Discussion was held on the legislature’s authority over interpreting code
to cities and counties with the intent that this inquiry is not an attempt to
run local cities but merely to insure the adequacy of the law governing
cities arising from recent incidents in the city of Boise.

Senators Hill and Sweet

Income Tax Administrative Rules

Senators Ingram and Werk

Sales and Use Tax Administrative Rules

Senators McKenzie and Malepeai

Property Tax Administrative Rules

Senators Gannon and Compton

Property Tax Administrative Rules (35-0103-0205)

Senators Ingram and Werk

County Option Kitchen and Table Wine Tax Admin. Rules
Cigarette and Tobacco Products Tax Administrative Rules
Beer Tax Administrative Rules

Tax Commission Administration and Enforcement Rules

Karen Gustafson with the Department of Administration, Office of Administrative Rules,
explained the difference between Pending Rules, Pending Fee Rules and Temporary
Rules. The committee will only deal with Pending Rules. Options are to
approve, reject, or reject a piece of the rule. The committee may not
amend a rule.

Ted Spangler with the Idaho Tax Commission referred to some rules that
may have more comment than others and should be reviewed carefully.

35.01.01

(Details of each presentation are not included on these two pages. A copy
of the rules and synopsis is included with the permanent set of minutes.)

35-0201

35-0103-0201

35-0103-0202

35-0103-0203

35-0103-0204

35-0103-0205

A question was raised as to when property tax on a new home begins and
the flow of revenue starts flowing to the state. No property tax is due until
the property is occupied and collected the following year. There is
another tax called the occupancy tax which is a prorated tax assessed
from the time the home is occupied.

Vice Chairman Hill indicated that the House will accept this rule and
there will be legislation this year to make clarification to this issue.

Legislation may come up this year that offers counties flexibility in the
20% per year rule as long as 100% of property is appraised every five
years.

35-0103-0201

35-0103-0202

35-0103-0203

35-0103-0204

35-0103-0205

Senator Malepeai seconded the motion.

Monday-Brian Whitlock and Mike Ferguson with the Governor’s office will
present the Governor’s tax package, consequences and elasticity and
Dan John with the Idaho State Tax Commission will review tax
exemptions.

Wednesday-Wells Fargo Bank will present their economic forecast,

and Bill Von Tagen with the Attorney General’s office will brief the
committee on the AG’s opinion relating to which House may initiate tax
bills.

Friday- Nancy Merrill and Mike Mooney, members of the Governor’s Blue
Ribbon Task Force will present their recommendations.

Chairman Bunderson reminded the committee to review the tax
exemptions and prepare a prioritized list of how to go about evaluating
them and which ones are worth reviewing. It was suggested setting some
criteria to apply that establishes a level playing field when reviewing
exemptions.

35-0102-0201

(Details of each presentation are not included on these two pages. A copy
of the rules and synopsis is included with the permanent set of minutes.)

35-0109-0201

35-0110-0201

35-0112-0201

Mr. Whitlock showed the committee a graph of base general fund revenue
estimates. FY 2002 had a decline in growth by 14.3%. The Governor and
the legislature then ordered cuts. With the cuts and projections FY 2003
looks like Idaho will experience a 4.3% increase in growth and FY 2004 a
4.1% increase. Budgets are estimated eighteen months prior to the
actual year. The 14.3% decline in growth in FY 2002 was 29% due to the
tax cut by the Idaho Legislature and the other 71% was due to the decline
in the economy.

Raising the sales tax to 6.5% brings the sales tax more equal to the
income tax for the state’s major income stream. It offers the state more
predictability to the income stream. It also allows the state’s critical
projects to continue in a timely manner. The Governor has included a
sunset clause to drop the sales tax increase from 6.5% back to 5% by
June 30, 2006. He will not sign a bill without this sunset clause.

Mr. John reviewed the three types of exemptions in Idaho. There are
exemptions based on who purchases the product (government entity),
product exemptions (prescription drugs), and use space exemptions (how
the product is used. For example the use of a tractor for farming is
exempt. The use of a tractor to mow your lawn is not exempt.)

A. Lottery and parimutuel ticket sales are exempt as a service. Any
winnings under $600 are not taxed as income. Winnings over $600 are
taxed as income.

B. A non tribal member who is working and living on a reservation pays
Idaho income tax. Tribal members working on a reservation are exempt
from taxes. A definition of who is an indian is determined by the Bureau
of Indian Affairs and is issued a card by the tribes.

Mr. John explained that there is an Idaho statute that says sales and use
taxes are exempted if they’re (the sale) made by a tribally owned
enterprise on the reservation. Anybody can buy a product on a
reservation and not have to pay a sales or use tax when they take that
product off the reservation. The use tax exemption was enacted by the
Idaho Legislature. The Tax Commission probably could not enforce the
sales tax collection because they have no jurisdiction on reservations, but
they could enforce the use tax when the item came off the reservation if
the exemption was repealed.

Chairman Bunderson asked that if he was a tribal organization could he
put in any retail establishment, even heavy equipment or automobiles,
worth a million dollars and sell them for less than any non tribal business
by not collecting sales and use tax? Mr. John replied “yes.” Mr. John
indicated that as of yet no big ticket items have been sold by tribally
owned businesses on a reservation.

Chairman Bunderson asked if he purchased an automobile from a
tribally owned business on a reservation and took it off the reservation
and registered it with the state would he be exempt from the use tax? Mr.
Johns answered “the way the statute is written, yes you would be exempt
from the use tax.”

C. Mr. John indicated that the issue of fuel tax on indian reservations is
currently being litigated in the ninth district court.

EXCUSED:

Mr. Matthews presented the committee with four key points important to Idaho.

1. The Idaho and national economy will gradually begin to grow this year. He
predicts more job creation and the continuation of lower interest rates. This
gradual growth may show a growth in jobs by approximately 6,000this year
versus a loss of 4,000 last year.

2. The growth will not be rapid enough to hold the state budget flat. Idaho will
not avoid some magnitude of a deficit, barring a big national or environmental
event.

3. Areas that will prosper will have strong high tech businesses. These high
tech regions have the fastest growth rate. To recruit this high tech business an
area will have to have a strong educational environment.

4. States must watch their balance sheet. Idaho has used up the one time
monies and rainy day type of reserve funds. It is important to rebuild some of
Idaho’s reserve funds. These reserve funds are necessary for the state’s credit
rating.

Mr. Matthews reported that the agriculture industry may not be a growth segment
in the near term but agriculture is also not a dying segment of our economy.

Mr. Matthews felt that some sort of tax revenue producing action would be an
investment in the future growth of Idaho.

Mr. Johnson handed out a letter reviewing these duties (a copy of this letter is
attached). He stressed that the Controller’s relationship with municipal
governments is to act as a resource and as an oversight and safety net to local
governments. His office does have subpoena power and acts as a law
enforcement agency.

If a city or municipality requests the assistance of the Controller’s office the
controller can aide them in the auditing process. The cost of this assistance
would average $30 per hour plus any costs of experts needed.

Vending Machine Sales carry one exemption. There is no sales tax imposed
when the vendor purchases the dispensing machines. Sales through vending
machines are taxed at 117% of wholesale costs. Amusement games purchase a
sticker for $35 per year and this is the only tax on these items.

Magazine subscriptions collect sales tax if they are based in Idaho. If not in
Idaho, sales are subject to the use tax.

Professional Services are not taxed by definition in Idaho statute. The statute
only speaks to tangible items.

