The Chairman assigned the following Subcommittees: #1 Chairman
Representative Kellogg, members Representatives Field, Smith, Wood
Ringo; #2 Chairman Representative Cuddy, members Representatives
Ridinger, Barrett, Roberts, Denney; #3 Chairman, Representative
Raybould, members Representatives Collins, McKague, Martinez; #4
Chairman, Representative Ridinger, members Representatives Schaefer,
Henbest, McGeachin.

The Chairman informed the members that Representative Raybould will
be serving as the Assistant Vice Chairman. She appointed Vice
Chairman Kellogg and Assistant Vice Chairman Raybould the
responsibility of dividing the Idaho State Tax Commission rules in
categories and assigning subcommittees to review the rules and report
back to the full Committee.

Chairman Crow requested that the members review the minutes.
Representative Kellogg moved to accept the minutes of the meeting held
on January 13, 2003 as written. Motion carried. The Chairman informed
the members that Representative Schaefer was undergoing surgery and
would temporarily be replaced by Carol Schumacher.

The date by which county auditors must certify the new construction roll to
the State Tax Commission is changed from the first Monday to the fourth
Monday of July. In addition a reference to the Farmers Home
Administration is changed to the Consolidated Farm Service Agency to
reflect a change in federal law.

Obsolete language relating to taxation of merchandise held for sale is
deleted from the code section relating to the property tax exemption for
property of fraternal, benevolent or charitable corporations or societies.
When taxes on inventory was repealed several years ago, this statute
was never corrected.

This proposed bill permits additional time for school districts to certify a
budget for a school emergency fund levy. Last year legislation moved the
date for setting budgets which can be before the first day of school.

MOTION:

Motion to introduce RS12392 passed. Representative Barrett requested
to be recorded as voting NO.

Second, the proportion of out of state use by interstate vehicles registered
under the International Registration Plan shall be measured based on the
vehicle’s annual registration period rather than on a calendar year.

Third, the requirement that certain exempt aircraft must be registered
under the law of another state or nation is stricken.

Deletes an extraneous word in the section relating to the Idaho deduction
for health insurance costs.

Conforms the Idaho income tax it relates to electing small business trusts
to the Internal Revenue Code except to provide that the maximum Idaho
rate for individuals shall apply to such trusts.

Makes two changes to the provisions relating to special credit available
for new employees. The first is to provide that a new employee includes
an employee subject to Idaho income tax withholding whether or not any
amounts are required to be withheld. The second is to restore
amendments inadvertently omitted in prior legislation to increase the
limitation on the credit and to coordinate the credit with other credits.

35-0103-0203, 35-0103-0204, 35-0103-0205. See attachment for details.
Discussion and review followed with questions from the committee.

The first change is the date by which county auditors must certify the new
construction roll to the State Tax Commission is changed from the first
Monday of June to the fourth Monday of July.

Second, a reference to the Farmers Home Administration is changed to
the Consolidated Farm Service Agency to reflect a change in federal law.

Third, obsolete language relating to taxation of merchandise held for sale
is deleted from the code section relating to the property tax exemption for
property of fraternal, benevolent, or charitable corporations or societies.

Fourth, permits additional time for school districts to certify a budget for a
school emergency fund levy.

This bill provides for administrative review of denial of an application for a
seller’s permit.

The proportion of out-of-state use by interstate vehicles registered under
the International Registration Plan shall be measured based on the
vehicle’s annual registration period rather than on a calendar year.

The requirement that certain exempt aircraft must be registered under the
law of another state or nation is stricken.

Janice Boyd presented the next item on the agenda which was Docket
No. 35-0201-0201. Discussion and questions from the committee
followed.

Mr. Husted addressed the additional Docket No 35-0102-0202, sales and
use tax administrative rules.

Mr. Husted continued the presentation with the Idaho County option
kitchen and table wine tax administrative rules 35.01.09, Docket No. 35-0109-0201. Discussion followed from committee members.

Next on the agenda was Idaho cigarette and tobacco products tax
administrative rules 35.01.10, Docket No. 35-0110-0201. Mr. Husted
presented a brief explanation of the rule.

amendments to IDAPA 35.01.10, Docket No. 35-0110-0201 and to
present it to the full committee for approval. Motion passed.

Idaho beer tax administrative rules 35.01.12, Docket No. 35-0112-0201,
was presented by Mr. Husted. Discussion followed.

Representative Anderson stated that the proposed legislation has
primarily three directions. One, the proposed bill provides for quarterly
payment of income tax estimates by wage earners required to make
estimated payments to the Internal Revenue Service in the approximate
sum of $80 million. Two, total sales tax exemptions estimated to be
$955,308,000, recoverable estimate of $799,597,000 resulting in a gain
from removing certain sales tax exemptions in the sum of $45,705,000.

