Update: On September 7th, the sponsors of Idaho Proposition 1 withdrew the initiative.
A pending 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. ballot measure in Idaho may take the prize for gaffe-riddled drafting. Proponents had a straightforward goal: to create a new top marginal individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. rate of 10.925 percent on high earners. That is dubious enough, as it would create the highest rate between New York and California. But through a series of errors, the initiative does so much more than that.
It seemingly reverses recent tax cuts for lower-income filers. It creates an inadvertent recapture provision that introduces a tax cliff of more than $1,300 in additional liability on one additional dollar of income. And instead of 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. -adjusting the new top bracket, it accidentally reverses the direction, subjecting more nominal income to taxation with each passing year rather than less.
The basic idea of inflation adjustment is that a marginal tax rateThe marginal tax rate is the amount of additional tax paid for every additional dollar earned as income. The average tax rate is the total tax paid divided by total income earned. A 10 percent marginal tax rate means that 10 cents of every next dollar earned would be taken as tax. should kick in at the same real value of income, meaning that it needs to be upwardly adjusted when inflation erodes the value of the dollar. If a tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. began at $250,000 a year ago, and then we experienced 8.5 percent annual inflation, inflation-adjustment would set the kick-in at $271,250 the next year. But the drafters inverted the equation, so instead of multiplying by 1.085 in this scenario, they would divide by it, with the kick-in now coming at $230,415.
With each passing year, the new top 10.925 percent rate would apply to more taxpayers. If, for instance, inflation settled at 2.5 percent per year, the kick-in of the top rate would be about $195,300 in a decade, even as the dollar was worth 28 percent less. That represents almost a 40 percent erosion of the kick-in over a decade, in real terms, for a provision that on paper is supposed to counter the effects of inflation.
Meanwhile, if tax authorities choose to construe the text literally, the tax cliff will have risen from $1,319 immediately (and about $1,343 in 2025, the last year before adjustments begin) to a mind-boggling $9,203 10 years later.
It is possible that the Idaho Secretary of State’s office, in certifying the measure for the ballot (signatures are being verified now), will attempt to save the drafters from themselves on some or all of these points, or that interpretations adopted by the State Tax Commission will hew to what was likely intended rather than what a narrow reading of the text might require. Some errors and omissions might be easier to paper over than others. But as it stands now, the measure, which carries the title of “An Initiative Supplementing Funding For K-12 Education By Increasing The Individual And Corporate Income TaxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. Rates,” would accomplish much more than advertised.
The first potential problem is not really the drafters’ fault. Supporters began circulating petitions to put the initiative on the ballot before Idaho H.B. 436 was enacted on February 7, 2022. That legislation consolidated income tax brackets and lowered rates across the board, providing income tax relief to all earners. In amending that same code section to add a new high-earner top marginal rate, the ballot measure reprints the old, higher rates on incomes below the new threshold, potentially restoring the pre-2022 rates—a tax hike for everyone, not just high earners.
When amending statutes—either through laws or ballot measures—the typical approach is to underscore or italicize new text, and Idaho ballot measures follow that convention, with this one underscoring the clause adding a new top rate but not underscoring the reenacted text elsewhere in the amended statute which lists the now-outdated rate schedule. This creates a conundrum for the Secretary of State’s office. If the initiative is certified for the ballot, do they assume the drafters didn’t want to reverse this year’s rate cuts and insert language reflecting them? Do they keep the language as-is, maintaining uncertainty about whether the old rates would be restored if the measure passed? Do they reformat the text to expressly confirm that the measure would change the lower-income rates, and if so, is a change made to the Long Title to reflect this?
The second problem arises because the drafters chose to inflation-index the new bracket with a base year of 2024 even though all other brackets are indexed based on a 1998 base year, and because the new text establishes the tax liability for income of $250,000 or more as $16,097 plus 10.925 percent of the amount over $250,000.
