How to close Idaho’s budget gap

Senator Elliot Werk sent out his pre-session newsletter today asking for feedback so I sent him a few ideas for balancing the budget. The reality is that without spending reductions and tax increases, there is no way to get to the $340 million that we’re gonna be short. But here are seven things I’d probably do regardless:

1. Cancel all the state purchasing contracts and work out new contracts with local vendors. At any given day you can go to Best Buy and get computers cheaper than you can on the State contract. With furniture, it’s even more noticeable. Plus, why we would want to send Idaho’s wealth directly to Michael Dell in Austin TX is beyond me. We need to buy local and keep those profits with our businesses and banks in Idaho. That is the way it was before Gwartney took over.

2. Privatize the Department of Commerce as they have in Utah. Send Packwood and Dietrich to the Governor’s office and help the private sector put together an NGO like the Utah Economic Development Corporation to run the show.

3. End the charade at the Tax Commission by redefining business income. The problems at the Tax Commission are not agency problems, it is a policy problem created by legislators. If you redefine business income more simply, you’ll close the loophole in 63-3027 that allows companies to challenge their tax bills. This will also bring in $5-$10 next year from out of state corps dodging their taxes. I sent Killen and Sen. Hill a bill mock up for this.

4. Give local governments and entities more authority to control their own futures. School funding is not my strong suit, but I can’t help thinking that giving the Boise School District more authority to raise revenue (and the City of Boise as well) would allow the state to reduce transfer payments to those entities.

5. Give up on the Tax Expenditure bugaboo. The state will fail to collect taxes on about $2 billion in sales and income this year - so the issue is far worse than you describe. However, Idaho’s tax code really doesn’t look any different than any one else’s as far as exemptions, credits, deductions, and exclusions go. In that $2 bilion there’s really only about $20 million worth of really bad tax code. Almost 80% of those exemptions are for things that generally comport to “good” tax policy - that is those exemptions mitigate double taxation, regressivity, and help us comport with interstate taxation. So there really isn’t a whole lot of bad tax policy there to be honest (Boise State has a new paper coming out on this that I co-authored). However, I would let Alex LaBeau trade a rate reduction or increased cap in Personal Property Taxes or Corp. Income taxes for every dollar he agreed to support in elimination of some of the really dumb exemptions (like model glider kits, vending machine sales).

6. Why not eliminate the Senate? There isn’t any use for that body (sorry) if it isn’t going to be structured like the U.S. Senate. Go the way of Nebraska, Australia, Canada, and Hong Kong. Unicameral.

7. Cut ISP. Masterson says BPD is bored and underworked so they are focusing on traffic enforcement. Fine. Push off ISP’s urban patrols on urban police departments.

I assume that legislators have already done all the sleight of hand stuff - raise revenue predictions; sell assets; borrow from other funds; accelerate revenue collections; defer payments; capitalize current costs; anticipate future savings; raid pension funds or defer contributions; rearrange payment dates - and the like. No one asks but I assume the $340 million figure is what is still left after al the budget tricks have been applied. Gonna be a rough ride this session . . .

Brad Little: Idaho “Very Competitive”

Last week the Governor’s Blue Ribbon Transportation Commission wrapped up its work. The work was trying to figure out how to pay for the massive transportation infrastructure investment needed in Idaho. Betsy Russell at the Spokesman wrote a GREAT series of posts on the work of the Commission. I encourage you to get the details there.

In short, the Commission decided to recommend the Governor do nothing. In order to maintain and improve our existing road and bridge network, Idaho needs to spend more than a half billion dollars per year. And revenue enhancements are not forthcoming.

Lt. Governor Brad Little in response to the Committee’s work said this:

“One of the things that makes Idaho a great state and makes us very competitive is how hard it is to raise taxes.”

First a comment, then I’ll ask the questions that are begged here. To illustrate the flawed thinking in this statement, let me translate it into private sector language (since the Guvs want to run ID like a business):

“One of the things that makes ACME a great company and makes us very competitive is how few capital expenditures we make.”

