Every year, Idaho spends millions of tax dollars to make sure families receive a good education, live in safe homes and communities, and enjoy good health. However, over the last several years, the state has passed deep and costly tax rate cuts that make our tax system more regressive- disproportionately burdening Idahoans with the lowest incomes.  

Idaho Lawmakers Should Consider Tax Relief Policies that Lift-Up Working Families 

Idaho deserves a fair approach to tax policy that targets tax relief on Idahoans with modest incomes that need it the most. Idaho has some programs to help balance the regressivity of the tax code, such as a property tax reduction “circuit breaker” program, a grocery tax credit, and a non-refundable child tax credit. But these efforts need to go further to make a bigger impact.  

Income tax relief can be provided to those that need it the most by creating tax relief programs that target working families and Idahoans with modest incomes – such as a state Earned Income Tax Credit and making the state’s Child Tax Credit refundable.  

How do income tax cuts make Idaho’s tax system more regressive?  

A regressive tax system is when those with lower incomes pay a larger share of their income on taxes than those with higher incomes. This can happen when everyone is charged the same tax rate regardless of income. Therefore, Idaho sales and property taxes that charge the same tax rate to everyone add regressivity to the tax code.  

Prior to the changes made in 2022, Idaho had an income tax rate that gradually increased depending on your income range. This added progressivity to the tax code, working to balance the regressivity of the sales and property tax. In 2022, Idaho changed to a “flat” income tax system that charged the same rate to everyone weakening the income taxes’ progressivity, thus adding more regressivity back into the tax code. Now Idaho’s tax system is more regressive and disproportionately burdens Idahoans with the lowest incomes. 

Income Tax Cuts are Permanent and Greatly Favor Wealthier Idaho Households  

The bill’s income and corporate tax cuts are the latest in a round of cuts over 3 years to arrive at a “flat” tax of 5.8 percent. Yet these broad-based tax cuts do little to help cash-strapped families. The bulk of the permanent income tax cut benefits will flow to the wealthiest households and corporations, not people and families struggling to afford gas, groceries, and childcare. Tax relief should be aimed towards those that need it the most. 

House Bill 521- Income Tax Reduction Impact

House Bill 521 includes a provision to reduce the flat tax from 5.8 to 5.695 percent. While this could significantly reduce Idaho’s revenue between $59.1 and $74.5 million (see Appendix), most Idaho households would not see a meaningful change in their tax bill from a reduction in the flat tax from 5.8 percent to 5.695 percent. The top 20 percent of households – those with incomes of $137,700 and above – would receive 66% of the overall benefits. The remaining benefits would be spread out among the 80 percent of Idaho’s households whose incomes are below $137,700. The top one percent of income earners would receive a $1,285 income tax cut on average. Families earning around the median income would receive $63 on average from the cut.  

Dollars Spent on Tax Cuts are Unavailable for Education and Other Priorities  

The permanent revenue decrease from income tax cuts in House Bill 521 builds on previous cuts made in early 2023, 2022, and in 2021. In total, these three rounds of tax cuts add up to a $571 million ongoing reduction in long-term revenues, removing the equivalent of 12.4 percent of the state’s main fund that supports core public services like transportation, education, and other economic growth investments (using FY23 General Fund as a reference). ^[1]

Idaho’s deep tax rate cuts will continue to chip away at Idaho’s revenue stream leading to general fund revenues shrinking by 6.7 percent over the next five years. ^[2] When the next recession hits the economy, a lack of revenue may force cuts to education and other important public services and resources. Or a recession could prompt an increase in other taxes – like sales and property taxes, which hits lower-income families and communities harder than wealthier ones.  

Idaho’s total tax collections per person are already very low according to an annual study of the tax load by the Idaho Tax Commission. Idaho has the 36th ^[3] lowest overall tax burden in the U.S. and eighth lowest amongst 11 western states. ^[4] The most recent analysis of the tax load was completed before tax cuts in 2021, 2022, and 2023.  

Every family should have the tools to meet household needs and succeed, especially in a challenging economy. Enhancing economic opportunity makes communities stronger in turn.  

There are better ways to help low- and moderate-income families afford the things they need and assure long-term economic growth, such as: 

• Creating a refundable Earned Income Tax Credit that low-income families can count on year after year to combat continued inflationary effects. ^[5]
  • A refundable Earned Income Tax Credit (EITC) is a tax credit that can put dollars back in the pockets of working families by lowering their taxes during tax season.
  • Families typically claim an EITC for only 1 or 2 years.
  • If Idaho established an Idaho Working Families Tax Credit that is 10 percent of the federal credit, it would cost $30 million, at 15 percent of the federal credit, it would cost $45 million. ^[6]

• Making Idaho’s Child Tax Credit refundable to give low-income families a boost that can help them combat the rising costs of child care and housing. 
  • Idaho’s Child Tax Credit is nonrefundable, meaning that people who owe very little or nothing on their income taxes are not able to claim the full value of the credit, resulting in negligible benefits for households in the lowest income range.
  • If Idaho made the Child Tax Credit refundable, it would cost $29 million, helping over 80 thousand families. ^[7]

• Investing in affordable housing, health care, child care, and other essentials that help people make a living and contribute to the economy. 

Appendix: Estimates of Fiscal Impact of HB 521 Income Tax Cut

The fiscal note attached to the legislation makes a conservative estimate that the proposal will cost $59.1 million in its first year (FY 2025) and $59.9 million in FY 2026. ^[8] The Institute on Taxation and Economic Policy (ITEP), a nonpartisan nonprofit that stimulates tax policy scenarios, makes an estimate that the proposal will cost $74.5 million in the bill’s first year (FY 2025).  

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^[1] Alejandra Cerna Rios. “2022 Special Legislative Session: Understanding Impacts of the Tax and Education Bill." Idaho Center for Fiscal Policy. August 30, 2022. https://idahofiscal.org/2022specialsession/

^[2] Wesley Tharpe. “States’ Recent Tax-Cut Spree Creates Big Risks for Families and Communities.” Center on Budget and Policy Priorities. November 30, 2023. https://www.cbpp.org/research/state-budget-and-tax/states-recent-tax-cut-spree-creates-big-risks-for-families-and

^[3] Lower ranks equal higher taxes, higher ranks equal lower taxes, with 1 being the highest.

^[4] Sharlene Davis. “Comparative Tax Potential: Tax Burden in Idaho and the United States FY2020." Idaho State Tax Commission, December 2022. COMPARATIVE TAX POTENTIAL: (idaho.gov)

^[5] Angelica Moran. “Idaho Tax Credits for Working Families.” Idaho Center for Fiscal Policy. August 9, 2023. https://idahofiscal.org/idaho-tax-credits-for-working-families/

^[6] Ibid.

^[7] Analysis by the Institute on Taxation and Economic Policy.

^[8] Idaho Legislature. “H0477 – Seventy Seventh Legislature (2024): Taxation, school facilities funds.” February 8, 2024. HOUSE BILL 521 – Idaho State Legislature