Three Choices for the Legislature

The State of Idaho is facing a $400 million budget shortfall. This could mean a further reduction in k-12 funding of up to $200 million and $175 million reduction in the Department of Health and Welfare (DHW). Why are tax revenues down? What can be done?

Tax revenues are down because the private sector of the economy has contracted. Idaho once had a $54 billion economy that generated $3 billion in tax revenues at a 5.5 percent average tax rate. A $45 billion state economy at the same 5.5 percent generates only $2.4 billion in taxes.

It is obviously better to have a bigger economy than a smaller economy. A $60 billion economy would generate more taxes for public education, roads, and social programs than a $40 billion economy.

Fact: higher taxes and more regulations act like a brake and slow the economy while lower taxes and fewer regulations stimulate the economy.

We have one of three choices:
1. Do nothing to reduce taxes and regulations and hope the economy improves by itself. This is called the Titanic Approach; hang on long enough and it will come back up.
2. Raise taxes to protect the state budgets like education and DHW and run the risk of slowing the economy even more. A smaller economy at a higher tax rate will result in less tax revenue than a larger economy at a lower tax rate. ($40 billion x .06% = $2.4 billion: $60 billion x .05% = $3 billion)
3. Reduce taxes and regulations to stimulate the economy.

Which is the wisest policy to adopt?

The Titanic Approach is a passive approach. It is doomed for two important reasons. First, according to Americans for Tax Reform, the cost of government is 48 percent of the GDP (Gross Domestic Product) plus another 15 percent of the GDP to pay the cost of regulations. The cost of taxation and regulations is too high in order for the economy to significantly improve. Second, environment regulations are killing natural resources and manufacturing jobs which form the foundation of any strong, stable economy. The strategy of doing nothing runs the real risk of condemning the average Idahoan to a steadily declining standard of living for years to come.

Raising taxes will guarantee a smaller economy and a prolonged recession. Who would make this choice?

The last choice, our only real choice, is to reduce taxes and/or the cost of regulations to allow the private sector of the economy to expand and regain its strength. I see a real opportunity for the State Legislature to reduce the cost of regulation which has the same effect as a tax cut and getting more money into the private sector without reducing tax rates. While it will not be easy to reduce spending and still maintain services, for far too long the legislature has taken the easy approach of raising taxes when the going got tough. What will happen this year? What will the legislature do? What do the citizens of Idaho support?