Any CEO that said they were successful because they didn’t invest in their physical plant would be deemed insane by the Board of Directors and fired. But our leaders say exactly the same thing - we’re not going to invest in Idaho and that’s what makes us competitive - and we send them right back to office with high marks.

So - on to the questions. I want to know who told the Lt. Governor that Idaho is competitive, in what, and compared to whom? As I have argued over, and over, and over if a site selector has Boise and Salt Lake on his list, there is simply no way Boise wins. Not ever. Boise is absolutely not even in that league, and that should concern private and public sector leadership here, but it does not.

There’s a nifty new tool out there that Dr. Brian Greber over at the BSU College of Business and Economics developed that shows detailed cost of living comparisons between metro regions in the U.S. Soon, he’ll be unveiling dashboards that will allow public and private sector leaders real time economic indicators. Maybe that will scare ‘em finally. We’ll see. Anyway, quickly - here’s the comparison of SLC and BOI:

This tool is mostly relevant for employees as opposed to employers. And remember, it’s employers that decide where plants are located. Generally, employers don’t care about quality of life issues. They care about costs, connectivity, infrastructure, and quality of workforce among other things. So employers don’t care if a t-bone costs more in Vegas than it does in Des Moines. But three things that they will definitely care about are utility costs, local transportation costs, and the cost of health care. And, as Dr. Greber’s nifty tool shows us, the cost of living differential between BOI and SLC is minimal except in the areas that business cares about.

So maybe Brad Little is right in one regard. We’re competitive because you can pay low wages in Idaho, because cost of living is relatively low. But the lack of economic development in this region relative to the BOOM in economic development just south of the Idaho border, is prima facie evidence that those low wages aren’t offsetting the costs of doing business here.

Give the U of I to Washington State

I’m reading through a book by Jim Weatherby and Randy Stapilus, Governing Idaho: People, Politics, and Power and came across an interesting note regarding the creation of the State of Idaho and the Idaho Constitution:

Prospective threats to the Constitution - which was drafted without yet having the benefit of a state to attach it to - quickly arose. The most notable area of opposition came from the northern part of the territory, which was still interested in separation from southern Idaho and joining with Washington State. But northern Idaho was given some spoils in return for support, especially an assurance that the University of Idaho would remain at Moscow.

So - proposition to help cut the budget this session: go ahead and give north Idaho, and the U of I to Washington State. That saves the U of I appropriation of about $150 million. I’m good with that.

Two Better Ways to Fix the State Tax Commission

Unless you’ve been living in a cave for the last two years you are familiar with the issues at the Idaho State Tax Commission. In short, all Idaho is now aware that our state tax commission regularly lets out of state corporations get away with paying way less taxes than they actually owe. This begs only one question.

Why?

A very large part of the problem is caused by legislators, NOT tax commission employees. The root of the problem is how the state of Idaho defines “business income.” Here’s the actual definition from Idaho Statute 63-3027:

“Business income” means income arising from transactions and activity in the regular course of the taxpayer’s trade or business and includes income from the acquisition, management, or disposition of tangible and intangible property when such acquisition, management, or disposition constitutes integral or necessary parts of the taxpayer’s trade or business operations. Gains or losses and dividend and interest income from stock and securities of any foreign or domestic corporation shall be presumed to be income from intangible property, the acquisition, management, or disposition of which constitutes an integral part of the taxpayer’s trade or business; such presumption may only be overcome by clear and convincing evidence to the contrary.

So here is what happens at the Idaho State Tax Commission, and tax commissions all across the country where this definition is used (about 26 states). A corporation gets its tax bill and goes to the tax commission and says - “yeah this income you are trying to tax us on - we don’t think it’s an integral or necessary part of our business operations, so we’re not paying tax on that income.” There isn’t a tax commission in the country that could stand up to an army of well funded corporate lawyers, so tax commissions usually fold and cut a deal for whatever taxes they can get rather than getting their butts kicked in a long and costly lawsuit.