Such language is typical—in fact, it follows Idaho’s existing approach to codifying rate schedules—but by both neglecting recent changes to the lower rates and using a different inflation adjustment base year than the other brackets, it sets the stage for the first part of the inadvertent tax cliff.
That $16,097 amount is how much someone would owe on the first $249,999 in taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. under not just the old (pre-2022) rate schedule, but in its pre-inflation-adjusted form. But those brackets have been inflation-adjusted for over two decades now, so by setting a nominal amount that tracks with 1998 values but with a 2024 base year, the figure overstates existing liability on that $249,999—even before taking the new 2022 rates into account.
Even prior to the 2022 tax cuts, the difference in inflation adjustment base years made $16,097 too high by $90. Liability at $249,999 would be $16,007, and adding one additional dollar of income would, under the new measure, raise that liability to $16,097. But the 2022 tax cuts make the gap much larger still. On $249,999 of income, a taxpayer would face $14,778 in tax liability. Under the ballot measure, earning one more dollar would increase that liability by $1,319. (The gap would actually be even wider by 2024.)
Then it gets worse, due to the most mind-boggling provision in the initiative: inflation-indexing in the wrong direction.
Here’s the relevant text: “For the $250,000 and over bracket contained in subsection (a) of this section, the state tax commission shall provide an adjustment factor for the bracket amount by multiplying the bracket amount by the adjustment factor. The adjustment factor is calculated by dividing the consumer price index for the calendar year 2024 by the consumer price index for the calendar year immediately preceding the calendar year to which the adjusted bracket will apply.”
Did you catch that? They’ll multiply by an adjustment factor that is base year CPI (2024) divided by last year’s CPI. That’s backwards. It’s supposed to be last year divided by base year.
We can illustrate this by looking at prior years’ inflation. Imagine, for sake of argument, that we set a base year of 2018 (CPI = 251.1) and, in 2022, we were adjusting based on last year’s (2021) CPI of 271.0. Our adjustment factor should be 271.0/251.1, which equals about 1.079. If you multiplied $250,000 by this, you’d be increasing the value by about 7.9 percent, to $269,813. But using these inverted rules, you would instead use an adjustment factor of 251.1/271.0, which yields 0.927. Instead of increasing the kick-in above $250,000, it would shrink it to $231,642!
Presumably the $16,097 figure would have to be adjusted in a way corresponding to this inverted directionality as well, so that figure would keep getting larger—even though, due to inflation adjustment on the lower brackets, it ought to get smaller—while the kick-in of the top bracket keeps going lower. That’s how, at 2.5 percent annual inflation, you get a 40 percent erosion of the kick-in over the course of a decade.
The following table shows estimated tax schedules and liability in 2024 and 2034 under current law and the ballot measure, under an assumption of 2.5 percent annualized inflation for the period.
|Recapture at Top Bracket||$0||$1,343|
|Total Liability on $250,000||$14,748||$17,317|
|Recapture at Top Bracket||$0||$9,203|
|Total Liability on $250,000||$14,676||$26,582|
|Source: Tax Foundation calculations assuming a 2.5 percent inflation rate after 2022.|
Or put it another way. A small business with $250,000 in earnings today, if it simply increased earnings by the rate of inflation, would face $21,529 in tax liability under the existing tax code but $38,929 under the new plan—an 81 percent tax increase for a pass-through businessA pass-through business is a sole proprietorship, partnership, or S corporation that is not subject to the corporate income tax; instead, this business reports its income on the individual income tax returns of the owners and is taxed at individual income tax rates. that shouldn’t see any tax increase under a normal inflation-adjusted tax hike on income above $250,000.
In short, a ballot initiative which intentionally imposes an incredibly high top marginal rate (one that would fall on many small businesses, not just high-income wage earners) manages, through poor drafting, to impose a tax increase on everyone. If in effect today, it would drop Idaho from 17th to 35th on our State Business Tax Climate Index. And it would make a complete hash of the state’s tax code.Share