House Majority Caucus Room
July 22, 2003
The meeting was called to order at 10:15 a.m. by Cochairman Representative Dolores Crow after
it was moved to the East Conference Room of the JR Williams Building due to overcrowding.
Members present were Cochairman Senator Hal Bunderson, Senator Joe Stegner, Senator Edgar
Malepeai, Senator Fred Kennedy, Representative Dell Raybould, Representative Wendy Jaquet
and Representative Margaret Henbest.
Others present included Honorable Pete Cenarrusa; Bob Fick, Associated Press; Ben Ysursa,
Secretary of State; Bill Roden, Hopkins, Roden; Phil Homer, Idaho Association of School
Administrators; Representative Kathy Skippen, Representative Steve Smylie and Representative
Shirley Ringo, Idaho House of Representatives; George Moses; Justin Ruen, Association of
Idaho Cities; Jim Weatherby, Boise State University; Val Brooks, Idaho Credit Union League;
Vera Raybould; Larry Benton, Benton and Associates; Gayle Batt and Kristin Hagedorn, Idaho
Water Users; Don Olerding, Idaho Grain Producers; Mike Ferguson and Derek Santos, Division
of Financial Management; Tony Poinelli, Idaho Association of Counties; Jack Jones,
AARP/Area 3 Council on Aging; Sam Haws, Dan John and Dewey Hammond, State Tax
Commission; Steve Ahrens, Idaho Association of Commerce and Industry; Steve Millard, Idaho
Hospital Association; Woody Richards, Moffatt Thomas; Laird Maxwell, Idahoans for Tax
Reform; F.M.Duck, F.M. Duck dot com; Mark Durham and Alex LeBeau, Idaho Association of
Realtors; John Eaton, Building Contractors of SW Idaho; Pam Eaton, Idaho Retailers
Association; Brent Olmstead, Milk Producers of Idaho; Bea Black, Boise School District; Rick
Naesebout, Idaho Dairymen's Association; Mike Huntington, Intermountain Gas Company; Neil
Colwell, Avista; Ken McClure and Molly Creswell, Givens Pursley; Tom Ryder, J.R. Simplot
Co.; Mike Reynoldson, Qwest; Brian Whitlock, Governor's Office; Rich Hahn, Idaho Power;
Betsy Russell, Spokesman Review; Pete Skamser, National Federation of Independent Business;
Andrea Mihm, Sullivan and Reberger; Ed Lodge, Connolly and Smyser; Dave Kerrick; Sherman
Burger; Paul Pusey, Consultant, Idaho Manufactured Housing Association; Ron Williams, Idaho
Consumer Owner Utilities Association/Idaho Cable Telecommunications Association; Carl
Bianchi, Maureen Ingram, Katharine Gerrity and Caralee Lambert, Legislative Services Office.
Staff members present were Susan Bennion and Toni Hobbs.
After opening remarks by the Cochairmen, the Honorable Pete Cenarrusa was introduced to
discuss the history of sales tax in Idaho. Mr. Cenarrusa stated that during his nine terms in the
House of Representatives, beginning in 1950, there was a lot of interest in the sales tax issue.
The first sales tax in Idaho was passed in 1935 at 2%. The people called for a referendum to
repeal this sales tax and it failed by a 52.3% majority. It is thought this failed due to confusion
over how the question was posed.
In 1957 the Senate warned the House of Representatives that the Senate would initiate
legislation to change the constitution to allow the Senate to be able to introduce revenue
measures if the House would not transfer a revenue bill to them. As a result the House decided to
transmit three bills to the Senate. They were:
The Senate immediately killed all three bills.
In the 1958 general election, both houses became controlled by the Democratic party. This was
the same year that Right to Work was on the ballot. Governor Bob Smylie was the only
republican to be elected. During this year there was a push to develop a head tax and Governor
Smylie argued this was the most regressive tax ever passed.
In 1960 the Republican party gained the majority in both houses again. In 1963, the House of
Representatives passed the sales tax with exemptions by one vote. The feeling was at this time
that if the Senate passed this bill, Governor Smylie would sign it. Before the Senate could pass
it, the majority leader of the Senate received a copy of an Idaho Statesman editorial criticizing
the sales tax bill. After this, the bill did not pass the Senate by a vote of 12 to 32.
In 1965, a sales tax bill finally passed both houses and was signed by Governor Smylie. People
were able to get a referendum on the next ballot to kill the sales tax with a yes vote meaning the
sales tax would remain in effect and a no vote was against the sales tax. The way this question
was worded made it very confusing for voters. The referendum repealing the sales tax failed. In
Mr. Cenarrusa's opinion this sales and use tax would not have passed had several exemptions
not been included. There were 17 original exemptions.