The simple solution, then, and one that lawmakers here have avoided, is to redefine business income. In Texas, North Carolina, Florida, Iowa, Minnesota, and Pennsylvania, they don’t have this issue. Why? Their definition of business income reads:

Business income is all income which is apportionable under the Constitution of the United States.

In short, this says if case law somewhere has called it apportionable income, you’re paying tax on it.

So that change covers most of the problems at the Tax Commission. But former Attorney General Tony Park in a recent Statesman op-ed highlighted another issue - the improper attribution of credits, deductions, exclusions, and exemptions by corporations to their income tax bills. Indeed that is an issue, but Park’s suggested investigation certainly won’t yield any answers, and policy responses by legislators that try to reorganize the Tax Commission won’t solve anything either. So here’s the big idea: eliminate the corporate income tax.

This idea certainly won’t fly in this climate, and it isn’t a new idea, but this is a topic that we need to take seriously. One component of an optimal tax is that it doesn’t cause tax payers to change their behavior (unless we are trying to get them to change their behavior, e.g., cigarette taxes). Another component of an optimal tax, is one that provides adequate revenues to the government. Under both of these cases the corporate income tax completely fails.

As we know, corporations will go to great lengths to avoid taxation. This has huge efficiency costs to the economy and administration costs to the government. And what about the corporate income tax as a revenue source? Well, last year the corporate income tax generated just 5% of revenue to the general fund. That share is also declining over time. 30 years ago, the tax contributed about 10% of general fund revenues. Nationwide, revenues from corporate income taxes to state governments averages less than 3% of most states’ budgets.

So the big question is, should we be spending this much time on the State Tax Commission and corporate tax avoidance when we’re talking about a declining revenue source, and one that provides only 5% of revenues to the general fund?

As noted this isn’t the year to be reducing revenues any further (this is about $140 million/yr hit to the budget) but I think we need to take seriously the idea of eliminating this tax altogether. While I wouldn’t advocate this as genuine economic development policy, eliminating the corporate income tax certainly won’t hurt business retention and attraction efforts.

For this year, redefining business income is a simple no-brainer. As the economy improves and revenues increase in the future though, we ought seriously to ask ourselves whether the corporate income tax is even worth maintaining.

Housing Prices Still Dropping. Bueller? Bueller?

I am guessing that in all the state budget cuts we lost the part of government that was responsive to the people whom elected them. Today’s Idaho Statesman has this:

A survey by the National Association of Realtors showed prices rising in 77 of 155 metropolitan statistical areas in the third quarter, compared with the third quarter of 2009. But the Boise/Nampa MSA showed a 14.1 percent decline. Only eight other metro areas had bigger percentage decreases. Ocala, Fla, had the greatest decrease: 20 percent.

Home prices INCREASING in half of the U.S. Boise-Nampa MSA has the ninth WORST housing market in the nation. And Joe Estrella spins this as good news because inventories are falling? That might be good news if employment was expanding (it’s not) but as a stand-alone statistic it means nothing.

But the real surprise is that our electeds continue their head in the sand routine where our economy is concerned. Governor? Mr. Speaker? Bueller? Bueller?

The Loudest Message of All: Local Control

Last night was indeed a huge win for the Republican Party. When all the dust settles it will probably be the largest mid-term shift since the Great Depression. But in Idaho, where the GOP were also big benefactors of a national Tea Party tidal wave, voters sent an additional message: give our local governing bodies more control.

What I am referring to of course was the overwhelming victory of the three Constitutional Amendments - HJR 4, 5, and 7, which variously devolved more fiscal control to public hospitals, airports, and utilities. Idaho, I salute you.

Make no mistake, this vote stands in direct contrast to the usual will of the majority party in this state, one that has never seen fit to devolve local control (Home Rule) to municipalities. Idaho’s cities have less municipal authority that any other state west of the Mississippi. We’re nowhere near the Home Rule we need yet, but this is a good start.

