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Idaho Considering Complicated and Gimmicky Job Creation Tax Credit

3 min readBy: Joseph Bishop-Henchman

Idaho officials believe not enough businesses are looking at their state when deciding to expand or relocate. Unfortunately, the proposed solution (PDF) – a new jobs taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. credit – is unlikely to be the fix.

From the Associated Press:

According to the proposal, companies would have to create jobs and pay income, sales and payroll taxA payroll tax is a tax paid on the wages and salaries of employees to finance social insurance programs like Social Security, Medicare, and unemployment insurance. Payroll taxes are social insurance taxes that comprise 24.8 percent of combined federal, state, and local government revenue, the second largest source of that combined tax revenue. es before ever getting a penny back from Idaho's government.

Beforehand, they'd work with the Department of Commerce, as well as the seven-member Idaho Economic Advisory Council, to negotiate the level of tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. — ranging from 1 percent to 30 percent. They'd also hash out the duration of the deal — up to 15 years — along with the terms to be met in order to get their tax credit.

Companies in rural areas would have to create at least 20 new jobs, while companies in urban areas would have to create 50 jobs, all of which pay more than the average in the county where those jobs are located.

While tax preferences like new jobs tax credits can be politically appealing because they ostensibly incentivize new jobs, at best they distort business investment decisions and at worst they subsidize select companies for doing something they would have done anyway. Even if administered efficiently (which is difficult given the degree of political connections required to obtain them), job tax credits can misfire in several ways. They push businesses who would be better served by buying new equipment or marketing to instead hire new employees. They favor expanding and out-of-state businesses at the expense of firms that may be struggling to keep the employees they have. Their record in other states has shown that they can never hope to attract more than a tiny fraction of new jobs, often at heavy taxpayer cost. And, if the impediment to job growth is high taxes, then they ought to be cut for all taxpayers not just big business or out-of-state businesses.

Wayne Hoffman of the Idaho Freedom Foundation offers examples of similar failed policies in Idaho:

Recall, for example, the Corporate Headquarters Incentive Act. It was heralded as a tool to lure and keep big corporations to Idaho. Born 2005, died 2008. Total usage: zero.

The Small Employer Tax Credit, also born 2005, extended to 2020, has done little — less than half a million dollars in annual usage.

Biofuels investment tax credit. Born 2007. Was supposed to generate up to $300,000 in utilization. Sunsetted in 2011. The most it ever did was $68,000 a year.

The Hire One tax jobs tax credit, created in 2011. That was supposed to generate $25 million in tax revenue at a cost of $7.9 million. Total actual usage: zero.

The Otter administration’s latest offering is no different. It promises to provide a tax credit if an existing business or a new business brings in, for some weird reason, at least 20 new jobs. But what if I create only 19 jobs? What if I create no new jobs but I give all my employees raises so instead of making $11 an hour, they’re now making $22 an hour? Isn’t that good for my employees, for the state and for the economy?

What if I own a little company? And what if I have only four employees and I double my workforce to eight employees. I get no consideration from the state, but I’m expected to help subsidize the business of my competitor.

Likewise, the state would make its tax credits available to, say, Walmart, which has the resources to create hundreds of retail jobs at a time. But the little neighborhood grocery store, or restaurant or automobile mechanic — companies that are the backbone of the American economy — can expect nothing except to have to subsidize their competition through higher tax rates.

The Idaho corporate tax rate is 7.4 percent, compared to 5% in Utah, 6.75% in Montana, 7.6% in Oregon, and zero in Wyoming. Idaho has a throwback rule to punish out-of-state corporations, doesn’t index its tax brackets for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. , and applies its sales taxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. to office equipment and business rentals. Those might be more fruitful areas to tackle than a gimmicky new credit that won’t move the needle much on job creation.