Motor Vehicles, bought in Idaho, and taken out of state to use have an
exemption. This keeps people buying cars in Idaho vs. in other states.

Production equipment and supplies exemption is for equipments that produce a
product that will be resold.

Utility sales have carried an exemption since 1965. Mr. John reported that some
states do tax utility sales.

Motor fuels since 1965 have been exempted. Idaho constitution provides that
taxes collected on motor fuels go directly to the highway department. There is a
tax on fuels not used on highways.

Charitable organizations are not tax exempt unless specifically named in statute.

As per your request, the following is background information pertaining to
clarification of the Controller/Auditor duties in relation to oversight of
entities receiving government funds.

1. Historical/ Chronological

– Work began in Summer 2002 to identify, analyze, and
determine all roles and responsibilities currently set forth in
statute pertaining to the office of Idaho State Controller,
formerly known as the State Auditor.

– A bill (HB55) was drafted in November of 2002 and pre-filed with the Legislative Services Office. This piece of
legislation was intended to modernize and address
inconsistencies and vague language in Idaho code, which
appear to be obsolete and/or not compliant with current
modern practices.

– Subsequent to pre-filing HB 55, it became apparent that
Idaho State Code and Idaho Territorial Code clearly
stipulated specific duties for the State Controller/Auditor
relevant to municipalities, and/or custodians of state funds.

– After the pre-filing of HB55, the State Controller was asked
what responsibilities the office has when there are
accusations of misuse of public funds by a municipality.
This question was posed following the public release that
Boise City was hiring an out-of-state firm, at taxpayer
expense, to review their financial practices, expenditures,
and receipts.

– The question isDo the citizens of a given city, as Idaho
taxpayers, have a safety net within existing government
(The State of Idaho) to ensure the integrity of the financial
records and practices?

– It appears that statutorily and through case history that it
would be permissible for the Idaho State Controller to be
that safety net.

2. Key Points-

– It is not the intention of the Idaho State Controller to
unduly involve itself in the business of the state’s
municipalities.

– The language in both Idaho State Code and Idaho
Territorial Code would indicate the intent of the original
authors was for the state, through the Controller/Auditor, to
provide a “safety net” to ensure the veracity and integrity of
those entities charged with administering public funds.

– Although it might be politically expedient to avoid this
question altogether, the Idaho State Controller is compelled
to carry out our responsibilities consistent with the intent of
state law.

– It appears to the Idaho State Controller, and to others we
have consulted, that Idaho Code sets forth on several fronts
the clear authority of the state to review the financial
records of any public entity handling public funds.

– The Idaho State Controller has subpoena authority, and is
referred to as a “Law Enforcement Agency” in Idaho Code
9-335(2), along with the Attorney General, Idaho State
Police, the office of any prosecuting attorney, sheriff or
municipal police department. (The Territorial Controller
had subpoena power. The Supreme Court has said the
Territorial Controller’s duties translate to the State
Controller’s current duties.)

Please let me know if I can be of any further assistance.

Sincerely,

Keith Johnson

Idaho State Controller

KJ/dg/tkl

EXCUSED:

Senator Hill will inform the Pro Tem that our review of rules is completed.

Ms. Merrill informed the committee that the Blue Ribbon Task Force is a
recommending body only. Their first task was to develop some short term
recommendations that this session of the legislature could act on. The
committee’s recommendations are:

1. Explore the expansion of community-based prevention programs for
“at risk” youth to decrease the need for treatment and/or incarceration of
juvenile offenders.

2. Explore creative, community-based sentencing alternatives for
juvenile offenders.

3. Ask to Governor to appoint a group of policy makers to work with the
VERA Institute of Justice to assess sentencing for adult offenders in
Idaho.

4. Appoint an interim or Ad Hoc Legislative Committee to explore
reinstating “good time release” policies for adult offenders in an effort to
substantially reduce growth rate in prisons.

5. Examine the need for a separate facility, specialized treatment, and
dedicated funding for inmates with mental illness being held within the
state correctional system.

6. Examine the need for specialized treatment, dedicated funding, and
alternative housing for geriatric inmates held within the state correctional
system.

7. Examine the need for separate facilities, specialized treatment, and
dedicated funding for the sex offender special population group held
within the state correctional system.

8. Examine the need for separate facilities, specialized treatment, and
dedicated funding for the substance abuse population held within the
state correctional system, in particular the development of chemical
dependency treatment facility.

9. Support the transfer of the Threatened and Endangered Wildflower
Management program from the Department of Parks and Recreation to
the Department of Fish and Game.

10. Support development of online pesticide licensing by the
Department of Agriculture.

11. Support a request that the Idaho Legislature adopt a concurrent
resolution that creates a task force or committee with active participation
by the Department of Transportation’s Visioning Committee, counties,
cities, highway districts, and other entities to study and report issues
related to public transportation coordination and funding for urban and
rural areas.

Mr. Nelson reviewed the recommendations from that committee.

1. Implement an estimated tax payment system for the State of Idaho
Individual Income Tax.

2. Increase the number of tax personnel at the Idaho State Tax
Commission primarily to focus on non-filer and compliance recovery.

3. Modify the Investment Tax Credit to make it transferable to other
taxpayers from the taxpayer earning the original credit.

4. Increase cigarette tax by 20 cents per pack and direct increased
revenues to the States’s General Fund.

5. Support the effort of the Streamlined Sales Tax Project to collect tax
on remote sales by simplifying and modernizing sales/use tax
administration.

6. Implement an Accounts Receivable Offset program for those
businesses or individuals’ providing services to the state of Idaho that
have established tax liabilities to the state.

7. Increase the sales tax rate by 1%, effective June 1, 2003 and sunset
this increase 3 years from the date of enactment.

EXCUSED:

EXCUSED:

Senator Bunderson introduced Greg White with the City of Boise
Information Technology department. Mr. White reviewed what sort of
bandwidth, reliability and accessibility that will be required for the City to
meet the demands of the next decade. Due to high costs from private
providers, Boise has hired a consultant and continues to explore
developing an INet system for the city. Mr. White indicated that it would
be very helpful if high speed or ultra high speed broadband be
acknowledged by the Legislature as an ordinary and necessary service
requirement of local government. This acknowledgment would enable
cities to pass a bond with a simple majority vote. Discussion was held
relating to if cities can provide this service for less than the private sector
by borrowing for a longer period of time and at a lower rate, does this put
the city in competition with the private sector?

Mike Reynoldson with Qwest reported to the committee that there are a
variety of choices available to the city and that the city should continue to
work with the private sector.

Ron Williams with Sprint and the Idaho Cable T.V. Association reported
that this type of broadband carries a huge investment in capital. He
questioned the need of every household to have access.

The committee decided to revisit this issue to try to knock down some
barriers between the public and private sector.

Due to the hour, this issue will be continued at a future meeting.

EXCUSED:

Mr. Harward read a resolution adopted by The Association of Idaho Cities
membership reaffirming beliefs, standards and codes of conduct for city
officials. (See attached). Cities who have no established codes will use
this resolution as a model to establish codes.

Mr. Harward reported that the Association and the State Controller’s
office are working together to provide city officials with training. They are
also developing an accounting manual for officials. They will continue to
foster their relationship with the Controller’s office.

The Association of Idaho Cities supports adding language to Idaho code
50:1017 that includes, “The city council shall establish and maintain an
adequate and reasonable system of internal accounting controls.” They
also support language acknowledging electronic payments an acceptable
means of paying claims of the city.