There were seventeen sales tax exemptions in 1965, now there are
seventy sales tax exemptions. Three, total income tax credits in the
amount of $183,293,000, recoverable estimate of $120,891,000 resulting
in a gain of $45,705,000. (See attachment #1 for detail list of
expenditures and exemptions.)

This bill will result in an increase in revenue to the State of Idaho of
approximately $131.2 million commencing September 1, 2003.
Additionally the payment of quarterly estimates will increase the revenues
by the approximate sum of $80 million which will be received on June 15,
2003. This may reduce or eliminate the need for any further hold-backs in
FY2003.

Explaining his motion, Representative Denney stated that this proposed
legislation is quite lengthy and expensive to print. The proposed
legislation removes economic tax credits from businesses that are
important tools for expansion. If there is a problem with sales tax
exemptions perhaps the Speaker of the House needs to appoint a task
force to study the issue.

EXCUSED:

Chairman Raybould asked for a report from Representative Field,
Chairman of the Subcommittee on the Idaho Tax Commission Income
Tax Rules. Representative Field reported that the subcommittee had
reviewed 35.01.01 and 35.02.01 and recommend the rules be approved.

Chairman Raybould asked Representative Smith, Chairman, submit his
subcommittee report. He reported that the subcommittee reviewed the
Idaho State Tax Commission Rules in the following categories: Sales Tax
Administrative Rules, Idaho County Option Kitchen & Table Wine Tax
Administrative Rules, Idaho Cigarette and Tobacco Products Tax
Administrative Rules, Idaho Beer Tax Administrative Rules and Tax
Commission Administration and Enforcement Rules. The subcommittee
recommends approval of the rules.

Chairman Raybould returned the gavel to Chairman Crow.

EXCUSED:

Ridinger moved to accept the minutes of the meeting held on January 23,
2003 as written. Motion carried with a voice vote.

There are five new major changes in the 2002 IRS Code. First, makes
technical corrections in the pension plans, 401 (k) and a follow up which
has already been adopted. Second, extended some expiring credits
which do not impact Idaho taxation. Third, changes the net operating loss
carry back from two years to five years Idaho has it’s own carry-back
provision and should not impact Idaho. Fourth, provides a deduction to
teachers and counselors for out-of-pocket expenses for purchase of
books and supplies up to $250. Fifth, special allowance for 30% first year
“bonus depreciation” permitted by subsection (k) of section 168 of the
Internal Revenue Code. This bill does not include the “bonus
depreciation” allowance. For 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.

The efforts to put on the ground is in four priority areas: Meeting total
maximum daily loads, addressing threatened and endangered species
issues in ESA; enhancement riparian areas through fencing in an
appropriate manner and addressing fish passage barriers. All work
requires a plan of management to carry out and be recognized for
inclusion in the program.

He detailed conservation measures that were approved and unapproved.
He said the maximum return per person cannot exceed $2,000. There is
a cap on how much can be given in credit.

The bill provides that the seller who paid the tax to the state must claim
the credit or refund for sales taxes remitted on bad debts.

It provides that the three-year statute of limitations on claims for credit or
refunds resulting from bad debts will begin on the date the debt becomes
worthless for income tax purposes.

EXCUSED:

Idaho’s counties have spent an increasing amount of money updating
their recording offices with changes in technology. For example, counties
are shifting from recording books and microfiche to scanning and this has
caused an increase in costs to the recording office.

This proposed legislation would allow the Clerks to charge $5.00 per page
for recording every instrument paper or notice, $15.00 for recording every
town plat or map for the first 100 lots or less and $15.00 for issuing and
filing of marriage licenses.

Counties are currently experiencing at least a two million dollar negative
difference between what they can charge and what it costs to efficiently
manage the recording office.

EXCUSED:

The proposed legislation will do the following things: Require a cigarette
revenue stamp be affixed to each pack of cigarettes sold in Idaho.
Impose a tax to be pre-collected on all cigarettes sold in Idaho.
Designate responsibility for tax collection. Provide for remittance of
cigarette tax to the State of Idaho. Allow Tribal members their federally
protected rights to not be taxed for cigarettes they purchase on
reservations for their personal consumption.

When the exemption was taken away it made it difficult for assessors to
administer the law. This proposed legislation specifies the eligibility for
the exemption, the requirement for an application for exemption to be
filed, the effective date of the exemption, the events that will terminate
eligibility, the exemption from the requirement for total land area defined
in Section 63-604 (a) and the amendment to 63-604 providing exceptions
for the implementation of this act. Also defining terms used in the act and
declaring an emergency with retroactive application.