I feared for the outcome of these initiative last night because usually when the voters are angry and confused, complicated issues such as these garner NO votes. I credit Idaho’s voters with being smart enough to resist the utterly ahistorical hysteria promulgated by Dave Frazier at the Guardian Blog, and the Free Market Duck who hides behind that pseudonym. The simple fact is that since the inception of these things called “states,” cities, which were almost always founded first, have gone to state legislatures to get more local authority because the boilerplate constitutions that states adopted all across the east, and then another one in the west usually didn’t give cities (our economic engines) enough authority to even do the basics. Frazier ignores that fact.

Luckily, we can have the work of Professor Richard Wade, one of the most cited historians of the twentieth century, to tell us the real story. From Wade’s seminal text, The Urban Frontier: Pioneer Life in Early Pittsburgh, Cincinnati, Lexington, Louisville, and St. Louis:

Legally cities are the children of states, but in the West many offspring antedated their parents. With the exception of Pittsburgh, the major frontier towns were established before the creation of their states. Indeed, St. Louis saw a half century pass before Missouri entered the Union, while Louisville and Lexington were more than a decade old by the time Kentucky gained its independence from Virginia. Even the youngster, Cincinnati, had passed its its tenth birthday when Ohio split off from the Northwest Territory.

As I have written before, the same can be said of Boise. Boise was settled in 1863 - the State of Idaho didn’t exist until 1890. Hence, the 2,000 Boiseans that were living in the Valley when “Idaho” was created had been governing themselves for a quarter century. However, unlike almost everywhere else in the nation, Idaho has been painfully slow at recognizing local authority. According to Wade, that stands as an oddity in American History, as he explains the experience in the East, and then in these new western colonies:

Eastern urban life was over a century old when the Revolution brought national independence to the colonies. The new state constitutions generally reaffirmed or regularized established practices or confirmed ancient privileges of local self-rule.

The reason for cities to have some control over their own administrative affairs was quite simple. Theses new state constitutions levied such fiscal austerity upon the cities, that they were left without ability to pay for basic things such as bridges, streets, sewers, wells, and street lights. Thus the remedy was petitioning the legislature for more local control, and amending state constitutions and local charters. In places like Louisville which in the early 1800s were the West, charter amendments were frequent. In fact, Richard Wade notes that their charter was amended twenty-two times before 1815.

So in reality, almost (and that’s being charitable) none of what you hear from folks like Frazier and the Duck, even remotely approaches the usual American experience. The truth is, states, since the early 1800’s have been ceding power to local governments. The supposed constitutional protections that “we’ve always” had are a myth. It wasn’t until 2006, the date of the Frazier decision, that most local authorities in Idaho even questioned their ability to deal with their own capital funding and needs. As Idaho voters figures out, the Boise Airport seems to have amassed a good track record as a responsible public agency, operating as it did without Frazier’s supposedly so important Constitutional protection from 1925 to 2006. For 81 years with no assumed Constitutional protection the Boise airport hasn’t recklessly mismanaged public money. What makes Frazier think that would happen now? Frazier’s “Constitutional protections” have only existed in practice for FOUR years. Again voters were clever enough to figure out that these entities - hospitals, airports, and utilities, have served Idahoans well - better than the STATE I’d contend, and voted YES on all these amendments.

At least now we can close the book on Frazier. Hopefully, we’re turning to a new chapter of devolution of power from the state to the governments and public entities that are closest to the people.

Tea Party are you listening?

My appearance on Fox 12: Constitutional Amendments

I made a quick appearance on the news last night to talk a bit about the Constitutional Amendments that are on the Idaho ballot today. I suspect that there is still a lot of confusion out there about these proposed amendments. If you have questions, I recommend visiting IdahoVotes.GOV to get some background information. Most importantly, GO VOTE!

My Boise State Radio interview on “The Hole”

Got a call the other day from a new reporter over at Boise State Radio, Scott Ki. As a new Boise resident, he wondered why on Earth there is a large hole there at Eighth and Main. I told him the unvarnished truth: the site is cursed.