Mr. Harward was questioned on the number of cities who have
established per diem rates and what type of resources are available for
cities to establish internal controls. Mr. Harward stated that most cities do
have established per diem rates and that cities rely on professional
auditors and association sponsored training for establishing and
maintaining controls.

The Association of Idaho Cities will prepare legislation relating to internal
accounting controls and electronic payments to present to this committee.

The county conducts workshops for elected officials and all counties have
a per diem rate or approval of expenses with receipts.

Honorable Members of the Senate Local Government and Taxation
Committee:

Senator Hal Bunderson, Chairman

Brent Hill, Vice Chairman

Dick Compton

Tom Gannon

Cecil Ingram

Edgar Malepeai

Curt McKenzie

Gerry Sweet

Elliot Werk

 Thank you for the opportunity to meet with you today.

 The Association of Idaho Cities has conducted a review of Idaho
statutes regarding financial controls for city governments. An AIC Task
Force was assembled to review the laws and gather information on the
internal financial control processes in place among the cities of Idaho.

The attached resolution was drafted by the Task Force and was
unanimously adopted by the nearly 200 city officials in attendance at
the AIC legislative conference yesterday and by the AIC Board of
Directors. We believe that a strong commitment to honesty and
integrity has to be foundational to legal financial controls.

 We support adding language to 50:1017 that includes, “The city
council shall establish and maintain an adequate and reasonable
system of internal accounting controls.”

 We would also support language acknowledging electronic payments
as an acceptable means of paying claims of the city, as the current
language in the code speaks only of “warrants and checks.” Electronic
payments must come under the same scrutiny and control as warrants
and checks. The Internal Revenue Service and the Public Employee
Retirement System of Idaho now require remittances electronically.

 Respectfully submitted,

Ken Harward

Association of Idaho Cities

Resolution 2003-01

Association of Idaho Cities

RESOLUTION REAFFIRMING BELIEFS,
STANDARDS AND CODES OF CONDUCT
FOR CITY OFFICIALS

WHEREAS, Cities in the State of Idaho have a long history of integrity and
excellence in local governance; and

WHEREAS, all City officials, as stewards of the public trust, have a
responsibility to conduct the affairs of government with the
highest of ethical standards; and

WHEREAS, the public judges its government by the way public officials and
employees conduct themselves in the position to which they are
elected or appointed; and

WHEREAS, citizens have a right to expect that every public official and
employee will conduct themselves in a manner that will preserve
public confidence in, and respect for, the government it
represents; and

WHEREAS, it is important for all representatives of City government to
periodically reaffirm the beliefs, standards and codes of conduct
that are critical links to the trust and confidence of the citizens
we are sworn to serve.

NOW, THEREFORE, BE IT RESOLVED that we, as representatives of our
respective Cities and members of the Association of Idaho Cities, subscribe to
and reaffirm the following principles.

We are dedicated to the concepts of effective and democratic City
government.

We affirm the dignity and worth of the services rendered by City
government and the employees through whom the services are provided.

We are dedicated to the highest ideals of honor and integrity in all public
and personal relationships.

We will continue to conduct ourselves in a manner to maintain public
confidence in our City governments.

We subscribe to systems of strong internal controls and believe current
Idaho statutes, if complied with, adequately provide for sufficient
controls.

We support clear, concise and understandable budgeting, auditing and
financial reporting systems.

We subscribe to fiscally responsible practices, compliance with
established budgets and using tax dollars wisely and effectively for the
benefit of all.

We endorse openness in government and empowerment of employees to
help assure public trust at all levels of government.

EXCUSED:

The General Services Division provides for centralized management,
policy development, legal, personnel, fiscal and computer services with a
total of 74 positions.

The Audit and Collections Division provides direct taxpayer service,
collects delinquent taxes, conducts audits, conducts discovery and
enforcement efforts and administers Idaho’s unclaimed property statutes
with a total of 222 positions.

The Revenue Operations Division administers the voluntary tax
compliance program with a total of 76 positions.

The County Support Division provides oversight and technical support in
the administration of the property tax system with 40 positions.

Total budget recommended for FY 2004 is $23,802,600 and 412
positions.

Mr. Hammond reported that the target of the Tax Commission is for
Idaho to have a voluntary compliance-based system of tax administration
that is understandable, administrable and fair to the taxpayer, to the State
of Idaho, and to the staff of the Commission; and avoids, as much as
possible, the need for post-transactional assessments.

Coleen Grant

He also reported that the division continues to deploy modern computer
enhanced appraisal systems, but due to budget hold backs fewer were
completed than scheduled. He is continuing to work on partnerships with
stakeholders to uncover new financial sources to advance important
technological initiatives.

Commissioner Watson reported that the Circuit Breaker property tax
reduction program distributions to the counties increased $813,729. This
increase to the elderly and disabled is due to organizations getting the
word out about the program. The income ceiling for this program is tied to
the Social Security rate of inflation and is presently $22,000.

She reported that electronic filing of returns has increased 142% over the
same time last year. This is promoted at every opportunity.

Tax payer services include holding offsite tax assistance as well as all
requests for assistance in tax preparation.

EXCUSED:

Discussion was held on the meaning of “attempt to contact” the debtor
and what the extent of the attempt is. Several committee members
expressed a desire to have the word “attempt” defined.

The Committees mission is to: (1) Make an overall assessment of Idaho’s
economy; by providing a forum for expert testimony from economists,
business leaders, and industry spokesmen regarding the status of Idaho’s
current economy and the economic outlook for the next eighteen months.
(2) Review the Governor’s fiscal years 2003 and 2004 General Fund
revenue projections and provide advice to the Legislature regarding the
total estimated revenues expected to be available for appropriation.

EXCUSED:

Representatives from the Association of Idaho Cities and the Idaho
Association of Counties had no objection to a full review of the Planning
Act.

EXCUSED:

Mr. Kane presented the committee with an amendment to line 33 section
6 adding (c) which reads “Pursuant to Section 21-114, all aerial activity
related to search for lost aircraft and airmen shall be under the direction
and supervision of the director of the Idaho Transportation Department
and coordinated with the Division of Aeronautic. (d) Nothing in subsection
(6) shall apply to search and rescue operations within the limits of any
city. (e) Nothing in subsection (6) shall apply to the rescue of entrapped or
injured persons where their location is known to be within a fire district,
where the fire district performs such service.”

Mr. Kane requested that the committee send the bill to the 14^th Order to
be amended to incorporate the new language.

Ms. Elliott reported that four counties have ordinances that are working
well.

The committee requested that Ms. Elliott and the Idaho Association of
Counties review the need for the Association to annually report on this Act
to the legislature.

(A copy of this report is on file in the secretaries office.)

Mr. Boyce suggested that the Legislature form and interim committee or
task force to look into and develop a good incentive base for Idaho and
future economic development.

The committee discussed the possibility of crafting a Concurrent
Resolution to establish this committee. Mr. Boyce will work to develop
this.

FY 2003 forecasts a growth rate of 4.3%. FY 2004 forecast a growth rate
of 4.1% FY 2002 had a 14.3% decrease in growth.

FY 2001 had several tax law changes that affected FY 2002.

The first three months of FY 2003 the sales tax revenue was strong due
to an increase in car sales.

Mr. Ferguson reported that the national economy needs to improve for
Idaho to see any economic improvement. There needs to be a return to
business investment and a quick, concise end to the conflict in Iraq. If a
war were to draw out, the nation could face a recession.

