Idaho Effort to Broaden Base, Lower Rate of Sales Tax

December 23, 2011

Idaho Democrats are pushing a proposal that would broaden the base of the state's 6 percent sales tax to include various services and lower the overall rate to 5 percent. The proposal is far from revenue neutral; backers say it will raise an additional $371 million. In 2010, Idaho collected $1.12 billion in sales tax revenue, which accounts for 38 percent of the state's total tax collections.

While specifics on the new base are still scant—the "Stop Unequal Taxation in Idaho" website has a lot of political rhetoric, but little substantive detail—the Idaho Statesman reports:

Their plan would retain the production exemption on sales of goods and equipment used by agriculture and other businesses and continue to exempt health care. But it would lift 21 exemptions and exceptions.

The biggest hit would be felt in service industries, from lawyers and accountants to hair-stylists and auto repairmen. Other transactions subject to tax would include real estate commissions, construction materials, electricity and other utilities, transportation, trade-ins, lottery tickets and commercial aircraft.

As our readers know, broad bases are consistent with sound tax policy because they do not give preference to one form of business activity over another. With that said, sales tax bases should only apply to consumer products. A sales tax should not apply to business inputs, not because businesses deserve special treatment, but because taxing inputs is especially distortionary to economic activity. It leads to tax cascading, which distorts the allocation of capital.

Many Idaho Republicans reject the plan because of its increase in the total tax burden, but base-broadening can easily be made revenue-neutral, so I would urge them not to dismiss this idea out of hand.

As more details of the plan materialize, I'll be sure to provide commentary.

Follow Scott Drenkard on Twitter @ScottDrenkard.

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