EXCUSED:

Varying physical and economic characteristics of the forty four counties in
Idaho such as degree of complexity of appraisals, physical landscape,
high volume of new construction and loss of appraisal staff can make it
difficult for Assessors to complete exactly 20% of the properties each
year. Other years, Assessors may be able to complete more than 20%.
This proposed legislation would allow the Assessor to set a plan based on
the needs and resources of the individual county while still guaranteeing
that the process is complete within five years but allowing flexibility.

In response to an inquiry relating to mill levies , Jan Wall, Idaho State
Library, said Library Districts are subject to statutory levy limits.

Original motion to introduce RS12714 passed.

The criteria would go to the professionals to review and be sure all the
pieces are in place in order to go forward. The people can decide and
then go to the county commissioners to make the decision to be voted on.
There were several questions relating to making rules rather than
legislating by Code.

This proposal also allows established city libraries to consolidate with
established but non-contiguous library district. Under the current statute,
library districts and city libraries cannot consolidate unless they share a
common boundary. Non-contiguous consolidation would follow the
current statutory requirements for inclusion of new territory.

EXCUSED:

In response to a question whether this proposal was an attempt to
become a Community College and in the future ask for full state funding,
he replied absolutely not. There were questions regarding the language
on page 1, lines 36 through 38, which transfers $150,000 from the
general fund.

To correct this problem, this legislation moves the filing deadline to the
third Monday in June. Although this reduces the time frame for filing
appeals by one week, it allows county boards of equalization more time to
adequately conclude their duties and still allows sufficient time for the
property owner to file an appeal while encouraging the negotiation of
solutions outside of the board of equalization process.

EXCUSED:

Cities, counties and other local taxing districts could collect the same
amount under the budget cap. Annual increases in property tax
collections going to schools as a result of inflation in the market value of a
home affected by this change increases by five percent. The increase in
taxable value would be $5,500 rather than $6,500 and the increase in
money for schools would be $16.50 rather than $19.50. It increases by
ten percent, the increase for schools would be $33 rather than $39.

Beginning in 2005 the impact on the general fund would be a reduction in
the amount of state funds for the “circuit breaker” program, an estimated
$775,000 in the first year. Most who qualify for the exemption also qualify
for the “circuit breaker.” There would also be a reduction in the state
funds going for property tax replacement for schools, an estimated
$110,000 in the second year. There would be no reduction in the amount
of property tax collected by cities, counties or other local government
entities. The annual increases for schools resulting from inflation in
residential values would be less. Based on recent rates of inflation, the
difference would be $505,000 in the second year.

EXCUSED:

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. For 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 purchase of
classroom supplies otherwise allowable under the IRC would not be
deductible.

Federal government Medicare payments do not adequately cover the
costs of providing ambulance and emergency medical services. New
federal regulations prohibit counties from seeking reimbursement from
Medicare patients for these services. Limitations on property tax
increases do not allow the collection of sufficient funds within the county
or district to cover these costs.

Original motion to introduce RS12750 passed on a voice vote.

It is critical that these sales and use tax exemptions are repealed for the
following reasons. Combines with other tax exemptions and special
privileges, this law gives tribal businesses unfair and potentially massive
competitive price advantages and favoritism over Idaho retail businesses
that are required to collect taxes.

The exemption causes unwarranted loss to the general fund and
unnecessarily exposes the general fund to significant additional losses.
For example, Tribal businesses may under the existing law, operate any
retail business, including automobile, truck and heavy equipment
dealerships and not collect and remit state sales and use taxes. Idaho
citizens purchasing vehicles from a Tribal dealership would be required to
register and license their vehicle with the state but under existing law
would be exempt from paying the use tax. This proposed legislation puts
retailers on a level playing field.

EXCUSED:

This proposed legislation provides that each homesite on an otherwise
recognized farm or ranch under 63-602HH, Idaho Code would be
considered agricultural property. This proposal provides that the
assessed market value for qualifying homesites which exceeds $30,000
shall be exempt from property taxation.

In response to a question relating to the Fiscal Impact Statement he said
there would be no fiscal increase, it would shift to other property. There
were several questions as to the restriction of one hundred contiguous
acres on page l, line 27 of the RS.

In response to inquiries from the Committee Dan John, State Tax
Commission, said the Idaho State death tax credit is fully phased out for
individuals that die during 2005. When this happens the state will receive
no money from the inheritance tax or state death tax credit.

Currently companies doing business in more than one county within Idaho
report sales tax figures to the State Tax Commission directly without
regard to the county in which the sales have been generated.