In thirty-eight years the sales tax has doubled from 3% to 6%.
Mr. Cenarrusa commented that exemptions to the sales and use tax are appropriate if they
result in increasing the economy with additional revenues. The economy does seem to have
shifted from an industrial economy to a service economy. Thus the push toward taxing services.
Mr. Cenarrusa stated that this task force has a very difficult job in front of them and wished
them luck. To study all of these exemptions will require a lot of time and effort.
President Pro Tempore Bob Geddes was introduced to discuss the role and mission of the
Sales Tax Task Force. He mentioned that Governor Bob Smylie's book Governor Smylie
Remembers includes an interesting description of what happened from 1931 to 1965 when the
sales tax was implemented.
Senator Geddes continued that currently there are 72 exemptions to the sales and use tax. The
objective of this task force is to determine if modifications need to be made. The goal should not
be to simply raise revenues, the goal should be to establish equity and fairness in our sales tax
In the 1700s, Economist Adam Smith wrote why certain nations were flourishing while others
were not. Much of his study has become the handbook of the way tax structure is developed,
even today. He quoted that "Virtue is more feared than vice because its excesses are not subject
to regulation of coincidence." Senator Geddes continued that in Adam Smith's fourth maxim of
taxation, he warned that many high taxes obstruct the industry of the consumption of the taxed
commodities and frequently affords a smaller revenue to government than what might be drawn
from the more moderate tax. A similar argument was used this session regarding raising the
cigarette tax. Adam Smith had the contention that whatever you tax, you discourage. If you
think about this and what has happened in the past 38 years with our tax structure and the state's
economy, our service industries have flourished. These are the industries that enjoy a sales tax
exemption. Production industries that are highly taxed and highly regulated have declined.
Senator Geddes cautioned the committee to remember why the exemptions were implemented
in the first place before doing away with them. He said that the committee needs to rely on the
resources available to help understand the economics and circumstances that can help business
and industry flourish. Many people also understand what would be harmful. If nothing else
comes out of this task force, at least there will have been the opportunity to objectively look at
the 72 sales tax exemptions and to remember why they were put in place.
Mr. Dewey Hammond, State Tax Commission, was the next speaker. Mr. Hammond
introduced Commissioner Sam Haws who has oversight over sales and use tax with the State
Tax Commission. He also introduced Mr. Dan John who is the manager of tax policy.
Mr. Hammond distributed a handout that was prepared due to a request from Senator
Bunderson. This document is available electronically through the Legislative Services Office.
Mr. Hammond commented that the document tries to answer the following questions for each
The last point raises an issue that has to do with the fact that on July 1, 2005, the sales tax rate
will be lowered back to 5%. A revenue source providing between $160,000,000 and
$170,000,000 annually will sunset. How will these moneys be replaced? As this material was
prepared the question of which rate to use arose. It does make a difference. The fiscal cost of
these exemptions at 5% is slightly over 1 billion dollars and at 6% it is 1.2 billion. His
information was done using 6%.
In preparing the document, the Tax Commission put the sales tax exemptions into the following
This document also include revenue charts showing Idaho tax collections by tax type in the last
twenty years. Mr. Hammond noted that while corporate and individual income tax, along with
property and sales tax have grown over this time period, the relative proportions have stayed
about the same.
A pie chart showing Idaho fiscal year 2004 estimated state and local tax revenue also shows that
the proportions of corporate and individual income tax, property tax and sales tax do not change
that much. These figures are total money received minus refunds.
Mr. Hammond also discussed the 1965 definition of "Sale" as used in Idaho Code Section 63-3612. He also included any amendments that were made to this definition from 1965 to 1999.
In the spring of 1965 Mr. Cenarrusa, as speaker of the House of Representatives, asked the
Revenue and Taxation Committee to issue a report capturing the intent of the Sales Tax Act. A
copy of this report from the Chairman of the 1965 Revenue and Taxation committee in support
of House Bill 222. This is also available electronically through the Legislative Services Office.
Mr. Hammond continued with an explanation of a comparison of states that tax services. He
broke the taxation of services into three categories.
The first is those states that tax most categories of service transactions. There are 164 services
that could be taxed. The states in this category tax at least 140 of those. These states are
Hawaii, New Mexico and South Dakota.
The second group of 14 states tax at least 60 of the 164 services that could be taxed. These
states include Arkansas, Connecticut, D.C., Florida, Iowa, Kansas, Minnesota, Mississippi, New
York, Tennessee, Texas, Washington, Wisconsin and Wyoming.
