Deficit down, but risks remain

BOISE – After five years of struggle, Idaho finally is shrinking a structural deficit that has plagued the state budget, but the state’s financial challenges may not be over.

Idaho has to balance its budget each year. For the last five years, it’s been scraping by with temporary fixes to make the books balance.

That’s meant everything from draining state savings accounts to imposing temporary taxes to make up for the fact that the state’s been spending more on ongoing expenses than it has taken in each year.

It’s not that the state’s been spending up a storm. Budgets have been so tight that the 2003 and 2004 general-fund budgets were actually lower than 2002’s, thanks to wrenching budget decisions by state lawmakers. State employees have gone without raises, crucial building maintenance projects have been repeatedly put off, and university funding has suffered.

Rep. Maxine Bell, R-Jerome, co-chairwoman of the Legislature’s joint budget committee, said Idaho faced a “perfect storm” in 2001 of a massive decline in tax revenue coupled with just-approved tax cuts. The state lost 15 percent of its revenue from 2001 to 2002 as an economic downturn kicked in – the biggest decline before that was 3 percent back in the 1950s.

“Everything came together to cause a structural deficit,” Bell said. “And frankly that is not good budgeting; that is just not good budgeting, and I feel responsible.”

Things are finally looking up for Idaho’s state budget now, thanks to an unexpected jump in state tax revenues this spring on top of five years of frugal budget-setting. As it stands now, the state’s structural deficit – the amount that ongoing tax revenues lag behind ongoing expenses – should drop to less than $20 million by the end of the next fiscal year, and the following year the deficit could be gone.

But a national study published last week warns that Idaho is one of many states at risk for long-term structural deficits, because state tax and budgeting systems don’t match today’s economic realities, such as the shift to a service-based economy and the impact of an aging population.

“If the structural issues and chronic underfunding of public services are not addressed, they could be addressed by initiative,” warned economist Judith Brown, director of the Idaho Center on Budget and Tax Policy in Moscow. “What is really needed is a broad restructuring and update of the tax structure.”

Brown spoke at the release of a new report from the Center on Budget and Policy Priorities in Washington, D.C., that found such problems in many states. In fact, the study placed Idaho in a middle group, finding it has seven of 10 risk factors for long-term structural deficits. Thirteen states were judged at greater risk, while 12, including Washington, matched Idaho’s status.

Those risk factors included failing to cover services with the state’s sales tax, offering tax preferences to seniors regardless of income level, and raising regressive taxes such as sales, cigarette and property taxes while lowering more progressive taxes, including income and corporate income taxes.

Boise economist Don Reading said Idaho’s budget crunch in recent years also has meant state spending as a percentage of personal income has risen in areas where increases couldn’t be avoided – Medicaid and corrections – and fallen in all other areas, including education.

Though key lawmakers in the House have been resistant – most notably House Tax Chairwoman Dolores Crow, R-Nampa, who opposes new taxes – both Gov. Dirk Kempthorne and legislators have been talking about big changes that may be needed in Idaho’s tax system.

If Idaho continues to face structural deficits, said Kempthorne’s press secretary, Mike Journee, “the governor said he would take a top-to-bottom look at the tax code and how it affects state revenues. I’ve heard him say more than once, ‘If you’ve got the hood up, take a look at the whole engine.’ “

Sandpoint Sen. Shawn Keough, vice chairwoman of the joint budget committee, said, “Even though Idaho’s doing a lot better, and that’s good news, I still believe personally … that we still need to have a debate about our tax structure, and whether it is going to serve Idaho in the future.”

Keough noted that Idaho is in the midst of a property tax revolt, with angry homeowners threatening a voter initiative to slow their escalating property taxes. “If an initiative makes it on the ballot and passes, I don’t think we’re prepared to handle that, and the potential impact that could have on schools in particular,” Keough said.

Idaho’s public schools are funded by both state tax revenues and local property taxes. A decline in property tax funding would put a pinch on the state budget to make up the difference – public schools already account for 46 percent of the state budget.

Bell said, “We’re moving money around, the old shell game – we move it here to cover this, and then you’ve got something (else) that’s falling behind. I know those things are out there.”

Brown noted that in addition to the property tax revolt, Idaho’s facing a possible initiative to increase education funding.

Reading said he’s been following Idaho’s economy for 45 years. “One thing we know as economists is when things go up, they come down,” he said. “The recovery that is occurring now is almost four years old. … Right now the Legislature’s sort of saying ‘whew’ and relaxing – now’s the time to do something, because we’re not in a crisis.”

Idaho’s two-year, temporary 1 percent sales tax increase, from 5 percent to 6 percent, expires on July 1, removing $180 million a year from the state budget. But with the recent growth in state tax revenues and five years of penny-pinching, the state budget still may come close to balancing.

Keough said, “I think it’s really timely to take a look at our tax structure. Because we may be pulling out of it now, but I don’t know that we’re not going to be there again.”