EXCUSED:

Discussion was held on how the collection agencies would be paid. By
statute, a county is responsible for collecting all of a public debt. They
cannot waive any of the debt to collect part of it. The fee paid to the
collection agency would be on top of the debt owed a county.

Discussion was held on what type of complaint process is available to the
debtor. The Department of Finance investigates all complaints against
collection agencies.

An elected Trustee would have to abide by all laws affecting elected
officials. They would become an entity unto themselves like other entities.
If a Trustee was appointed, they would answer to the County
Commissioners.

The Idaho Association of Counties supports this legislation.

Discussion was held on what entity would be liable if an organic farm was
accidentally sprayed for mosquito abatement, and the committee
expressed concern about cutting the County Commissions out of the
picture.

Due to factors including more properties requiring first time appraisals,
inclement weather, extensive distances and new subdivisions, the ability
to complete the required 20% per year has at times been unattainable.
The new legislation seeks to change the flat 20% or more requirement to
15% or more in the first year, 35% in the second year, 55% in the third
year, 75% in the fourth and 100% by the end of the fifth year.

He reported that reaching every household with high speed broadband is
not feasible for everyone, but there are other less expensive ways to
reach residential customers from the main high speed fiber lines.

Mr. Clark reported that Cable One has invested $60 million in the
Treasure Valley and more than $100 million in Idaho to update systems.
In the Boise area their high speed cable internet is available to 100% of
the customers. They serve 20,000 households.

Mr. Hannan explained that the reason fiber cable is not in all homes is
that not everyone wants it and the cost is high. Coaxial cable is used to
reach the average two miles that any residence is from fiber cable.
Technology will develop as customer demand rises. His example was
that not everyone needs Niagara Falls in their home.

A meeting was held with service providers and Boise City representatives,
and the following points of agreement arose from that meeting.

1. 1. The issues surrounding telecom and broadband availability are
   complex, and not well understood due to the myriad of new
   regulations and number of new service providers entering the
   market.

1. 2. There is not a lot of agreement on what broadband services do
   exist and how available they are to business customers.

1. 3. Solutions developed for Boise may not address the needs of
   other Idaho communities. One size does not fit all.

1. 4. Service providers and local government in the Boise area will
   be invited around the table to develop and agree on criteria for
   identifying what broadband services and facilities do exist and
   where the gaps might be. This could be used as a model of
   other Idaho communities.

EXCUSED:

Vicky Beall, Civil Deputy for Boise County, testified in favor of the
legislation stating that in 2001 the average fee paid per service in Boise
County was $28. The actual cost was $45 per service leaving Boise
County taxpayers paying the $17 difference. She also reported, that
many private process servers’ charge clients a hefty fee to have
documents served and then rely on the county to serve them at a lesser
fee.

County Commissioners are required to hold hearings on these fees and
will periodically review and set fees.

Discussion was held on what checks and balances are available for this
fund. To use the fund, the sheriff must sign an affidavit demonstrating the
need for the money and the fund is audited at the end of the year. The
County Commissioners also will review the expenses when the fund is
replenished.

Discussion was held on the recommended 2% hold back by JFAC and the
effect on public schools. Mr. Shinn reported that some school districts do
have reserve funds that would allow them to survive the cutback this year.
Eighty five percent (85%) of education money goes to salaries and
benefits. Many of these salaries are for contracted employees.

The average cost to educate a student in Idaho is $5,569.00. Enrollment
numbers have increased 3-4% over the last five years.

Funding for Charter Schools was briefly discussed. They do not receive
dollars from property tax.

Ms. McClaran reported on appropriated and unappropriated funds per
university. Appropriated funds are general fund dollars, endowment funds
and student fees. Unappropriated revenues include, auxiliary enterprises,
such as book stores and student housing, institutional accounts, gifts, and
grants and contracts.

Appropriated Unappropriated

Boise State University $ 94,386,300 $122,428,159

Idaho State University $ 83,208,800 $106,009,605

University of Idaho $111,816,100 $179,321,800

Lewis Clark State College $ 16,849,300 $ 14,288,300

Of all appropriated funds in FY 2003, 52.1% were used for instruction,
12.4% for physical plants, 11.0% for institutional support, 7.8% academic
support, 5.7% student services, 5.6% libraries, 3.0% research, and 2.1%
athletics.

Ms. McClaran reported that the average annual resident student tuition at
an Idaho university or college for FY 2003 is $3,004.00.

In response to a question asking if Idaho has too many colleges or
universities, Ms. McClaran stated that she will find this information from
the Western Interstate Commission on Higher Education (WICHE) and
report her findings to the committee.

EXCUSED:

Lisa Godwin testified that she is 32 years old, a native of Idaho with two
young children. She graduated from Orofino High School and attended
Lewis Clark State College. She worked at Western Appraisal in Lewiston
for one year. Ms. Godwin became a certified appraiser and worked in
Nez Pierce County for 18 months until an opening came up in Clearwater
County. She was elected as a County Assessor in 1995 and served two
terms. She continued her education and became a Fee Appraiser starting
her own fee appraisal business in 2002. She is interested in this
appointment as a way to serve the Governor and the state in a field she
loves. Her political party affiliation is Democrat.

Representative Tilman reported that during a Charter School start up
period no funds are available for the school (some federal programs are
available) so leasing becomes an attractive alternative to owning until
they can afford to buy a permanent building. The exemption would only
cover the portion of the building used for the Charter School.

This legislation repeals term limits on planning and zoning
commissioners. It adds a check and balance in that the governing body
must approve the members by a public 2/3 vote. This legislation is
supported by the Association of Idaho Cities and the Idaho Association of
Counties.

Representative Tim Ridinger testified that small communities get hit
hard by term limits on planning and zoning commissioners. These
commissioners are volunteers requiring a lot of training. Keeping
members with the knowledge base on the board is important.

This legislation would allow terms to be extended. There is also a
provision in the legislation for removal of commissioners and the
legislation would not limit the appointment of those who want to serve,
because the governing board is required to appoint a variety of members.

The incentive investment credit can be transferred one time. The
broadband credit is a five-year credit given as an incentive to establish
broadband capabilities. This credit can be transferred twice because
these companies tend to be small companies with limited resources.

1. The special allowance for 30% first year “bonus depreciation”
permitted by subsection (k) of section 168 of the IRC would not be
deductible in computing Idaho taxable income, the adjusted basis of
depreciable property and capital gains or losses will be modified to reflect
the disallowance of the federal bonus depreciation.

2. Expenses of elementary and secondary teachers for purchases of
classroom supplies otherwise allowable under the IRC would not be
deductible.

Mr. John estimated that if Idaho conformed to the IRC in full leaving in
these two provisions, it would cost the state $25 million per year in income
tax in the first three years.

Senator Brent Hill testified that as an accountant he thinks the bill has
some problems. The bill is trying to save the state money, but Senator
Hill feels that it is poor public policy.

Senator Hill presented the committee with a chart showing bonus
depreciation versus no bonus depreciation over a seven-year period. By
not conforming with the IRC in this area, every year the taxpayer must
add back in an amount on their state tax return. Internal Revenue Service
(IRS) form 4797 is used when a sale of an asset is sold and is extremely
complicated to fill out. A separate 4797 form must be filled out for the
state to show a smaller gain than on the federal tax return for every asset
sold. This is a problem for the small business that has several
depreciable assets (i.e., a dairy farmer must keep a separate depreciation
schedule for each replacement heifer, then as the heifer is sold, the
farmer must recalculate the gain or loss on that asset.)