Hear the whole interview from Boise State Radio.

More BSU v. U of I

I was a little surprised that the local media thought that the U of I opening a t-shirt shop in downtown was a news story. And the Governor and Mayor show up? Was it news when Palmer Cash opened up downtown? At any rate in the ongoing rivalry between the two schools I think it is worth noting that while U of I is breaking its arm patting itself on the back for opening a merchandising storefront, Boise State has opened an academic storefront downtown on Main Street. Probably enough said there.

Before I leave the subject of U of I though, I am absolutely confounded about this “3rd year law” thing that U of I is proposing to host in the old Ada County Courthouse. I’m confounded because U of I law students have always had the option to do their third year here in Boise - so what’s the news? It still remains to be seem as to what will happen with the U of I law school’s maybe move to Boise - the new space will certainly aid that effort. But what I’m waiting for at least, is word about programming. My guess is that U of I won’t offer anything that will fit the needs of Boise based students, i.e., night classes for working professionals and streamlined financial assistance. Those will certainly be hallmarks of the Concordia program.

And while we’re on the subject of lawyers - there are so many negative comments about lawyers every time there’s an article about either of the law schools. I don’t get it. News flash to the unaware: those with law degrees do lots more than chase ambulances. Lawyers start and manage companies that employ people (Blackfin, and Keynetics are a couple in town that come to mind). Trus Joist and Washington Group were headed by managers with law degrees. I know “lawyers” who run web companies, “lawyers” that run non-profits, and “lawyers” that found start-ups. Yeah, its usually a good thing when a boat full of lawyers sinks, but there is absolutely nothing negative about new law schools coming to Boise.

Allred’s Transportation Plan: Huh?

I’ve always pledged to be an equal opportunity critic, and I’ve given Butch plenty of hell for ignoring the financial meltdown in the state, so now it’s time to ask Dr. Allred about his transportation stance.

Following the report that showed truckers aren’t paying their fair share of road costs, Allred conceived the following, according to reports in the Statesman:

Democratic gubernatorial candidate Keith Allred aims to cut Idaho’s gas tax by 3 cents and says Gov. C.L. “Butch” Otter’s push to raise more money for roads is misguided.

Allred would cut the tax to 22 cents per gallon, from 25 cents per gallon now, to save drivers $19.2 million annually.

He’d boost fees paid by heavy trucks by an equal amount to make up the difference.

Ok. This is nice populist rhetoric, but here’s the reality. First, there is universal agreement that no drivers are paying their fare share of transportation costs. I.W.H. Parry and K.A. Small argue in a 2005 article in the American Economic Review, i.e., the top journal in the field of economics, that gas taxes in the United States would need to rise to $1.01 per gallon (from around $.40 per gallon today) in order to cover the externalities created by accidents, pollution, and congestion. So reducing fuel taxes, as nice as that sounds, moves us in the opposite direction of optimal policy. Further, it’s totally unsustainable - we cannot finance our infrastructure needs with the current level of taxation - we certainly can’t reduce that rate.

So Allred proposes to raise taxes on truckers. Sounds like a great idea - stick it to the man. Let me just ask all you legislative observers this question: how many people think a bill that raises the gas tax on truckers would ever get out of committee? Exactly.

What we have so far in this governor’s race is no transportation solution from either candidate. Allred’s plan has no chance of becoming reality, and shouldn’t become reality - it moves Idaho away from good policy, not toward it. And after making transportation a centerpiece of his first campaign, the Governor has all but given up, his task force offering a mealy-mouthed plan to increase the gas tax by a penny in order to fund the billions of dollars in maintenance, safety, and infrastructure needs of the transportation system. That isn’t going to work either.

What’s that sound you hear? That would be legislators in Utah, Nevada, and Arizona - three of our regional competitors - getting a good chuckle as they watch themselves pull away in the transportation game.