Of the remaining 29 states, 16 states (including Idaho) tax less than 30 of the 164. Idaho taxes
29. There are 24 states (including Idaho) that tax fewer than 10 of the 19 enumerated labor and
repair services. The degree to which Idaho taxes services tends to be at the low end of all states
and well below those states that extensively tax services.
Mr. Hammond included in his information a spreadsheet that itemizes all of the exemptions at a
tax rate of 6%.
Senator Bunderson asked how the estimated amount of the exemption and the predicted
amount of first year tax was reached? Mr. Hammond said that was reached using a study of
the population affected, history and theory. In response to a question from Senator Stegner,
Mr. Hammond explained that for analysis purposes the first year tax amount over time would
eventually equal the estimated amount of the cost of the exemption. He said this should happen
in two or three years after the exemption is removed.
Senator Bunderson stated that his understanding of the committee's charge includes looking at
the economic impact of the exemptions. He asked if the Tax Commission took economic impact
into account when this study was completed. Mr. Hammond said that this information was
gathered to help familiarize the committee, in a condensed fashion, with what the exemptions
were and their cost. They did not consider the ripple effects. He stated they could do that for a
Mr. Randy Nelson, Associated Taxpayers of Idaho, was introduced to discuss the
recommendations of the Governor's 20/20 Task Force. The first meeting of this task force was
October 10-11, 2002. This included a lot of discussion about demographics and background, the
economic outlook at that time and understanding the tax system.
As a result of the meetings, the task force developed some guiding principles to give them
directions. These include:
This complete report is available at www.idaho2020taskforce.us
Mr. Nelson stated that Item E should probably also include the term exclusions or untaxed
services. These terms do show up later in the report.
The committee developed seven recommendations by the time the legislative session started in
2003. Of those seven the following relate closely to what the Sales Tax Task Force is doing:
An intermediate recommendation made by the committee was to place a sunset provision or an
Idaho Administrative Procedure Act (IDAPA) like process on all sales tax exemptions and
require legislative review and action in order to be reinstated. Stagger the reviews so that at least
25% of the exemptions are examined in any one year. This process would be ongoing. The
advantages and disadvantages to this recommendation are explained further in Mr. Nelson's
document that is available at www.idaho2020taskforce.us
Representative Jaquet asked if the committee looked at expanding the fiscal note on tax
legislation that would talk of doing an analysis of different income groups and how they would
be effected by this change in tax policy. Mr. Nelson said the committee did not get into that
Senator Bunderson asked if there was a status report of the states that have signed on to the
Streamline Sales Tax Project. Mr. Dan John, State Tax Commission, answered that 18 states
have complied with the agreement. This represents about 23% of the population of the United
States. This is important because the agreement was once there were 10% of the states and 20%
of the population on board, they could go to Congress to try to get the standards changed to
allow taxation of remote sales. According to a study by the University of Tennessee, Idaho is
losing about $44 million by not being able to collect these taxes.
In response to a question from Senator Bunderson, Mr. John stated that Idaho participated in
the document that was eventually approved by the group as an observer state. Idaho was able to
give insight into what the group was doing, but they were not allowed to vote. Since that time,
eight states have actually passed legislation to put into practice what is in the agreement. This is
mainly definitions such as how many tax rates you can have in a state and if there is a definition
in the agreement, that is what the state must use. An example of this is food. Many states
exempt food but they each have their own definition. With this legislation, if the agreement
contains a definition of food, that is what the state must use.
At this time 18 states have committed to making their laws and rules comport to what is in the
agreement. Next, the Federation of Tax Administrators, the Streamlined Sales Tax Group and
the Multi state Tax Commission will go to Congress for further action. In Mr. John's opinion,
Congress will make some moves to get legislation in place to expand the nexus standards to
allow for the collection of sales tax from remote sellers.
Senator Bunderson asked for clarification of where Idaho stands and what we have to do to get
remote sellers to collect and remit sales tax on sales into the state of Idaho. Mr. John stated that
they are currently just watching the process. Idaho's population did not add much to get the
20% necessary for this to go forward. If Congress allows expanded nexus, Idaho would need to
modify our law to conform with the agreement. As soon as that was certified, Idaho would be
able to share in the proceeds of these taxes. Of all the states involved in the streamline project,
Idaho was probably the closest to having a sales tax act that conforms to the agreement. Mr.