This affects assets with depreciable lives of up to 20 years. Not
conforming with the IRC can make it very difficult for small business even
if Idaho decides to comply several years down the road. Senator Hill
testified that this is a tax on our citizens of time and work.

Senator Hill testified that the deduction for kindergarten through twelfth
grade (K-12) teachers of up to $250 is a good investment because it only
costs the state $15.00-$19.50 depending on the teacher’s tax bracket. He
feels that every $250 donation a teacher makes to the classroom is less
money the state provides. If it is an incentive for teachers to buy supplies
for teaching students, then it is a good program. He feels that by doing
away with this deduction that it is an insult to Idaho’s teachers.

Discussion was held on deductions for anyone who donates to a school.

Senator Hill asked that the committee send the bill to the amending
order. Discussion was held on holding the bill in committee, but Senator
Hill felt that it did have some good things for the tax commission.

Discussion was held on amending the bill to conform to the IRC and
freezing the investment tax credit for three years.

Mr. John felt that tacking on language freezing the investment tax credit
to this bill was not the proper place to that.

Mr. Skip Smyser representing Connolly and Smyser testified that he
would like to see the committee hold hearings on any amendments that
might affect the investment tax credit.

Russell Westerberg representing PacifiCorp testified that the committee
should not use conformity with the IRS bill to tack on investment credit
issues.

Randy Nelson, President of the Associated Taxpayers of Idaho agreed
with Mr. Smyser and Mr. Westerberg. He stated that they are two
different issues.

H 194 will be held until the committee’s next meeting.

Meeting adjourned at 4:50 p.m.

EXCUSED:

Representative Mike Naccarato testified to the numerous duties a fire
commissioner performs. He said that at times they travel up to 80 miles
per day to perform their duties.

The legislation changes the process by having the sheriff seize the
property, and then turn it over to the Tax Commission for them to sell. Mr.
Spangler feels that the Tax Commission can garner more revenue from
selling the seized item than the sheriff can, thus being advantageous to
the taxpayer by covering more of the delinquent debt.

Senator Hill testified that by conforming with the Internal Revenue Code
(IRC) it will cost the state between $18-$25 million per year. Idaho will get
this revenue back starting after year three. He testified that by conforming
to the IRC it will avoid waste in taxpayer’s time and effort. He feels that
not conforming to the IRC is bad public policy. By amending the bill to
conform in full, it would keep Idaho maintaining good public policy.
Senator Hill testified that conforming to IRC will help spur business and
investment and lead to economic growth. He stressed that Idaho does
get this revenue back.

Senator Hill testified that allowing teachers up to a $250 deduction for
supplies used in the classroom is a good investment. It costs the state
$15-$19 for an investment of $250. This is a 16-1 return on investment.
He feels that Idaho needs to show that we care about education. It sends
a wrong message to Idaho teachers.

Dan John with the Tax Commission, testified that the bill as it is written
has a zero cost impact. If the 30% bonus depreciation and teacher
deduction is not carved out, the state will experience a $25 million impact.
He questioned if Idaho can afford to comply. It is very front end heavy
and the cost is probably prohibitive. Twenty-nine other jurisdictions have
not conformed to the IRC.

Steve Ahrens, President of the Idaho Association of Commerce and
Industry (IACI) testified that H 194 presents a special challenge both to
the legislature and to the business community. He testified that IACI’s tax
mantra is that Idaho’s tax system must be fair, stable and balanced. One
important element of such a system is conformance between state and
federal tax codes. He felt that conformance is wise tax philosophy and
that the state’s revenue needs are a separate consideration.

Mike Ferguson with the Division of Financial Management, testified that
the $25-$30 million revenue loss may be a high estimate but that the
impact will be significant. Conforming to the IRC, puts more money in the
taxpayer’s hands and less in government to pay for programs.

The ITC is not transferrable and costs Idaho anywhere from $10.7 million
to $47.1 million.

Steve Ahrens with IACI, reported that the ITC is very essential to the
business community.

EXCUSED:

Regulatory taking is a regulatory or administrative action resulting in
deprivation of private property whether such deprivation is total, partial,
permanent or temporary. Upon receiving a written request from an owner
of real property requesting a taking analysis, the government entity has
twenty-eight (28) days to prepare the written taking analysis concerning
the action. The government entity will use the Idaho Regulatory Takings
Act Guidelines manual, prepared by the attorney general, to conduct the
analysis.

Bill Chisholm from Buhl, Idaho testified in opposition to H 256. He felt
that when this legislation was being written that citizens’ groups were left
out of the process. He testified that the legislation gives special rights to
developers. Mr. Chisholm felt that the takings analysis should include
input from neighbors affected by the taking. He felt that the legislation
was not equal and that notification needed to go beyond the 300 feet that
is already in law.

Representative Kathy Skippen testified that the legislation is good
public policy. It reminds local government that they are dealing with real
people and their well being. It gives land owners some options.

Lauren McLean representing the Idaho Conservation League, testified in
opposition to the bill. She testified that it put pressure on local
governments not to say no to takings, and that it will make it harder to
think about owners in the initial planning process.

Jo Ann Butler, an attorney and member of the task force who wrote the
legislation, testified that the legislation insures that government doesn’t go
too far. It catches mistakes that local government may make. She
testified that neighbors always have rights and judicial relief is always an
option.

Ken Harward, Association of Idaho Cities, testified that his association is
in favor of the legislation. It protects private property rights.

Nancy Merrill, Mayor of Eagle, Idaho testified that Eagle is in support of
the legislation. User-friendly government is important.

Norm Semanko representing the Idaho Water User’s Association,
testified that his association supports both House bills 256 and 257. It is
an improvement over existing law.

A. A 1 ½ % sales tax increase proposed by Governor Kempthorne
could generate $20 million per month for the state. This legislation has
not been delivered to the House Revenue and Taxation committee.

B. A $.34 cigarette tax increase proposed by Governor Kempthorne
could generate $28 million per year. The legislation has not been
introduced to the House Revenue and Taxation committee.

C. There are two other bills raising tobacco taxes pending in the House
Revenue and Taxation Committee. One increases the tax on cigarettes
by $1, and another by $1.20 per pack. The $1 tax increase per pack
would raise about $90 million.

D. House Bill 135 is in the House Revenue and Taxation Committee.
The bill requires all cigarettes sold in Idaho to bear an Idaho stamp. Also,
it causes tribal businesses to collect and remit to the Tax Commission
cigarette taxes on sales they make to non-tribal members, the same that
is required of all other tobacco retailers. Dan John with the Tax
Commission reported that one-third (1/3) of all cigarettes sold in Idaho are
sold on Indian reservations.

E. Quarterly payment of estimated income taxes was discussed. If this
were to go into effect, it would generate $70-$80 million one time, $20
million per quarter. The positive side of this plan is that it would increase
revenue for the general fund in a one time flow of money. It would also
conform to the federal quarterly tax collection program. The negative
aspect of quarterly tax payments is that it would be more than an 80% tax
increase the first year for taxpayers because of paying tax for the year
previous, and making payments for the year it is implemented. Dan John
said that if the legislature did this, it would be preferable if it was
implemented at quarter end.

EXCUSED:

“Area of Operation” means the area within the corporate limits of the
municipality and the area within five miles of such limits, except that it
does not include any area which lies within the territorial boundaries of
another incorporated city or town or within the unincorporated area of the
county unless a resolution is adopted by the governing body of the city,
town, or county declaring a need.

Both cities and counties will have to come to an agreement to change
boundaries of Urban Renewal Districts.

