Tuesday, January 12, 2010

Idaho's Budget

Idaho's Budget

Like many states, Idaho is having to confront the inevitable budget shortfall that comes from a declining national economy, reduced workers earning less income and paying less income tax, corporations earning less and paying less corporate income tax, and increases in costs for such things as unemployment insurance. It's never easy. Governor Otter managed to avoid cuts in education last year, but this year it doesn't look so encouraging.

I've been aware of a politician named Rex Rammel who is running for governor against Otter, but I didn't have much of an impression, positive or negative. Purportedly he's a conservative of some sort. Listening to him interviewed by Nate Shelman on KBOI AM 670 this evening Rammel certainly made an impression on me alright: and not a good one.

Rammel's position of how to deal with the budget shortfall is to eliminate the personal and corporate income taxes and increase sales tax rates as a way to create jobs. While I'm no fan of income taxes because they encourage a variety of manipulative and economical inefficient tax shelters, it is generally very high marginal rates that create this sort of idiocy. Federal income tax rates can be a real problem, because the marginal rates are high enough to make people do dumb things. But Idaho personal income tax rates (like most states) are pretty low. It is hard to imagine that our 8% state income rate is making much of a difference in how anyone in this state decides what investments to make, how many people to hire, what factories to build.

Even more absurd: because state income taxes are deductible on your Form 1040, Schedule A, those Idahoans in the top marginal state income tax bracket (as I was until last year) were reducing their federal income tax by 35-40% of their highest marginal state income tax rate. Eliminating the Idaho state income tax would put perhaps $5000 in the pocket of the top 5% of the state's income earners--but probably $2000-$2300 of it would end up paid as federal income tax, instead. The gain for the taxpayers, even for the high end Idaho taxpayers, isn't as impressive as it first sounds.

The notion that reducing personal and corporate state income taxes is going to be a big win for creating new jobs here, or moving existing jobs from other states, is really hare-brained. Yes, they do probably impair job growth a bit--but it is a minor factor when you consider how low the rates are. (At the federal level, it is a stronger argument, where the marginal rates are much higher.) In a thriving economy, there might be a stronger argument for eliminating these taxes to encourage growth--but the only thing growing in Idaho (and much of the rest of the country), is discouragement about jobs.

Increasing sales tax rates, while a pretty simple and economically efficient method of gathering revenues, is extraordinarily regressive--especially in a state where groceries are still subject to sales tax. I'm not a raving liberal bleeding heart, but people at the bottom of the economic scale are hardly in a position to pick up a bigger share of the state budget. Many of them are having trouble paying their rents and car payments.

Then Rammel proposed that the loss of about 1.25 billion dollars from our budget by eliminating these two taxes could be handled by turning all the public schools back to the local governments, and wiping out those parts of the state board of education handling K-12. Again, I am skeptical of the value of much of the centralized state bureaucracy, but I am very skeptical that's this is where most of the money being spent on public education in this state is going.

There's a case for pretty radical transformation of our education system, perhaps using vouchers to create more competition for schools. I just don't get the impression that Rammel has given much thought to what he is talking about.

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