In response to questions relating to data collected by the State Tax
Commission, Dan John said reports are made by some companies on a
multi-county and multi-state basis. He said that when a piece of
equipment is sold it would be reported at the point of sale and not the
destination. He also said that Revenue Sharing is based on a formula
and this bill would not affect the distribution.

EXCUSED:

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. For 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
deducible.

EXCUSED:

In response to a question relating to the deletion of language on page 3,
lines 28 through 30, Dan John, State Tax Commission, stated the RS
was very narrowly drafted and changes needed to be in two sections of
Code.

Original motion to introduce RS12847 passed on a voice vote.
Representatives Crow, Kellogg, Schaefer, McKague, McGeachin and
Henbest requested to be recorded as voting NO.

EXCUSED:

EXCUSED:

This legislation simply asked that all, not just slightly more than half, of
the cigarettes sold in Idaho be subject to a product tax. The bill provides
for an exemption for smokers on Indian reservations. He said perhaps a
different but equally fair approach to this issue would be legislation that in
fact exempts all cigarettes sold in Idaho from a product tax.

Cigarettes sold at Idaho Tribal outlets are tax exempt from Idaho
Tobacco Product, Idaho Code 39-5704. The goal of this legislation is to
reduce sales of cigarette to minors, permitting inspection and educational
programs to promote compliance with the law. There are several tax
inequities and the cigarette tax exemption exclusive to Tribal sales of
cigarettes is one of the more blatant. He handed out a graph depicting
the twelve year history of Idaho cigarette sales. (Attachment #1) There
are 1,921 retail cigarette outlets throughout the state that pay Idaho
cigarette tax and eleven Tribal outlets are tax exempt and free of
compliance from the Idaho Tobacco Product law. Tribal sales of
cigarettes are 40% of all Idaho cigarette sales.

Wholesalers reported to the Idaho State Tax Commission 57.5 million
packs of tax exempt cigarettes were sold in 1999 which is up from 14.5
million packs in 1991. Tribal sales on Indian Reservations increased by
43 million packs. Wholesalers report 86.4 million packs of taxed
cigarette packs were sold in 1999 which is up from 81.6 million packs in
1991. non-tribal tobacco retail outlets increase less than 5 million.

Tribes are now beginning to wholesale cigarettes and the state has
limited information about internet activities. Web advertisers now offer
“keep full” service and “discount cigarette buyers club.” All schemes are
for smokers to lower their state cigarette tax to zero.

The cigarette tax statute is not clear as to who bears the legal incidence
of the tax in the context of Indian sellers. Idaho cigarette tax law needs
to be amended to clearly place the legal incidence of the tax on the
consumer with a duty to collect by the wholesaler.

In 1978 Fort Hall embarked on economic development to create jobs and
relied on longtime tax immunity. The unemployment rate is 60% at Fort
Hall compared to 5.7% national average and is the real issue. This bill is
bad tax policy and will hurt the economic development in its infancy. The
tribal governments provide primary services on reservations, including
roads, schools, police and more. To change this law would “upset the
apple cart” and change the status quo of providing vital services. The
need for services and the need for jobs would still be there.

Mr. Echohawk said this issue is a very complex matter and the
legislature should not act on impulse. The tribes called for a legislative
study to look at how revenues and service play out on Indian lands. The
issue needs careful study of every reservation.

Section 1 on legislative intent. on Page 1, lines 9-11­”It is the intent of
this act to eliminate unfair competitive business advantages now enjoyed
by Indian tobacco retailers in direct competition with non-Indian
business.” This language may be problematic when facing a
constitutional challenge in state or federal court. The question is the
power to tax, not non-Indian businesses concern over competition.
Idaho businesses on the Washington/Oregon border do not object to
their tax advantage over Washington retailers. He questioned whether a
tax advantage is an unfair advantage.

Page 1, line 15-18 “Legislature intends to require that cigarettes sold to
non-Indian purchasers on an Indian reservation must have an Idaho
cigarette stamp affixed even if sold by an Indian or an Indian enterprise.”
Contrary to only requiring the stamping of cigarettes for sale to non-Indians, the other provisions of the Act require the stamping of cigarettes
for sale to Indians as well.

Section 2, Page 1, lines 12-23 ­ Purpose. To levy a tax on cigarettes
used, consumed or purchased for any purpose other than resale in the
regular course of business. A sale to any business for the purpose of
resale would be tax exempt. A sale to Costco or Albertson’s would not
be taxable, because the sale to Costco or Albertson’s was for “resale.”
Arguably the wholesaler is also exempt from the tax because he
purchased the cigarettes for resale. However, the wholesaler has a duty
to pre-collect the tax from somebody other than a person who purchased
cigarettes for resale.