One piece of legislation would make Idaho an implementing and
governing state in the SSTIS. The second piece of legislation is a joint
memorial to congress urging them to adopt a federal law allowing
members to collect remote sales tax.

H-194 was amended on the Senate floor.

EXCUSED:

Cheri Rendler, representing the Ada Community Library District in
Treasure Valley, testified in support of H 140. She feels that by amending
current law, voters, library board members, and library personnel will
understand which budget figures are going to be used in planning and
implementing district consolidation.

Senator Sweet feels that the bill gives everyone a fair standard.

EXCUSED:

Developed plats would continue to qualify for the exemption if they were
actively devoted to agriculture when the plat was approved and recorded
with the county, and were actively devoted to agriculture on or before
January 1, 2002. They would lose the agriculture exemption if one of the
following things were to take place. If the plat no longer is actively
involved in agriculture, the parcel is sold by the owner, the owner leases
the parcel for a nonagricultural purpose, any construction construed as an
improvement is done, or the rural home-site is annexed into a city.

The amended legislation would allow an existing manufactured housing
park to be subdivided into individual lots. The legislation would not
increase the number of lots or change the boundary lines approved for the
park. It would require the park to create a homeowner’s association to
operate privately owned facilities like water, sewer and roads. It requires
that manufactured home parks must meet all land use planning
ordinances and certify that the drinking water and sewer systems meet
applicable standards.

In response to an inquiry as to why it is so difficult to convert from being a
mobile home park to becoming a subdivision, Ms. Nilsson responded that
Ada County wants to make sure that each lot has a good description, title,
proper water and sewer system, and proper roads and access.

EXCUSED:

Speaker Newcomb testified that the legislation would provide a way to
keep companies in business and in Idaho. It also encourages companies
to make new investment in capital.

A question was asked as to why the legislation was written to give the
incentive from money that comes from the counties, when the ITC
incentive uses state funds? Speaker Newcomb responded that the
economic gain will be in the county where the business is located and that
the county will see the rewards sooner than the state.

A question was asked what would happen if the company didn’t survive
after two years? Would they pay the money back to the state or the
county? Mr. Nelson’s response was that the payback would have to be
worked out in rules.

Discussion was held on how important it is for the state to retain
businesses.

It was decided that the Idaho Assessors should consider producing a
resolution that puts their recommendations for revisions to the tax notice
and reasons therefore in writing for the 2004 legislature to consider.
Senator Compton will work with the Assessors Association on the
resolution.

EXCUSED:

The threshold will rise for employers that had withholding equal to or
greater than two hundred forty thousand dollars ($240,000) in the
preceding year, or an average of twenty thousand dollars ($20,000) per
month per annum.

Commissioner Grant is a native of Idaho and resides with her husband of
34 years in Fruitland, Idaho. She has been a Commissioner for 12 years
having been appointed by Governors Batt, Andrus and Kempthorne. She
has been very instrumental in automating the Tax Commission having
spearhead the development of the Convert All Tax Systems (CATS)
program.

Commissioner Grant explained that each Commissioner is responsible
for a certain area in the structure of the Commission.

Chairman Bunderson asked if there is a way to implement a withholding
on people who work in Idaho but only live in the state part time who do not
file a tax return? Commissioner Grant replied that the Commission does
catch a number of non filers. The Tax Commission is able to do a match
with federal returns. Anyone who files federal returns listing an Idaho
address can be cross matched to see if they have filed an Idaho return.

Commissioner Grant was asked if the Commission had enough auditors
to collect owed revenue. She replied that there are not an optimum
number of auditors at this time to cover all the cases. The average
Compliance Officer annually brings in $500,000. The average cost for the
Compliance Officer is $43,000. There is a six to one cost benefit ratio.
The state has $88 million in accounts receivable that could be collected if
the state had enough Compliance Officers. This amount is a hard number
and does not include non-filers.

Dan John answered a question about amnesty programs that other
states have used to collect owed taxes. This is a potential way to collect,
but is expensive up front with advertising costs. It is a short term fix to a
long term problem. One of the problems is that people may not pay taxes
and wait to participate in the amnesty program. Mr. John will bring
information on how an amnesty program has worked in another state.

Mr. John explained that the $88 million in accounts receivable at this time
has been through the appeals process and some liens have been placed,
as well as property sold to settle some debt.

EXCUSED:

A bill that would move to quarterly tax payments has been sent to the
House floor without recommendation. This bill would generate $80 million
in 2004 and $80 million in 2005. It would begin January 1, 2004. The
shift to quarterly payments means that businesses may have to borrow to
pay the estimated taxes.

When questioned as to the Governor’s opinion on quarterly payments, Mr.
Whitlock indicated that the Governor is not looking for a one time fix, and
doesn’t want the state to be in the same revenue shortfall boat next year.

A second revenue bill that was in the House Revenue and Taxation
Committee, is legislation that would temporarily increase the sales tax ½
cent starting in May. It would have a sunset clause of June 30, 2004.
This would give the 2003 budget two months of revenue, and 2004
budget 12 months. Estimated revenue projected is $80 million. This
legislation did not pass out of the Revenue and Taxation Committee.

A similar bill that would raise the sales tax ½ cent would start July 1, 2004
and have a sunset of June 30, 2004. This would raise eleven months
worth of revenue. It would not benefit FY2003. This bill was sent directly
to the House floor without recommendation.

Mr. Whitlock indicated that the Governor would feel that this is a one time
fix.

A third bill in the House would increase the tax on cigarettes to $1.00.
This would generate $53 million in revenue. A 20% elasticity rate is built
in to account for people who will buy cigarettes out of state, on an Indian
reservation, or quit smoking. This bill does include other tobacco related
products.

The increase in cigarette taxes to $1.00 would be split with the original
$.28 cents distributed at the current levels, and the additional $.72 cents
would be distributed to the general fund. This bill has been sent directly
to the House floor without recommendation from the Revenue and
Taxation committee.

House bill 402 would increase the tax on beer from $4.65 a barrel (31
gallons) to $7.44 a barrel. It would increase the tax on wine from $.45
cents a gallon to $.75 cents. The revenue generated would be $3.7
million. This legislation is in the House Revenue and Taxation
Committee.

Mr. Whitlock informed the committee that both of the Governor’s bills
have been held in the House Revenue and Taxation Committee and
probably will not be seen again this year. The Governor crafted these two
bills to add stability to services and programs in the state. He also wants
to maintain good standing in bond ratings for the state. He looked at the
sales tax as a way to establish stability. The last time the sales tax
increased was in 1986. The sales tax went from 3% to 4% in 1983. From
4% to 4.5% in June of 1983. It dropped back to 4% in July 1984. In 1986
the sales tax increased to 5%, and in 1987 the 5% was made permanent.

Fiscal year 2003 has a $168 million gap to fill. The Governor wanted to
use some one time money from funds, plus a sales tax increase to 6.5%
starting in May to fill the gap. This would have generated enough revenue
to add $18 million back to stabilize the millennium, deferred maintenance,
and rainy day funds.

Michael Ferguson with the Department of Financial Management,
reported that the preliminary March estimate for tax collections is $6.7
million ahead of projection. February collections were down $22.4 million
from projected. If March holds steady, collections will be down $15.7
million from projected.

Senator Sweet asked Mr. Ferguson about a report published by the
Cato Institute that states that increasing taxes in hard economic times will
serve to keep a depression economy lingering. It also states that tax
increases just increase government spending. Mr. Ferguson replied that
the Federal government can deficit spend and Idaho cannot. Raising
taxes or cutting programs will both have an impact on the economy and
society. If taxes are raised it hurts lower income citizens. If programs are
cut, it hurts vulnerable citizens.

