Why Idaho’s income tax could be lowered even more
A flat rate is good. A lower flat rate would be better.
Idaho state lawmakers and Governor Brad Little have, twice now, lowered Idaho’s income tax rate. In the September special session, Idaho joined the flat tax revolution when lawmakers adopted a flat rate of 5.8%. But there’s still work to be done.
On an episode of MSPC's Peak Policy this past week, State Senator Jim Rice of Caldwell said the flat tax "reduces the degree to which you distort the economy with taxes."
We learned that state tax collections were “$50 million below expectations for the first three months of the fiscal year,” but that the state still has a $1.5 billion surplus. That $1.5 billion amounts to about $855 for every person living in the state.
Despite national economic trends, Idaho hasn’t felt an economic slowdown – at least not yet. The revenue increases and surplus cash have shown consistency. Meaning there is plenty of room to give families and business further relief.
In fact, what lawmakers could pursue is tying Idaho’s increases in revenue to automatic reductions in the state income tax rate. For example, if the state revenue consistently comes in at a rate of, let’s say 20% over what was expected, the tax rate would automatically be lowered. This could negate the need for any special or extraordinary sessions of the legislature to address tax reductions as they would kick in at certain revenue levels.
The exact revenue percentage over expectations, the period of time required to make sure it is consistent, and the corresponding income tax rate reduction would all need to be set by lawmakers. But adopting this type of policy would send a clear message that Idaho will continue to lower the income tax burden it is placing on families and businesses. And the more the economy booms, the lower the rate.
Why does Idaho need to show it is committed to lowering its income tax burden even more? Because it runs the risk of falling behind other states.
In Iowa, for example, legislators have lowered the state income tax to 3.9%. The rate will kick-in by 2026.
Arizona has lowered its income tax to a flat rate of 2.5%. Utahns enjoy a flat income tax rate of 4.95%. Mississippi just lowered its income tax to 4.0%.
The economic trends show states lowering their income tax rates in a responsible, taxpayer-friendly way.
At 5.8%, Idaho’s rate is still relatively high. Just 16 states have a higher rate. Even Illinois (4.95%), Maryland (5.75%) and Massachusetts (5.0%) are lower than Idaho. The Gem State also shares a border with two states that don’t have an income tax – Washington and Wyoming. Montana, by way of comparison, has a top rate of 6.75%.
Lowering the income tax also helps a state better-handle economic downturns. Credit agency S&P says states that rely more on sales taxes, rather than income taxes, demonstrate less sensitivity to economic cycles.
It is in the interest of both Idaho and Montana officials to figure out ways to lower their income tax rates while state revenues continue to surge.