Wednesday , January 18, 2012 - 10:28 AM
BOISE, Idaho-- Two Idaho economists painted an unflattering picture of tax relief Tuesday, prompting outcries from lawmakers who see it as an opportunity to spur job growth.
In a meeting with the Senate Local Government and Taxation Committee, retired University of Idaho agricultural economist Stephen Cooke criticized a proposal to eliminate Idaho's business personal property tax.
"It's very often touted that if you lower taxes and lower tax rates, it will stimulate business," he said. "My take is that it's a form of candy store economic development, where businesses line up for lollipops that spoil their dinner."
Idaho is caught in a "low skills equilibrium trap," Cooke said, where the labor force has below-average skills compared to the available jobs. Because they require on-the-job training, he said, they're paid less than they would have been if they'd come in with the necessary skills and never catch up financially.
The way out of that trap, Cooke said, is to invest in education, work force training and infrastructure that complements private industry needs.
He pointed to the partnership among farmers, agricultural research centers and extension agents as "a stunning example of how government got it right."
The governor's IGEM initiative (Idaho Global Entrepreneurial Mission) is another good example, he said. By partnering university researchers with private-sector investors and manufacturers, the program is intended to help commercialize their ideas and inventions.
Several lawmakers took exception to Cooke's statements that tax cuts "are counterproductive to economic performance."
"You seem to be suggesting that we should raise taxes and things would be a lot better," said Sen. John McGee, R-Caldwell. "That's difficult for me to get my arms around."
Cooke said he wasn't advocating for tax increases. However, if the choice is between eliminating an existing tax or investing in education, the latter approach offers substantially greater long-term benefits.
"We've just gone through a recession where you made prudent cuts," Cooke said. "Now we're coming into the recovery. Yet instead of making up for lost time, we're talking about decreasing the tax base -- the tax base that pays for local services. That's the wrong long-term strategy."
Former state economist Mike Ferguson, now director of the
Idaho Center for Fiscal Policy, said he wasn't there to debate whether eliminating the personal property tax was good policy or not. In fact, the Legislature already has a mechanism in place to remove the tax for most small businesses when revenues exceed 2008 levels by 5 percent.
However, he did dispute the notion "that it will pay for itself that it won't cost us anything because of ferocious economic expansion it would release."
A 2007 study by economist Stephen Entin with the Institute for Research on the Economics of Taxation concluded that eliminating the personal property tax would cost about $108 million. However, it would also generate more than $500 million in private-sector activity and create thousands of jobs.
When the income and sales tax revenue from that activity was taken into account, Entin estimated the net cost to the state would only be about $22 million.
Ferguson suggested the study had a number of problems, saying it "falls squarely in the too-good-to-be-true category."
A recent Tax Foundation ranked Idaho 18th best in the nation for business climate, he said, and ranked it second for property tax policies.
"For the half-decade preceding 2011, we consistently ranked in the Top 3 (for property taxes)," Ferguson said. "That means Idaho has one of the very best property tax systems in the nation from a business perspective -- which begs the question, what exactly is the problem we're trying to fix?"
Senate President Pro Tem Brent Hill of Rexburg noted the study ranked all of Idaho's neighboring states even higher.
"Don't you think we need to consider competitive environment when setting tax policy?" he asked.
Ferguson agreed, but added neighboring states all have "odd" tax structures that are missing either a sales tax or income tax.
Spence may be contacted at bspencelmtribune.com or (208) 791-9168.
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