Idaho Faces Budget Crisis After Tax Cuts and Federal Changes

Idaho is grappling with a significant budget crisis, driven by recent tax cuts and changes to federal tax policy. This situation stems from decisions made by the state’s governor and legislature, which have resulted in a deficit that could reach as high as $555.2 million by the end of the fiscal year on June 30, 2024.

Earlier this year, Idaho’s Republican lawmakers enacted approximately $453 million in tax breaks, including income, sales, and property tax reductions, as well as a private school voucher credit. These measures predominantly benefited the state’s wealthiest residents, a point highlighted by Governor Brad Little at the time, who cautioned that the financial implications were too severe. Despite his concerns, the governor ultimately signed the legislation into law.

The budget challenges intensified with the federal tax cuts championed by former President Donald Trump, widely supported by Idaho’s congressional delegation. Typically, Idaho aligns its state income tax code with the federal system, leading to an estimated $284 million in additional losses for the state treasury this year. A significant portion of this, around $167 million, is expected to provide tax relief to individual taxpayers, but $117 million will benefit corporations, much of which will likely assist out-of-state investors.

The Idaho Center for Fiscal Policy has pointed out that provisions in the federal tax code allow corporations to deduct national research and experimental costs from their tax liabilities in Idaho. This could potentially cost the state up to $96 million, diverting funds that could have supported local economies. According to Matt Gardner, a senior fellow at the Institute on Taxation and Economic Policy, the current tax breaks may not yield the intended economic benefits for Idaho, as state lawmakers cannot direct the resulting incentives toward local growth.

In response to the mounting budget pressure, Governor Little’s office has stated that it is still too early to determine the exact financial impact on Idahoans, with spokesperson Joan Varsek emphasizing the administration’s goal of aligning government spending with taxpayers’ means. The proposed solution appears to be a series of austerity measures, with a 3% cut across most sectors, excluding public schools. Nevertheless, this may not suffice to balance the state budget before the fiscal cycle concludes.

The upcoming budget discussions will have to address the projected $555.2 million shortfall that affects essential services, including public employee salaries, education funding, and infrastructure improvements. Local schools are already facing challenges in funding special education adequately, and the growth in prison populations and Medicaid enrollments further complicates the financial landscape.

While the aim of aligning Idaho’s tax code with federal standards is to simplify processes for taxpayers, critics argue that the current system does not fully achieve this goal. Idaho’s tax code still includes various incentives, such as savings accounts for education and first-time home purchases, diverging from the federal approach. Additionally, the state has not implemented certain corporate tax breaks established in 2017 that could further strain the budget.

Unlike the federal government, which can accumulate debt to finance tax cuts, Idaho must adhere to a balanced budget mandate. This constraint leaves state lawmakers with limited options: cut spending, deplete reserves, or increase taxes. In light of these challenges, some experts suggest that delaying the implementation of new individual income tax breaks may be prudent, especially to safeguard public education funding.

Moreover, keeping the corporate tax structure unchanged for another year could help provide necessary stability. If adjustments must be made, reversing some of the recent tax cuts could be essential. Restoring progressivity to Idaho’s income tax by raising rates on high-income earners and eliminating the $50 million tax credit for families who can afford private school tuition are potential steps forward.

The financial scenario in Idaho is pressing. The state government and legislature have already dug a substantial hole, and further measures may exacerbate the situation rather than lead to recovery. Addressing these issues requires careful consideration and a commitment to ensuring the long-term fiscal health of Idaho.