Smart Bombs: Tax cuts under the shell

On Friday, Spokesman-Review columnist Shawn Vestal explored Olympia’s budgetary shell games, finding that both parties use gimmicks to avoid some spending cuts. In Boise, the game is played differently, with the goal being greater spending cuts and, ultimately, tax cuts for the not-so-needy.

To illustrate the point, let’s start on June 30, the end of the past fiscal year. It was then that Idaho discovered it had $85.3 million more in revenue than projected. Had legislators chosen the forecast of then-chief economist Mike Ferguson, they would’ve had an excess of only $11.5 million. Former Gov. Cecil Andrus was so certain that current Gov. Butch Otter and the Legislature were low-balling expected revenue that he bet Otter $100 that Ferguson’s number would be more accurate. Andrus, of course, knows how the game is played, so it was easy money.

OK, but any state would be envious of a surplus, so what’s the gimmick? It actually has three parts, so let’s follow the money.

First, lawmakers disregard the chief economist’s expert opinion and set the revenue target much lower. Second, they glumly announce they must cut spending to meet the target. They don’t want to do it, or so they say, and they acknowledge that many truly needy people will be hurt. They call the cuts “painful” and bemoan their “agonizing” decision. But, ultimately, they need to be “the adults” and cast their votes based on “reality.”

The final scene of the gambit is playing out now. The state restored a chunk of the “unexpected” money to education, but let stand the cuts to safety-net programs such as Medicaid. So as lawmakers entered the current legislative session, they had a surplus. Otter challenged legislators to come up with tax cuts, and they obliged with a plan to cut the top income rate from 7.8 percent to 7.4 percent.

“The governor has recommended that we not collect this money, that we’re collecting too much,” said Rep. Marv Hagedorn, R-Meridian, apparently forgetting all the pain legislators reluctantly inflicted in achieving that surplus.

The tax-cut bill will probably pass, and the state will forgo an estimated $35.7 million, which will remain with Idaho’s highest earners. In addition, the Legislature has chosen a more conservative revenue estimate than the governor, which means it “expects” to bring in $33 million less. So, there’s about $69 million that can’t be tapped to restore last year’s spending cuts, which allegedly haunt them.

And so what does a principled budget watchdog think of this tax cut trick? House Tax Chairman Dennis Lake, R-Blackfoot, said, “We are creating a structural deficit in our revenue stream that we cannot deal with without at some time in the future raising taxes.”

Or, slashing even more spending on the truly needy.

The Lone Star fate. The justification for the Idaho tax cut is that it will help the state stay competitive in the fight for “job creators.” But the idea that a modest reduction in the top tax rate will be the tipping point for businesses to incur large moving expenses seems far-fetched. Economists are mixed on whether such cuts ever end up paying for themselves. Jeff Sayer, the state’s commerce chief, supports the cuts but notes that their value might be symbolic.

The race to the bottom on tax breaks for businesses is a tempting one. Texas is the acknowledged national leader in flinging open the doors, but that status has come with a heavy cost. In recent years, the Lone Star State’s record on job creation is second to none. However, the poverty rate has grown twice as fast as the national average, and only five other states have a higher percentage of poor people. The state is near the bottom in spending per person and at the top in the number of people without health care coverage.

If Idaho has designs on becoming a Wild West saloon that favors the rich at the expense of the poor, those “pained” legislators better start slashing spending and taxes at a much faster pace.

Otherwise, it’s no competition.