Draft bill would dramatically redirect online sales tax

by Logan Finney, Idaho Reports

Property taxes are a perennial discussion at the Idaho statehouse, and this year is no exception.

An interim legislative committee drew headlines last week for a proposal to phase out supplemental levies, which voters pass to raise their property taxes and fund local school districts. The proposal would not create any new revenue streams, but would make dramatic changes to how the state handles money from sales taxes.

Rice’s proposal

During its October 29 meeting, the Property Taxes and Revenue Expenditures Committee discussed a piece of draft legislation from Sen. Jim Rice, R-Caldwell, that would gradually phase out school supplemental levies and replace them with a new education fund that utilizes state sales tax revenue.

School districts would receive annual funding based on attendance from a new tax and levy reduction fund. Existing supplemental levies would be capped at 2022 levels, minus the amount received from the new fund, and districts would lose the authority to ask voters for a levy after failing to pass one for two consecutive years.

The provisions of the bill do not apply to bonds and levies for capital expenditures.

According to the Idaho Capital Sun, sales tax revenues this year would direct about $180 million into the fund, while Idaho school districts last year collected $216.6 million from supplemental levies.

Idaho school districts have relied on funding from supplemental levies since their inception. Idaho Education News reported in January that 92 of the state’s 115 districts are collecting supplemental levies to support general school operations.

Sales tax distribution

Another important aspect of the proposal: Rice’s draft would stop directing sales taxes from online purchases into the state’s tax relief fund. 

Idaho collects a six-percent sales tax on most retail purchases. That revenue is directed through a complicated six-page distribution formula that sends some of the money to various program funds, cities, counties and taxing districts, with the remainder deposited into the state general fund.

Rather than going through the distribution formula, however, sales taxes from online purchases go directly into a separate tax relief fund where they sit until the legislature decides how to use the money. (Click here for an explainer of the Tax Relief Fund and its origins.)

Democratic lawmakers have called for an end to that practice for years, arguing that directing online sales tax revenues through the distribution formula to local governments would help relieve the pressure on property taxes.

The legislature used some money from the tax relief fund this year for income tax rebates.

Rice’s bill would treat all sales taxes the same, depositing one of every six cents into the new education fund and sending the other five cents through the distribution formula.

Next steps

Several times last week, lawmakers discussed the complexity of property tax policy,  acknowledging that no single proposal will fix the system on its own.

“This is a work in progress,” Rice said of their committee assignment. “Let’s kick the tires, let’s see what works, what doesn’t. Let’s see if we can’t come up with some solutions that we’ve eliminated as many potential problems from as possible, and let’s eliminate ideas that aren’t gonna work.”

Lawmakers also reviewed draft bills on highway district impact fees and the homeowner’s exemption, and discussed local government cash flow, excess fund balances, and urban renewal.

The committee will meet next on Friday, Nov. 19, the week the legislature reconvenes.

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