Section 3, paragraph (1)-Page 1, lines 28031. Imposition of a Tax. ” A
tax upon the purchase, storage, use for any purpose other than the
resale in the regular course of business, consumption or use is hereby
imposed at the rate ———-.” The language mirrors the language of the
purpose section, which states that a purchase for the purpose of resale is
not subject to tax. A retailer purchases only for resale. The term
“precollected” is not defined. Section 1, lines 23-25, provides for
“precollection” from the person who first sells, receives, handles or
distributes the cigarettes. That person would be the wholesaler, not the
retailer.

Paragraph 2, page 2, line 5. The tax imposed does not apply to
cigarettes sold to an Indian retailer for resale to members of a tribe. But,
non-taxable cigarettes must have a tax stamp on them, paid for by the
wholesaler. Query: If the sale to the Indian retailer for resale to Indians is
exempt, how does the Indian retailer get a return of tax paid if the
wholesaler has pre-collected the tax from the retailer who was tax
exempt? The wholesaler obviously did not pre-collect the tax from the
consumer because the wholesaler had no relationship with the
consumer.

Paragraph 3, Lines 10-16 Wholesalers making sales to the Indian
retailers may apply to the commission for authorization to deduct taxes
paid on cigarettes sold by the retailers to members of an Indian tribe.

Why would the wholesaler make such an application? The wholesaler
has been paid for the tax by the retailer and is included in the price. As
written the tribe or Indian retailer was not liable for it in the first place.
This is a clear violation of the prohibition of taxation on Indian tribal sales
to tribal members.

In addition, to claim the deduction on the tax return that is not filed by the
wholesaler until the 15^th of the month following the transaction the
wholesaler has to have had permission for the sale from the Tax
Commission prior to the sale or the right to the deduction by the
wholesaler is lost.

Paragraph 4, lines 17-31 Allocation process. The first sentence seems
to make an allocation statewide and limits the amount of deduction
allowed to all wholesalers based on the “average annual allocated
consumption of cigarettes for all Indian tribes located in Idaho.” In other
words, if there are six thousand tribal members on reservations in the
state and the total allocation of all of the tribes is one pack a day per
member, (2,190,000), if one tribe used the entire allocation the remaining
tribes would not have an exemption for their tribal members.

The second sentence, line 21, seems to say something different but
changes the area in which the tribal population is determined, from
“reservation” to “tribal service.” A tribal service area, under federal law,
may be larger than the reservation boundaries. In the case of the Coeur
d’Alene tribe the tribal service area for health care purposes is
approximately a 100-mile radius from its reservation boundaries. It
extends into Montana and Washington. As written, the tribal allocation
would include Indian members within that radius, although they may not
be members of the Coeur d’Alene tribe.

The allocation shall also be based on the national cigarette consumption
per capita average for the most recently completed “calendar year” or
“fiscal year” ­which one? And whose data? Or the allocation may be
based on the cigarette consumption per capita average for a federally
recognized Indian tribe based on a calendar year. Which year as used in
the prior standard?

Paragraph 5, lines 32-34. How does the wholesaler show to the
commission that the economic benefit of the proposed deduction has
been passed by the retailers to whom the sales were made. Is it a
refund of the entire tax? The tax is not separately stated on the invoices
to retailers.

Mr. Roden summarized his testimony by saying there is no way that
distributors could comply with this bill.

He strongly opposed House Bill 135 which is being proposed for
enactment by the Idaho Legislature in an attempt to authorize the State
Tax Commission to collect taxes on cigarettes sold to non-Indians on the
Indian reservations in Idaho.

Historically, federal law has prohibited taxation in Indian country. The
current state statute, in effect since 1974, conforms to the federally
recognized law in this area. In addition the Idaho Supreme Court has
found in Mahoney v. State Tax Commission, in a strongly worded
opinion, “In the absence of “Congressional consent, the Idaho State Tax
Commission has no jurisdiction to tax the on-reservation sale of
cigarettes by an Indian seller, whether the purchasers were Indians or
non-Indians.” The decision makes a strong statement for Indian
sovereignty in Idaho and the Idaho Supreme Court has not changed their
ruling in recent years.

