Otter: benefits of repealing grocery tax are mostly imaginary while downsides are very real

Gov. C.L. “Butch” Otter killed the 2017 Legislature’s last chance to lower taxes by vetoing a bill exempting groceries from sales tax April 11.

Although several lawmakers called lowering taxes a priority, the Legislature did not pass many bills this year to reduce Idaho’s tax burden. Bills to reduce Idaho’s income and unemployment insurance tax rates failed to pass through the Senate.

Otter wrote a letter to legislative leadership during the session saying he did not support eliminating the grocery tax. Businesses from around the state lobbied the Legislature to repeal the tax over concerns that residents of Idaho’s border towns cross state lines to shop at stores in Washington, Oregon, Nevada, Montana and Wyoming where there isn’t a tax on groceries.

The Legislature passed the grocery tax repeal. The grocery tax bill was the only tax reduction option sent before Otter in 2017.

“I wrote a letter to our legislative leaders making it clear that I opposed removing the sales tax on groceries,” Otter said in a prepared statement detailing why he vetoed the bill. “It was my hope that our legislators would look beyond the understandable impulse to relieve a financial burden on taxpayers to weigh the relative merits of such a change. Unfortunately, they did not.”

Otter said he would have supported reducing the unemployment insurance tax because it wouldn’t have affected the state’s ability to pay for needed education and infrastructure programs. But he couldn’t support the grocery tax repeal because it removes too much money from the state’s General Fund.

“If you take the money already committed from the General Fund and then give back the sales tax on groceries, we will be well below what we need,” Otter said April 3 about promises the state has made concerning education spending and money needed to repair flood damage around the state.

The state would have lost about $80 million from its General Fund in its next fiscal year if it exempted groceries from the sales tax. It also might have exposed itself to greater budgeting volatility because food sales are a stable tax revenue source.

In his prepared statement, Otter quoted a message written to him by Dean Cameron, former state senator and chairman of the Legislature’s budget-setting committee:

“By removing food and other commodities from sales tax they unintentionally tie it more directly to the fluctuations of the economy. When the economic downturn comes — and it will — the Legislature will be forced into tax increases or dramatic reductions in education spending. Sales tax is what saved us in the four economic downturns during my tenure.”

Otter isn’t the only one who opposed removing the grocery tax. The Center for Fiscal Policy warned lawmakers before the session started that removing the tax would cost education budgets $21.4 million and health and human service budgets $7.3 million.

Utah lawmakers also warned the Legislature not to remove the tax on groceries while a legislative interim committee was working on tax reduction proposals before the 2016 session.

Utah removed its sales tax on groceries and experienced dramatic peaks and valleys in its budgets as income tax revenue fluctuated with the economy, said John Dougall, a Utah state auditor.

Thirty-seven states either exempt groceries from sales tax or don’t have a sales tax. Proponents of eliminating the tax in Idaho say it would increase spending at grocery stores and help Idaho stores compete with stores that don’t have to charge a sales tax.

“You don’t have to travel far to find a border community where this hits the ground,” Sen. Clifford Bayer, R-Meridian and sponsor of the bill Otter vetoed, said in March. “You have boarded-up grocery stores because we are losing business as customers cross the border to buy their groceries.”

But Otter said the effects of removing the grocery tax wouldn’t be that dramatic.

Idaho already returns about $150 million to taxpayers through its grocery tax credit, so much of the revenue Idaho would be losing is from tourists visiting the state and purchasing food, he said.

“The truth is this bill’s benefits are largely imaginary while the downsides are many and very real,” Otter said.