Idaho taxpayers may have to dig a little deeper

Betsy Z. Russell
Staff writer

Associated Press Idaho Gov. Dirk Kempthorne gestures during his annual State of the Budget address before a joint session of the Legislature in Boise in January.

BOISE -- In Idaho, even the economists are saying it's time for a tax increase.

"We have managed to shield the public from the magnitude of the problem," said Mike Ferguson, chief economist for Gov. Dirk Kempthorne. "We're at the end of the line on that."

For the past year and a half, Idaho has scraped its way through a sudden, precipitous drop in state income tax revenues through a combination of budget cuts and draining various state savings accounts, from the budget stabilization fund to the tobacco settlement trust fund. It's put millions in construction projects on hold, and used the money instead to balance the budget. It's put off even routine building maintenance, using those dollars to plug budget holes.

"We've sheltered the public," Ferguson said. "The fact that we even had a fiscal problem was news to a lot of people."

It's news that state legislators are grappling with now, faced with a $200 million shortfall between tax revenues expected next year and the amount it would take to just keep state government running as-is next year, with no increases.

That prompted Kempthorne, a Republican who likes to boast that he's signed 48 tax breaks or reductions into law in his four years in office, to propose the unthinkable: a three-year, 1-cent hike in Idaho's 5 percent sales tax, plus a 34-cent per pack cigarette tax increase.

"This is not easy, but there is a stark reality that we must face together," Kempthorne told lawmakers.

If the decidedly unenthusiastic Idaho Legislature goes along, the tax increase would raise $260 million a year, allowing Idaho to balance its budget plus start maintaining buildings again. It would also allow some of the state's savings accounts to be replenished, which Kempthorne argues is important to preserving the state's still-sterling bond rating.

Economist Kelly Matthews of Wells Fargo Bank said Kempthorne is on the right track.

"I do believe we will begin to see some economic growth this year," Matthews said. "I do not believe that in and of itself it will be large enough to generate enough tax revenues to hold the state budget flat."

Randy Barcus, chief economist for Avista Corp., said recently, "I think Kempthorne made a great case ... Obviously, he was listening to his economist."

Typically, either tax increases or deep cuts in state services would have a negative impact on the economy.

But with Idaho's situation right now, economists say the state is likely to have enough slow and modest growth in the next three years to absorb the impact of the sales tax increase. The other alternative -- cutting 10 percent out of the state's $2 billion budget -- would have a more dramatic effect.

"If we have massive cuts in state programs to the tune of $150 million or $200 million, that will inhibit our ability to provide services for many, many years to come," said Brian Whitlock, Kempthorne's chief of staff and former budget director. "Or we can look to the revenue side and keep what we have -- climb out, and three years from now be positioned to begin to grow again."

Ferguson noted that Idaho's economy was on a tear that seemed never-ending before the current downturn hit. "The past decade and a half has been pretty spectacular for the economy of Idaho," he said. "In the early '90s, we completely missed the national recession."

But that wasn't the case with the current recession because of Idaho's increasing reliance on high-tech. "This time around, we were clearly hit by the drubbing that hit high-tech," Ferguson said.

Matthews said the increasing importance of Idaho's high-tech sector is a reason to avoid major state budget cuts -- because most of Idaho's state budget is devoted to education, and education is the driver for boosting the high-tech economy.

"I don't believe education is the kind of thing you can turn off like a faucet when times are down," Matthews said. "If we choke it down too much, we may be in a situation where it's difficult to get it going again."

Ferguson said, "2003 I would characterize as a year in which we think that after a pretty weak beginning, we'll start to see some signs of economic recovery in the second half of the year." That gradual acceleration is likely to continue in 2004, he said, but Idaho may not return to normal growth until 2006.

Back to Top