Idaho has programs that have been cut, but the state needs an infusion of
cash to maintain needed programs. Idaho is not like some private
businesses that can give themselves an infusion of cash or cut whole
areas of operation. Idaho will have growth and vital programs that must
be covered.

Brian Whitlock discussed the Governor’s $.34 cent tax increase on
cigarettes. Many other states are looking at increasing cigarette taxes.
The national average is $.66 cents. Washington has a tax of $1.42,
Oregon $1.28, Utah $.69 1/2 cents, Wyoming $.60 cents, Montana $.18
cents, and Nevada $.35 cents. It has been nine years since the tax rate
on cigarettes has increased. The distribution rate would stay the same.
The current $.28 cent tax would be distributed as usual and the additional
collections would go to the general fund.

Mr. Whitlock indicated that the Governor does not favor an increase to
$1.00.

EXCUSED:

Mr. Crane reported to the committee that Idaho issues tax anticipation notes
that are rated by Moody’s, Standard and Poor’s and Fitch. Idaho has what
would be the equivalent to a AAA rating. He reported that 46 of the 50 states
have economic problems and Moody’s and Fitch have downgraded several
states including Washington and Oregon. If Idaho is downgraded, we could
have a tough time selling notes and it would cost the state 30-50 basis points.

Idaho issued $350 million in tax anticipation notes in 2003. If the state had to
pay 50 basis points the interest would be $1,750,000. All public debt in Idaho
totals $1.2 billion. At 50 basis points the cost to the state would be $2.5
million in interest for one year and over $50 million if carried to the term of the
bonds.

Idaho pledges their fourth quarter fiscal year revenues to pay off the
anticipation notes to insure a top rating from the three rating agencies.

Mr. Crane presented a handout from Standard and Poor’s directing the
committees attention to the paragraph addressing “The Peril of relying on
one-time measures. States that rely on significant one-time measures to
balance fiscal 2003 and 2004 will be facing structural budget imbalance,
which will be difficult to address in a slow-growth revenue environment.
These states will be most at risk for credit deterioration. Many states are
looking at interim and non-recurring measures for fiscal 2004, which will
bridge the budget gap to a more normal revenue environment in fiscal 2005.
This will be a risky strategy in this uncertain economy.”

Mr. Crane cautioned the committee that the rating agencies may not give
favorable ratings to states who initiate tax increases with a short sunset
clause. He felt that a three-year sunset clause would be acceptable.

Ms. Cook reported that Idaho’s bonds are very popular and sell quickly.
Idaho is paying slightly more than 2% interest. This year the interest rate is 1
½ %. Not all of the proceeds are distributed from the borrowed money
immediately. Some of the funds are invested until they are needed. If the
state is within 90% of the November cash needs estimate, the state can keep
the invested gain. If not, it goes to the IRS.

Mr. Youtz reported that the 2003 budget depends on one time money from
several funds. He also reported that 93% of the 2004 budget has yet to be
appropriated. He indicated that if a sales tax increase is passed, it needs to
start in June to get a full year of tax revenue collections. H 400 has a July 1
effective date. Therefore since sales tax collections are delayed one month a
July 1 effective date will only produce one month of revenue.

Mr. Youtz responded to a question as to what would happen if no negative
supplemental was passed and the legislature adjourned? The Governor and
the Board of Examiners would have to cut appropriations. They would do
that after seeing how the April collections come in.

Mr. Youtz reported that the state is counting on the tobacco settlement
money to help to balance the 2003 budget. The state is not counting on any
tobacco money in setting the 2004 budget.

A question was asked what options for balancing FY 2003 are available? Mr.
Youtz replied that all of the cash reserves have been used and that a sales
tax is the only way left. The Governor vetoed one appropriation bill and the
Senate vetoed another.

In response to a question, Mr. Youtz reported that there is no change in the
salary policy for state employees. In the Governor’s recommendation that is
being followed, money for salary increases will not be funded. That doesn’t
mean that some salaries will not increase. Any pay increases will come from
the agency’s budget. Teachers’ salaries are different. They have a statutory
roll up depending on time and continued education. JFAC will fund the health
insurance increase for teachers so they will not experience a loss in revenue.
The health insurance increase will cost approximately $8 million.

EXCUSED:

Representative Smith testified that H 400 is a compromise bill and that is
the reason that is has a one year sunset. Initially the bill had a two-year
sunset.

A question as to why the start date was July 1 and not any sooner to help
balance the 2003 budget was asked. Representative Smith testified that
the March 2003 revenues looked better than expected.

When questioned if the one year sunset will really be one year,
Representative Smith answered “yes.” Future legislatures may change
it. He said that the one year sunset was to enable an interim committee
to study the state’s tax exemptions, and develop a plan for next year’s
legislative session.

When questioned as to possible solutions, Ms. Eaton responded that the
state should do what businesses do and tighten its belt. She feels that
Education and Health and Welfare can be streamlined.

Ms. Eaton reported that internet sales are exempt from sales tax and that
the state loses revenue when cigarettes are purchased on an Indian
reservation. She also explained the Streamlined Sales Tax program that
is in the House Revenue and Tax Committee, and how it would bring in a
substantial amount of revenue and put retailers on a level playing field.

Senator Gannon feels that the dates on the legislation need to be fixed.

Senator Compton reported that he will be attaching an amendment that
will change the earned income tax credit to 10% of the federal rate. This
would generate $11.5 million.

Senator Werk feels that the ½ cent doesn’t get Idaho anywhere near the
amount needed to support education. He doesn’t think a regressive tax
like the sales tax should increase to subsidize the individual income tax
reductions of 2001. He would like to see lower taxes on groceries. He
likes the one year sunset clause in the bill to allow an interim committee
to present their findings on the sales tax exemption system to the
legislature next year.

Senator Bunderson clarified the effect of the 2001 income tax rate
reductions. He said that the lowest income tax rate was reduced from 2%
to 1.6%, a 20% reduction. The highest rate was only reduced 5%.

Senator Sweet feels that raising any tax during poor economic times is
bad judgement.

Senator Compton is opposed to any further cuts, and is opposed to a
sunset clause of one year. He is worried about the state’s bond rating
from Moody’s, Standard and Poors, and Fitch, who dislike a short term fix
for states in economic trouble. He feels that the cuts to the University of
Idaho have driven off some of our finest and most talented teachers.

Senator McKenzie supports sending the H 400 to the Amending Order,
but that will not guarantee his vote on the final bill that comes out of the
Amending Order.

Mr. Kumm, who is representing Senator Malepeai, feels that giving the
whole Senate a chance to amend the bill is a good choice.

Chairman Bunderson knows that this committee will be very
instrumental in amending H 400 because of the amount of professionals
that have been before them educating them on the issues.

EXCUSED:

The Educational Claims Act gives the court the right to impose a levy on a
district to provide that safe environment conducive to learning.

Mr. High doesn’t see an end in sight to the thirteen-year lawsuit. This
legislation is a reasonable way to resolve the issues. He referred to a
handout of tax levies by school districts (a copy is on file with the
permanent set of records in the secretary’s office). All but one district
involved in the lawsuit has no levies to help pay for school facilities.
These districts involved in the lawsuit are looking to the state to pay for
facilities rather than impose a levy in their district to cover the facility
costs.

Mr. High responded to a question stating that in the first two years of the
lawsuit the state had spent approximately $100,000 and the districts
spent $160,000.

