Idaho’s state corporate income tax rate is 7.6 percent. The Chamber Alliance believes that reducing the rate will attract more businesses to Idaho, increasing job prospects and revenues.
What makes this proposal interesting is the reason. According to the Chamber Alliance, “Idaho has been eliminated from consideration for economic development projects based on this tax rate alone.” It’s the “alone” part that that I wondered about. Is Idaho really ruled out of opportunity because of the corporate income tax?
So what would a corporate tax reduction look like? Representative Marv Hagerdorn gave me his vision for the 2012 legislative session and what a potential bill would look like.
His plan would decrease the corporate tax rate down to 4.9 percent over a span of ten years. Additionally, he would implement a growth cap on the state budget. Since all political sub-divisional cap their budget by 3 percent growth, Hagerdorn believes the state should as well. When it does, the state can take any revenue above and beyond the state budget cap to buy down the following year’s reduction in interest rates. He add that that “The more business we bring into the state, the faster we can buy the rate down,”
“The problem with getting this type of bill passed,” Hagerdorn explained, “is that no one can predict how many business will come into the state, how many will leave, and how many will fail. The only numbers can present is the loss in revenue.”
Hagerdorn is hoping for a Fields of Dream’s approach. If you cut it, they will come. The problem is that no one can predict how many will come. When the only thing you know is the loss, it’s hard to stomach approving such a large cut to the state budget.
We have actually done this before. According to Ray Stark, senior vice president of government and community relations at the Boise Chamber, we reduced the corporate rate about 12 years ago from 8 percent to the present 7.6 percent with the same goal of economic development.
At a chamber-sponsored leadership conference in Stanley, Dennis Donovan, a site selector from New Jersey, surprised the business leaders and legislators attending when he informed them Idaho’s tax rate was too high. A high tax, Donovan explained, prevented Idaho from attracting businesses.
Surprised, the Chamber created Idaho Associate of Commerce and Industry to work with the Legislature. Eventually they managed to reduce the corporate and personal income tax rates.
In more recent history, the Chamber brought out two more consultants during their 2009 Leadership Conference. Mr. Stark indicated that again, their findings suggested that Idaho’s tax rate was still too high. Hence the current proposal to reduce the tax rate.
So is the rate high for the region? Washington, Wyoming, and Nevada have a rate of zero percent. Not really a fair comparison. The highest bracket in Oregon is 7.6 percent, the same as Idaho (although they don’t have a sales tax). It’s when we compare ourselves to Utah, whose rate is 5 percent, that Idaho really looks high. More importantly, look at how well Utah has done at attracting businesses over the last few years—that’s something worth thinking about.
Regardless of the high tax rate, our overall cost of doing business is low. As the Boise Valley Economic Partnership website indicates, Idaho has” low workers’ compensation insurance premiums, competitive natural gas prices, and low electricity costs.” The website adds that “Economy.com ranks Idaho among the 10 states with the lowest overall costs of doing business.” Shouldn’t that count for something ?
Moreover, the Idaho Department of Commerce informed me that if you take into account various incentives the state offers to businesses, the real rate is actually somewhere between 3.5 percent to 5 percent, depending on the industry. So why all the commotion about a high tax rate?
A tax rate of 3.5 percent to 5 percent should make us attractive, right? Not quite, says Clark Krause, the Executive Director of BVEP. “Site selecting consultants, the companies that mid- to large-level businesses hire to help them find new locations, won’t take the time to do that dig down to that level of detail. Their looking at 25 to 65 communities from the start; they need to cut in order to narrow selection process—whether or not it’s fair. The tax rate is equivalent to a billboard. At the moment, Idaho doesn’t have a billboard to tell people we are open for business.”
I wondered if all of this was just a move to reduce taxes, considering the whole nation is in an anti-tax frenzy. So I called up Dave Brandon of Dallas-based Site Selection Group and asked him about tax rates and the selection process. He said: “Any site selection advisor worth his salt will make his decision based on no incentives and tax policy. Incentives don’t last forever.”
So much for the Department of Commerce’s promotion of tax incentives. Regardless of how wonderful and plentiful they might be, it seems that the corporate tax rate might be masking them from sight.
But Brandon also said he “never had a client that has said we’re not going to Idaho because the tax burden is too great.”
Okay, wait, I thought it was singling us out for elimination. When I spoke with Dennis Donovan, the originator of the first cut, he put it this way: “There are lots of factors depending on different businesses, but, bottom line, Idaho’s tax rate has always been an Achilles heel to the state.”
So what’s happening? Why is the Chamber using the tax rate as a lead indicator? The site selectors I spoke with indicated that there are too many factors beyond just the tax rate.
If the rate really functions as a billboard, we might want to consider other options. But that gets to Krause’s other point: compared to other states, Idaho has a limited toolbag. He’s not alone in his thinking. A handful of people think Idaho should focus on cultivating its own talent instead of trying to bring in outside business. I’ll discuss these concerns next week in “Developing Idaho Part 2: Toolbags and Job Creation.”