Idaho Activists Weigh Sales Tax Reform, but the Wrong Kind

For most state tax reform veterans, sales tax reform is a Mt. Everest: although most economists and tax experts say the sales tax should apply to as many final retail sales as possible and have as low a rate as possible, politics often gets in the way. Retailer X and service provider Y argue that their sales ought to be exempt. Policymakers decide that widely purchased products ought to be exempted because they’re widely purchased (groceries, clothing, etc.).

Before you know it, you have a high tax rate on a narrow, volatile tax base. Efforts to broaden sales taxes run into fierce opposition from the beneficiaries of current exemptions.

So I was intrigued to read this in the Idaho Statesman:

The Tea Party group in Idaho’s 2nd Congressional District advocates cutting Idaho’s sales tax rate from 6 percent to 3 percent or 4 percent by eliminating $1.7 billion in sales tax exemptions.

“We want you to make this a concerted effort in your discussions with elected officials this election cycle and we want to make a letter, email, and phone campaign during this coming legislative session,” writes the group’s planning committee in an e-mail. “End game is to reduce the Sales Tax to 3% or 4%.”

Among the examples they cite are the production exemption and the exemption for equipment used in manufacturing, farming, and fabrication. Trouble is, those things should be exempt under a proper sales tax. The mantra is that every final sale should be taxed once and only once. Inputs, raw materials, and machinery are not final retail sales, and any sales tax on them is passed forward to the consumer, resulting in multiple taxation and economic distortions.

I took the liberty of pulling up every sales tax exemption in Idaho, and the estimated revenue each could raise if it were repealed. Below is the list of all of them worth at least $1 million. (This year, Idaho is estimating it will bring in $1.2 billion in sales tax revenue with its 6.0% rate, so at the risk of huge oversimplification, every $20 million in this table can pay for a 0.1% rate reduction.)

Sales Tax Exemptions in Idaho worth at least $1 million
(thousands of dollars)

Motor fuels are probably exempt because the state taxes the sale through the gasoline tax, although a few states have both. Health, medical, professional, business, and information services are big unjustified exemptions (some $750 million, or around 3.7% of potential tax rate reduction), but have proven to be the most politically untouchable. Much of the remaining $1 billion worth of exemptions are inputs, constitutionally required exemptions (federal food stamps, for instance), or small giveaways with presumably political motivation (prescription drugs, senior citizen meals, used mobile homes, caskets, etc.).

The elephant in the room for Idaho is its corporate income tax. At 7.6%, it’s higher than all its neighboring states except Oregon, which has no sales tax. Neighbors Nevada and Wyoming have no corporate income tax at all. Shifting more of the tax burden onto business activity by taxing business inputs, as the proposal here would do, is moving in the wrong direction.