Mr. High was asked to explain what the bill really does. He answered
that if the bill passes that it will be challenged in court. If it is shown to be
constitutional, which Mr. High believes it is, then the state will become the
plaintiff and the districts become the defendants. The state would work
with the districts to fix the problems. They would research if the districts
have the resources to fix unsafe facilities. If the cases cannot be
resolved, then the court could impose a levy on the district.

Senator Malepeai asked about a Task Force that made
recommendations to the Governor in February and what came about from
that. Mr. High responded that he’s not sure the Task Force’s four
recommendations would make the lawsuit go away.

Senator Hill asked why section four of the original bill was deleted. Mr.
High responded that he did not know why it was deleted but the effect of
section four allowed a district to seek an additional levy and now the
amendment allows a levy only when ordered by a court.

Mr. High further explained that the state would take on the roll of
examining schools to see if they are safe. The state could sue a district to
make them impose a levy to fix their own schools. The state under Idaho
constitution is not responsible for maintaining schools.

Senator Ingram asked if the bill changes any constitutional issues and
Mr. High replied “no.”

Mr. High reported to the committee that the Attorney General’s office
requested a duplicate tape recording of a hearing held in the Idaho
Schools for Equal Educational Opportunity v. State of Idaho, Case No.
94008. (Copies of this request are on file with the permanent set of
records in the secretary’s office.)

The Task Force concluded with four findings and five recommendations.
The four findings included 1.) that the super majority of 66 % affirmative
to pass a bond levy is in some cases prohibitive, 2.) on occasion serious
safety hazards exist in schools and there is no fail-safe method for local
school district’s Board of Trustees to remediate the hazard, 3.) there is a
disparity among school districts in their ability to retire long term debt, and
4.) two of the leading causes of school facility deterioration is inadequate
and neglected maintenance.

He testified that poorer school districts must levy more than richer
districts, and that the bill excuses the state from constitutionally based law
suits.

Senator Ingram asked why should people in districts with no facility
problems be taxed to pay for other districts problems? Mr. Kress
responded that some districts have a higher per capita income and
receive more money to maintain facilities than poorer districts. He
reported that some districts have tried to pass a levy but failed due to high
unemployment in that district.

Senator Hill asked if Mr. Kress felt that the state should pay for all
schools. Mr. Kress responded that if the five Task Force
recommendations were tried that he would do everything possible to get
the law suits dropped. He said that the bill as written doesn’t allow for any
vote of the people. The Task Force recommendations allow for a super
majority of 60%.

Mr. Kress reported that the Task Force had eight members, and five
meetings. One of the members was asked to write legislation but did not
write legislation that had come out of the Task Force.

Mr. Kress was questioned as to why he hasn’t closed his unsafe schools.
He replied that he has used all sorts of methods to reduce the unsafe
conditions.

Senator Sweet asked why charter schools can make it without the help of
any property tax money. Mr. Kress responded that there are advantages
when an area can invite only those they want versus accepting every
student.

EXCUSED:

Senator Goedde reported that Kootenai County passed a local option tax
in 1999 to pay for a jail. The Supreme Court found the tax
unconstitutional and overturned it. Now the debt burden has fallen on
property tax dollars. If the bill is not passed, it will increase the property
tax by $3.8 million in the first year and $4.8 million in the next years.

Senator Goedde responded to a question on how Streamlined Sales Tax
would be affected. Streamlined Sales Tax would not be affected. There
would be a change in the collection point from the counties to the state.

Dan John with the State Tax Commission testified that Streamlined Sales
Tax would require one jurisdiction to administer all taxes. The state would
contract with Kootenai County to collect the extra local option tax. He
indicated that there is not a problem with this legislation in regard to
streamlined sales tax.

Discussion was held on if this was a shift from property tax to sales tax. It
is a shift in that out of county visitors and retail customers help pay the
debt burden for the jail. When the sunset is up, the local option sales tax
will go away and some burden will shift back to the property tax. County
Commissioners will have time to plan and ease that shift in the burden.
However, since Kootenai County has existing bonds that are paid off
around 2009, the reduction in property tax resulting from such payoff will
offset any increase in property taxes resulting from the loss of the 50%
local option tax.

A question was asked if this local option tax is constitutional. Senator
Goedde responded that he has an Attorney General’s opinion stating that
it would be constitutional because it is available to all counties.

Senator Compton testified that to pass the local option tax a county
would need a 66% super majority. Most businesses in Kootenai County
are in favor of this legislation. They have seen that it does not cause
them to lose business to other counties.

Senator Goedde reported that when Kootenai County had a local option
tax prior to the Supreme Court ruling, the revenue collected during the
best year was $6.8 million. $3.4 million or more of that would go to
property tax relief.

Senator Malepeai believes that the counties are extensions of state
government and that the state needs to assist counties in carrying out
state business. Counties may need resources from the state.

Senator McKenzie doesn’t like the idea of different counties having
different sales tax rates. However, he feels that with the super majority
needed to pass a local option tax and the sunset clause that it is good
policy.

Kerry Ellen Elliott with the Idaho Association of Counties, was asked to
provide information to the committee on the number of tax bills the
counties have opposed and their stance on property tax relief.

In closing Senator Compton reported that Kootenai County needed
many new facilities including a jail in 1999. They worked with the Tax
Commission and the Attorney General’s office and passed the now
unconstitutional local option tax. All was well, and the tax was working
well in the county. He knows that the citizens of Kootenai County are
wise and they would not pass anything that wouldn’t work for the county.

EXCUSED:

Contractors that have entered into a contract prior to April 15, 2003 with a
negotiated bid of 5% sales tax would be exempt from the 1% increase in
sales tax. It is a very specific exemption which has the contractor pay the
sales tax, and upon submitting a copy of the written contract, a detailed
invoice prepared by the seller, and a document signed by the purchaser
certifying that the tangible personal property relates to the qualified
contract, the contractor would receive a refund of the 1% sales tax
increase. The State Tax Commission will review all claims for a refund of
the sales tax, and if they find it proper a refund will be made. The bill
includes a high penalty for contractors who would abuse the system.

Discussion was held on how change orders within the contract would be
handled. Once change orders are signed, they become part of the
contract. The committee discussed adding intent language to clarify this
bill. Discussion was held that the language of the bill and rules already in
place at the Tax Commission would cover the issue of change orders.

Representative Bolz informed the committee that the Tax Commission
had a lot of input into the writing of the bill.

Roger Seiber with Capitol West testified that the language in the bill has
been used in other similar bills. He reiterated that the penalty imposed is
quite high and would deter contractors from abusing the system.

The bill updates references to the Internal Revenue Code (IRC). It
conforms the Idaho income tax to the Internal Revenue Code with two
deductions taken out.

The special allowance for 30% first year “bonus depreciation” permitted in
the IRC would not be deductible in computing Idaho Taxable income.
Also, the expenses of elementary and secondary teachers for purchases
of classroom supplies otherwise allowable under the IRC would not be
deductible.

Senator Hill testified that it is important to conform to the Internal
Revenue Code. He feels that conformity is important to the citizens of
Idaho.

The committee discussed that this bill was amended in the Senate earlier
to add back bonus depreciation and teacher deductions. The amendment
did not pass in the House. Discussion was held on the ability of teachers
to take an educational credit allowance on their taxes which is better than
this deduction. The committee unanimously voiced their displeasure
against the removal of the teacher deduction, but felt that Idaho must
conform with the IRC.