Responsible law making requires careful analysis before taking action.
Therefore, the leaders of the Shoshone-Bannock Tribes urge the
members of the Idaho Legislature to oppose the enactment of House Bill
135. Full written testimony is attached. (Attachment #2)

The disadvantage on all other cigarettes is $4.00 a carton including sales
tax. It is not uncommon for a customer to order 10-20 or more cartons of
cigarettes at a time. They come from all over Washington and buy
cigarettes for everyone in the neighborhood. It is a regular occurrence
for a customer to come to our store and ask for a price quote on our
cigarettes and then ask “how do I get to the Indian reservation,” without
buying a cup of soup, sandwich or even a drink. We lose the sale and so
does the State of Idaho. We don’t want to put anyone out of business
and we don’t want to be forced out of business. There are enough
cigarette buyers out there for everyone.

She concluded saying that all things equal let us share in the profit. We
are a member of the Idaho Tobacco Retailers Association. Please vote
yes on house Bill 135.

Mr. Stensgar concluded his remarks by saying that this is bad legislation,
bad for working people, bad for small businesses, bad for tribal
governments, schools, health care programs and other services funded
by our cigarette tax revenues. He urged that the State and the Tribes
work together on this and other taxation issues to reach agreement that
all governments can live with. Let’s not turn this issue into another
divisive, expensive Tribe/State battle. Let’s take the opportunity to
cooperate as sovereign governments acting in the best interest of all the
people of Idaho and the Indian Nations here.

He repeated Mr. Edmo’s report of the Indian Tribal Council’s decision to
analyze the economic effect of House Bill 135 on the Tribes. Full written
testimony attached. (Attachment #3)

He encouraged the House Revenue and Taxation Committee to not
support House Bill 135 and to maintain a respectable relationship
between the State of Idaho and Idaho Tribes as well as helping Idaho
Tribes to continue to become more self-sufficient.

The Nez Perce Tribe as a sovereign nation imposes its own tax on
tobacco sales on its reservation. He cited several programs that are
funded from this tax. Without these social programs the Nez Perce tribal
members who rely upon these services would be applying for State
assistance. While the idea to increase state revenue may sound
tempting at first glance the committee needs to consider all of the
economic impacts of this bill.

The bill would cost more to administer than it would ever generate in
revenue. The bill would violate a 1974 Idaho Supreme Court ruling that
says that imposition of a state tax on tribal cigarette sales is an
impermissible tax on commerce with Indian tribes. Tax on tribal cigarette
sales is an unlawful interference with Indian commerce. Copy of the full
text is attached. The issue needs to be studied further. (Attachment #5)

He stated that there are problems with the formula as to the allowable
exemption of enrolled membership and how the State would pay back to
the Indians. Cross border sales have not been addressed and the whole
bill does not hold water. He said most of his points had been addressed
by previous presenters.

Although she might not understand all the laws, she believed that if the
tribes had to pay cigarette tax that might afford an opportunity for
controlling their abuse of cigarette sales to minors.

Tribe is the only self-governing Tribe in Idaho. This bill offends the
sovereignty of Tribes. The status of this sovereignty cannot be changed
until the U. S. Government says otherwise.

For years the Federal and State government has held that the Tribes will
be self sufficient and be determined to develop revenue. This bill is
unfair and is a broken promise for the development of Tribal business to
be self sufficient. This proposed remedy should not apply to all Tribes.
Any remedy should be crafted to particular problems.

He concluded his remarks by urging the committee to hold H0135 to fully
analyze the economic impact.

EXCUSED:

He said the Tax Commission believes they could get more money for the
property which would be a benefit to the taxpayers to satisfy the lien. This
takes the burden from the sheriff and will reduce the Tax Commission’s
fee cost paid to the sheriff

EXCUSED:

In 1996 our contemporaries passed a bill that allowed local option sales
tax for specific counties. Based on the actions of the 1996 legislature,
Kootenai County Commissioners acting in good faith and with legislative
approval brought to the voters a proposal to build a jail employing a half
cent sales tax. That measure passed with 62% approval and the county
obligated itself to construct the jail and pay it off over ten years using the
proceeds of one half of the local option sales tax collected. The other
half, $3.4 million, as required in the legislation went to a reduction in
property taxes. In 2002 the Idaho Supreme Court found that the statute
passed in 1996 was unconstitutional because it was written in a manner
that only one county could avail itself of local option.

The citizens of Kootenai County are now in a dilemma. The annual
payment on our jail is $1.4 million. Last year’s property tax reduction was
$3.4 million increase. The following year the increase will total $4.8
million or a 22% increase in property taxes. We must have some relief
from this burden.

What is before you today is not a tax increase measure. Its passage
would offer the citizens of Kootenai County the opportunity to again vote
for alternative financing of the jail project.

Remember that to qualify a local option measure it must gain 60% voter
support. The measure has to be written for a specific duration not to
exceed ten years in length; must be written for a specific purpose; state
the exact rate of taxation and fifty percent of the proceeds from local
option tax must apply to property tax relief.