John continued that as Congressional action gets closer, Idaho will need to act quickly to bring
our laws into compliance. He has staff identifying all code sections that would need to be
amended if expanded Nexus occurs and if Idaho participates. It would be nice to be able to
actually have a vote in the agreement process. Senator Bunderson asked if it would be an
advantage for Idaho to add its name to the list and to encourage our congressional delegation to
support that legislation. Mr. John said the more states that are on board, the better chance of
getting something passed in Congress. The larger states are of course more important due to the
The meeting was reconvened after lunch and Representative Crow asked for suggestions for
the direction the task force should take for the next meeting. She gave the following ideas as
Representative Jaquet commented that developing a set of guiding principles (including things
like accountability, fairness, stability, adequacy, transparency, comparability and simplicity) to
be used when examining each exemption would be helpful. This would make sure everything
was looked at in the same way. Representative Crow stated that the Revenue and Tax
Committee considers all of those things on every tax issue and maybe for those that are not on
that committee this would be helpful. Representative Jaquet added that there are at least three
or four task force members that are not on legislative tax committees and it would be nice for
them to be brought up to speed in this area. Representative Henbest agreed with the issue of
developing guiding principles. She said this would be in line with Senator Geddes suggestion
of looking at fairness and equity in each exemption. Representative Raybould added that the
suggestion of looking at fairness and equity is good but one more item needs to be added. Idaho
is in competition both nationally and internationally, especially in the manufacturing and
production industries in the state. Due to this, the task force needs to look at whether adding or
taking away an exemption to that industry would put them at a competitive disadvantage or
maybe even put them out of business.
Senator Stegner reminded the committee to be careful of the effect any change that is made to
the sales tax exemptions could potentially have on the other tax systems in the state, including
property tax and income tax. Senator Bunderson added that exemptions also produce income
due to the fact that the exemption is in place. On any decision that is made, the task force needs
to understand the full impact of the consequences involved with an exemption.
On a practical matter, Senator Bunderson said that the complexities of these issues are so great
that the task force, if the job is done correctly, will not be able to complete it's mission by
January 2004. In his opinion, anyone who comes after this task force should be able to look at
the report and understand exactly what was done and why those conclusions were reached.
Representative Crow added that in her opinion, the task force needs to be very careful of
defending what is currently on the books and of the unintended consequences of any changes
that might be made.
Mr. Steve Ahrens, IACI, asked if the committee intends to leave the original 17 exemptions to
the 1965 sales tax act intact or will those also be examined. Representative Crow stated that it
was the task force's charge to look at all of the exemptions and to make recommendations. This
needs to be done very carefully and in-depth and to complete it will take a lot of time. She stated
that it was her idea to pick certain exemptions to be researched for the next meeting and to
proceed from there. Representative Crow also said that, in her opinion, the original 17
exemptions probably do not need to be revisited. Representative Jaquet commented that the
committee's charge seems to be to look at all 72 exemptions, including the original 17. In the
original 17 exemptions there could be something that needs to be adjusted due to the fact that the
state's economy has changed to a more service based economy. In response to a question from
Representative Raybould, Representative Jaquet said that staff is available from the
Legislative Services Office as well as the resources of DFM and the State Tax Commission as
mentioned by Senator Geddes.
Senator Stegner in response to the question from Mr. Ahrens, stated that, in his opinion, the
charge of this committee is to examine broadening the sales tax base and that would seem to
include looking at all of the exemptions. The committee should not start with any presumptions
that certain exemptions will remain in effect. Senator Kennedy agreed with Senator Stegner.
The charge seems to be fairly specific that the committee examine the 72 exemptions that exist.
In order to make a determination as to whether the exemptions meet the fair and equitable
standards discussed by the Pro-tem, he suggested defining what fair and equitable means. This
will allow the committee to examine each exemption in the same manner. He continued that he
received a memo from Northern Idaho stating hope that the committee will look at all 72
exemptions and to keep those that are fair and equitable.
Representative Crow asked the committee what criteria they would like to use to examine these
exemptions. Representative Henbest commented that discussion points that had been
mentioned by committee members and, in her opinion, should be incorporated into the guiding
principles for the committee to use include:
Senator Bunderson suggested that in preparation for the next meeting they prepare a matrix that
includes background information on consequences. He also suggested grouping the exemptions
by categories so the committee can vote on which exemptions to discuss first. He added the
need to be sensitive to the original 17 exemptions but they do need to be looked at also. He
suspects that the underlying rationale supporting those original 17 when they were originally
crafted into law probably still has validity. But that needs to be justified. The taxpayers and the
citizens of this state would want the committee to justify in an objective manner each exemption
Representative Jaquet said that before examining the exemptions, she would like to define the
framework that will be used for those examinations. Senator Bunderson answered that he
would like to have a list of guiding principles included with the matrix and allow the committee
to vote on those that will be used. Representative Jaquet added that she would also like to see
a presentation from DFM discussing how Idaho's economy is changing. Senator Bunderson
said that he has talked to DFM about this and will get that finalized.
The next meeting was tentatively scheduled for September 9 and 10, 2003. The meeting was
adjourned at 2:15 p.m.