s revenue will grow 5.27 percent, growth the state hasn’t experienced since before the recession.

Otter’s budget proposal includes reducing unemployment insurance rates for businesses by $50 million, an additional $35 million to Idaho’s rainy day account (there is already $48 million headed there), an ending fund balance of $13 million, and eliminating Idaho’s business personal property tax. That’s a $140 million hit to local governments. To make up for that lost revenue, Otter suggests giving local governments authority to levy local option taxes.

“The simple answer,” says Mike Ferguson, “is the math doesn’t work.”

Aaron Kunz / Boise State Public Radio

Mike Ferguson directs the Idaho Center for Fiscal Policy. He is former chief economist for the state of Idaho.

Q: The governor’s budget for fiscal year 2014 calls for a 3.1 percent increase in state spending. He’s counting on revenue growth of over 5 percent, a number the state hasn’t hit or exceeded in the last few years. At the same time, he’s advocating the state cut revenue for local governments by getting rid of Idaho’s personal property tax – how can all of this add up?

A: First of all you do start with the revenue outlook, and I give kudos to the governor for having a revenue forecast of 5.3, which as he mentioned at the Associated Taxpayers of Idaho meeting is down from 5.9. What the Economic Outlook and Revenue Assessment Committee has been hearing is somewhat more pessimistic than that, so I will be surprised if the Legislature takes his revenue forecast for 2014. But again, I give him high marks for including that in his budget.

The 3.1 percent spending growth is in part due to transferring money, money from the budget stabilization fund, leaving a $13 million ending fund balance.  That in my mind is not putting priorities in the right place in terms of state spending that has been cut dramatically in the course of the Great Recession.

One example, you know is near and dear to my heart, is education spending. We’re actually losing ground with education spending. Even though overall state spending in the general fund is going up 3.1 percent, for education it’s 2 percent. And for overall education funding, it’s only going up 1.6 percent. That means we will slip further behind in terms of our effort level.

Q: If lawmakers decide to get rid of Idaho’s business personal property tax, local governments could lose about $140 million every year. Gov. Otter has suggested the state spend $20 million to help with the transition – is this doable?

A: The simple answer is the math doesn’t work. One of the things that surprised me is when the governor recommended the possibility of local option taxes to replace the loss in property taxes. I’ve looked at the numbers and the counties and the school districts and the cities, not so much cities, but counties and school districts rely heavily on the property tax, and the business personal property tax as part of the mix – they don’t have high incomes.  They don’t have the capacity to have a local option sales tax or a local option income tax to make up the kind of losses we’re talking about.  So, it works great in Ada County, but not so great in Power, or Caribou, or any of the other counties that have a high proportion of business personal property taxes in the mix.

Q: And voters would have to decide if they want to tax themselves further?

A: Correct. At least that’s how I understand it.

Q: The governor wants to add $35 million to the state’s budget stabilization fund, our rainy day fund. There is currently about $23 million in there, and another $25 million will get transferred in there by law. What’s the benefit of beefing up this fund? Does Idaho have money to stash away right now?

A: The whole idea of a rainy day fund is that you have one time money you have set aside to help support your budget needs when the revenue stream is deficient. When you’ve got a recession or a downturn. My question would be, as we see a modest economic recovery underway, and revenue is coming back – what’s more important, restoring the reserves that were depleted in the downturn or restoring the funding that was cut in the downturn. It’s a matter of priorities. Reserves are important, but this may be a little bit premature.

Q: You still feel like there is damage left from budget cutting?

A: Yes. And if you look at what happened in the Medicaid area, with cuts that happened in the past, $35 million – very little of that was restored.  The school funding cuts that have been going on for quite a while now, there’s an enormous need.  I’m hearing from school districts that they’re on the verge of failure because of inadequate funding. That’s in areas where they can’t raise local property tax dollars. The ones that are able to are in a little bit better shape.

Q: Far from resolved is what happens to a pool of money sitting in Idaho’s bank account from the repeal of the education laws voters rejected last year. The governor’s office says almost $38 million is in the account, the Department of Education says it’s about $23 million, either way, there is no clear answer on how that will be spent. What is your takeaway on this?

A: In the governor’s budget, he designates $39 million that’s set aside for this work group he’s setting up.  My question would be how can school districts budget with money that is essentially allocated on this contingent basis.  I’m unconvinced this makes a whole lot of sense from the standpoint the school districts are facing. I come back to this, there is essentially a 1.6 percent increase in school funding overall, that means we’re slipping further behind. Personal income growth is about 3 percent overall. That’s a trend that doesn’t bode well for the future of education in Idaho.  Particularly when you factor in the possibility of moving the personal property tax off the rolls.

Q: The governor’s speech also alluded to a revamping of Idaho’s Medicaid system. He doesn’t want to expand eligibility for Medicaid, which is a low-income insurance program funded by the state and the federal government. The work group he created to study expansion said to do it – what do you make of his decision not to commit to an expansion?

A: I have to admit that was one of the surprising things in the governor’s budget and state of the state message. The work group included some pretty conservative members of the Legislature. And the evidence was pretty compelling that it was in Idaho’s interest to do the expansion from a cost saving standpoint, from providing health services, and from an economic development standpoint. That it will, essentially provide additional resources in the states’ economy that will help provide jobs and economic opportunity.


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