Changes from the legislation passed in 1996: The language defining a
resort county has been altered to reflect a population base of 17,000 and
employment base of 10% tourism related jobs. According to the data
provided by the Department of Commerce this will allow six counties in
the state to use local option as an income source and property tax
reduction mechanism The new legislation is more restrictive in that, in
addition to the sideboards in the first bill this one contains a maximum
taxation rate of 1%.

Senator Goedde stated that when he last appeared before this committee
questions were asked about the 60% voter approval: Why not 66 2/3rd%
as found in other code sections. The answer is fairly straightforward.
Local option does not create a general obligation bond situation which
would require the higher approval rate thus could be passed with a simple
majority. It is familiar in nature to school plant and facilities levies that
carry a sliding scale of approval as low as a simple majority. Reflect on
the number of school bonds that have failed in Idaho; 60% is a high bar to
jump. Put another way, if committee members had to gain 60% for
successful election seven members of this committee would not have
survived their primary and be sitting here today. Senator Goedde said he
also did not gain 60% of the vote and would be here presenting this
measure.

Senator Goedde passed out a copy of letter from the Idaho Tax
Commission on the issue of simplified Sales Tax. The key to compliance
with Simplified Sales Tax is the collection device. Should the legislature
pass the Simplified Sales Tax measure the only thing needing to be
changed in local option is the collection point. It would need to move from
the county to the state level. (Attachment #1)

Resort County local option would have no bearing on local option city
taxes as that is dealt with in another section of code. Cities gain no
additional taxation rights if they are located in a resort county.

In the original passage of the first local option sales tax a good deal of
concern was raised on the burden on business, not only to collect the tax
and remit it, but also because an additional one half-cent would make
them non-competitive in the area marketplace. He provided several
letters from businesses in the area refuting those concerns. (Attachments
#3)

In summation he said that HB192 offers the narrowest window they could
construct to solve the huge problem now faced by Kootenai County
property taxpayers who placed their full faith on the actions of the
legislature. He asked the committee to send this to the floor with a do
pass recommendation.

This bill is very important to Kootenai County to pay the $1.4 million
annual payment. They do not know what they will do if it does not pass.
Voters feel the sales tax is a painless way to pay for the jail which has
been a tremendous success. Detractors of the sales tax are now
supportive.

In response to questions, Mr. Panabaker stated that the jail project started
in 1999 and the jail is now over half full. The one-half cent sales tax is
used for property tax reduction.

The business community supports the resort sales tax and the collection
of the tax is not a burden but there is significant benefit by reducing the
property tax.

Under the definitions of the Department of Commerce Kootenai County is
a resort county. Kootenai County has approximately 2 million visitors
annually. Local property taxpayers are already overburdened by extra
services required by tourism. For instance, 30% of the County jail
population are non-residents. Similar statistics also apply to resort county
roads, parking, police and emergency services, parks, and utilities. This
legislation not only allows counties with strong travel and tourism base to
shift some of the tax burden to non-residents but also allow for property
tax relief.

He forecasted and analyzed what the impact of the property tax relief fund
could have been in Kootenai County continued for a 5-year period. Even
with the county property tax relief the growing budgets of the other taxing
districts and the taxpayers increasing property value will still cause the
property tax bill to increase.

In closing, Mr. Nelson stated that HB192 does attempt to identify and
narrow the local option sales taxes to a few resort counties, but does miss
resort counties such as Valley, Teton, Shoshone, Fremont, Custer,
Camas, Boise, Bear Lake and Adams which have their residents bringing
commerce dollars into population centers. He provided a hand-out listing
option tax pros and cons. (Attachment #3)

In these difficult times while we are trying to stimulate the economy
statewide, granting authorization of local option sales tax to select
counties offers the possibility of impeding growth in others.

IACI sees three primary objections to giving up tax authority to local
government: First, the multiplication of local-option taxes will create a
patchwork of taxation that will artificially distort business development and
operations. That is precisely what happened in other jurisdictions across
the country

Second, allowing local-option sales tax authority flies directly in the face
of efforts across the nation to simplify sales system, an area in which
Idaho already has an advantage, unless we dilute it with bills like HB192.

Third, it’s proposed that sales tax revenues be sued for property tax relief.
We do not believe property taxes will stay down. Taxpayers ultimately will
find themselves paying both property tax and sales tax and it will be
difficult to demonstrate that the property taxes are in fact lower.

