Making Idaho’s Tax System More Progressive

UVI’s 2006 fight to expand the Homeowners Exemption

While Californians were passing the draconian property tax initiative, Prop 13, in the late 1970’s, Idahoans were having their own property tax revolt. After initial right wing efforts to implement a Prop 13 style initiative failed in 1979 and 80, progressive community activists led by Al Fothergill and Ken Robison of the Idaho Citizen’s Coalition gathered the signatures and ran a campaign that resulted in the passage of the 50-50 Homeowners exemption in 1982, which exempted 50% or $50,000 of the value of homes from the property tax. The initiative was fought vigorously by business interests in the state because it targeted relief to homeowners and demanded that industry pay its fair share.

Not since 1982 has there been a major change in the property tax to the benefit of homeowners. This year marks the next time.

With another Prop 13 type initiative pending, demand was high in 2005 and 6 to address rapid inflation of property values and taxes. It was clear to United Vision for Idaho (UVI) and our allies that this should be done through an expansion of the Homeowners Exemption and that this was extremely popular with the public.

Through the efforts of UVI and our allies, including The Common Interest, and the associations of school administrators, school boards and teachers, through a combination of citizen action, lobbying and media work, we finally overcame the opposition of big business, led by realtors and the Farm Bureau, and convinced legislators that listening to the taxpayers and voters was in their interest.

For the past 7 years, UVI’s Idaho Center on Budget and Tax Policy has been analyzing the impact of tax proposals in Idahoans with low and moderate incomes. These analyses have been made available to lawmakers, the media and citizen action groups. We introduced the idea that who pays matters through our distributional analyses. We backed up solid, credible analysis with citizen action so that legislators knew that this mattered to their constituents.

2006 was a rough and tumble legislative session. From the beginning of the session, it seemed that the strong desire of the public for an equitable property tax for homeowners would be overwhelmed by the efforts of a segment of the business community led by IACI and the Farm Bureau (with several legislators carrying their water) to make this a debate over public school funding. This was always subtext but it got heightened as the Legislature got into full swing.

To win this battle for homeowners we had to bring the issue back to the interests of homeowners. Initially it seemed like the proposals we supported—expansion of the homeowner’s exemption and circuitbreaker and repeal of the developer’s discount—would go through easily. Then the real game started.

Representative Ken Roberts, a Donnelly Republican, brought forward the first of many proposals to remove the Maintenance and Operation levy for public schools from the property tax, raise the sales tax and place total control over school spending in the hands of the Legislature. This idea has been supported for years by agricultural interests and this year by big business.

The multi-year efforts of UVI’s Idaho Center on Budget and Tax Policy to introduce an income distribution analysis into the legislative and public debates really paid off. The Center believes that anytime we look at tax reform we need to be concerned about who pays. Taxes hit people in different ways depending on their incomes. Who pays is the justice issue in a tax fight.

And we were fighting over who pays. Plans to raise the sales tax, which went from ½ a penny to a penny and a ¼ as the session progressed, always cost people with incomes below about $100 thousand more than they would get in property tax relief. That’s why the sales tax is regressive. People at the highest income levels in Idaho would have gotten net tax savings despite paying more sales tax. Renters would have been nailed because they got no property tax savings and an increase in sales tax to boot.

Our analysis, backed up by citizen lobbying, helped shape the debate on M&O replacement. There was lots of talk about how poor people would do under various proposals. Most of it was anecdotal. UVI was able to provide real numbers that were used in floor debate in the Senate and in newspapers around the state. Ultimately the numbers trumped the stories of “my neighbor who would do better under my proposal.” Many citizens then had access to those numbers and were able to make the case to legislators that replacing property tax with sales tax was a tax increase for most homeowners. And moreover it threatened the stability of public schools. It became harder and harder for legislators to make the case that they were trying to help the average homeowner when the true benefit would go to high income Idahoans, utility companies and industrial agriculture.

For many years, UVI has used a booth at the Western Idaho Fair to engage people in a variety of surveys and actions around tax reform issues. In the summer of 2005, UVI did a survey with colored tokens and plastic canisters and invited nearly 1500 people to say what they wanted to happen to their property taxes on both the spending and taxing side. Overwhelmingly people chose 3 things: #1 Keep public school spending intact, #2 increase the Homeowners Exemption to $100 K and #3 protect local government spending. All other ideas, including the substance of the proposed initiative and replacing property taxes with sales tax to fund schools, were far down on the list. Over 1000 people signed postcards in support of the top three priorities.

Many legislators couldn’t get the idea that Idaho taxpayers want both to protect local services and tax relief for homeowners. As we went into the Legislative session this year we testified and lobbied and e-mailed legislators to let them know that we could accomplish both goals by expanding the Homeowners Exemption and by indexing it to inflation to protect the integrity of the property tax system. We called on them to support fairness for homeowners—who make up 72% of Idaho homes—and not to listen to big business, which was looking out for itself and not homeowners.

When United Vision for Idaho and the Idaho Center on Budget and Tax Policy talk about the tax system we focus on four principles: Is the tax fair in taxing people based on ability to pay rather than political criteria? Does it hold the beneficiaries of a tax break accountable to do what the tax break was supposed to accomplish, like create jobs for example? Is the system stable? Does the system produce adequate revenues to fund the important priorities of the state?

As we started to look at proposed property tax changes beginning last spring, we recognized first that something needed to be done for homeowners and, at the same time, that we must do no harm to public schools. UVI is not a group that hates taxes. In general we’re a group that believes like Supreme Court Justice Oliver Wendell Holmes that “Taxes are the price we pay to live in a civilized society.”

Still, we believe that we must hold our government accountable to spend our money well. When we looked at property tax reform, we began by looking at how to make our property tax fairer—not how to cut local services or public schools. Our property taxes are out of whack when the taxes of homeowners have gone up 4 times as fast as commercial property owners. There is a lot of unfairness that is created because of the different ways that property is assessed. These are problems that can be solved without hurting public schools.

The policy solutions that were adopted by the 2006 Legislature made Idaho’s tax system more progressive. The expansion of the Homeowners Exemption is now fairer because by including land, low income homeowners will benefit. In addition, it will grow with housing inflation and the increased value of the exemption will impact more people. Maintaining the 3-legged stool of property taxes, sales taxes and income taxes means that school funding will remain more stable. Lastly the expansion of the Homeowners Exemption, rather than replacing property taxes with sales tax, provides meaningful savings to homeowners but does not hurt schools. This provides a stronger base for adequate school funding.

This fight is not over. Already conservative politicians are talking about sales tax replacement and hoping the public can be fooled into believing that it is good for them. The Idaho Association of Commerce and Industry, representing big business interests, started its campaign for pro-business property tax reform the day after the session ended. Nonetheless, we have established a firm base for fighting these proposals and for putting forward an agenda that will make the sales tax more progressive by eliminating certain exemptions, taxing services, creating a state Earned Income Tax Credit and using those changes to reduce the current sales tax rate.