EXCUSED:

Representative Kellogg

This proposed legislation changes the legal standard from one that
requires proof that an assessment is manifestly excessive, arbitrary and
capricious or fraudulent and oppressive, to one that requires simply that
the assessment is erroneous. It changes the burden of proof to satisfy
that standard from a “clear and convincing” burden to the normal
“preponderance of the evidence” standard applicable to most civil cases.

This proposal adds a chapter which creates and defines the agricultural
land preservation tax. It give the county commissioners certain powers in
dealing with the new tax. It makes some technical corrections as well as
provisions for collection of said taxes and administrative functions.

EXCUSED:

Mr. Russ Hendricks, Idaho Farm Bureau, was called upon to present
his testimony. He rose in opposition to H0148.

Questions from the committee followed. (Attachment #1 – Report and
graph.)

In order to correct the problem H0 193 would give the voters an
opportunity for a choice of tax and services.

Toni Poinelli, Idaho Association of Counties, rose to speak stating
that the bill doesn’t cover just ambulance districts, it covers ambulance
and emergency medical services. The bill does effect all services. This
problem was caused by the Federal Government prohibiting entities that
provide ambulance service from billing the remaining balance from
Medicare recipients or insurance companies. The bill would require a
2/3’s vote of the citizen’s to exceed the 3% cap and would make it
permanent. There was a concern expressed about making it permanent
and we would be willing to work on this to develop some Legislative
intent if the Federal Government would reinstitute the ability to bill
Medicare recipients. We would be willing to sit down with the Tax
Commission to develop that language.

Randy Nelson, Association of Idaho Taxpayers, explained the 2002
levy year of the ambulance districts and counties with ambulance
service. He presented a spread sheet and discussed the graphs with the
committee showing expenses of the ambulance districts and counties.
(Attachment #2)

EXCUSED:

HB135 has an Attorney General’s opinion that it meets the provisions of
Idaho’s Constitution. Idaho Statute 67-4007 limits the powers and duties
of the Idaho Council on Indian affairs to “monitor, review and advise.”
Because this legislation is being proposed it requires no negotiation as
the Tribes claim. In fact there is presently nothing to negotiate.

HB135 is not a new tax, not a tax increase but is about tax avoidance. If
cigarettes are taxed it might well set the stage for regulation and control of
matters impacting risk to health and substance abuse, provide protection
from racketeering and crime and promote goals of the Idaho Tobacco
Products law.

The primary goals of this bill are to reduce sale to teens and about
fairness.

EXCUSED:

The consolidation would allow non-contiguous boundaries to consolidate
their budgets and merge to create a new budget. The consolidation
would reduce administration cost and there would be less overhead.

In response to an inquiry as to how many library districts straddled county
boundaries, Jan Wall said that there are two; Kootenai and Shoshone
and Nez Perce, Lewis and Idaho.

This proposal also allows established city libraries to consolidate with
established but non-contiguous library districts. Under the current statute,
library districts and city libraries cannot consolidate unless they share a
common boundary. Non-contiguous consolidation would follow the
current statutory requirements for inclusion of new territory.

The City of Meridian lies within the boundaries of the Meridian Library
District. Both the east and west city limits lines match the east and west
boundaries of the library district. She distributed a copy of ” Meridian
Areas of City Impact.” (Attachment #2) There are no current plans to
expand the city at either of these boundaries. However due to the recent
development of the North Meridian area expansion to the west between
Ustick and McMillian could occur.

The most eminent potential problem at this time lies south of the city in an
area called “Meridian Area of City Impact Referral Area.” When this area
becomes a part of the City of Meridian, two things could happen if 33-2703 (2) remains as written.

First is because a city cannot be divided, all of the City of Meridian would
lose library service because the area within the city limits could no
longer be a part of the library district.

Second the added territory which presently lies with Kuna Library District
and Ada Community Library District would also lose library service.

Residents of all the areas under discussion presently have library
services provided by library districts and are taxed by the districts.

Why should our district want to join the Meridian District? Combining
libraries will save money by consolidating acquisitions, cataloging and
administrative staff costs. Fewer offices will be needed for this staff so
the space may be used as additional public space without the cost of
building additions.

Combining libraries would improve public service while providing it with
more efficiency. Rather than each library requiring a director there would
be only one. The rest would be branch managers who because they are
relieved of administrative duties could spend more time enhancing patron
services where they are needed. Duplications in the collections of each
library would be reduced. Each library could instead focus on the specific
needs and wants of their area.

The public would be informed and a vote would be required before the
combining could take place. Consolidating library districts would better
serve the public and the levy would be lower. The city levy rate is higher
than the district levy rate.

This bill tells libraries how to go about consolidating and what process to
go through. Consolidation of small libraries would be a benefit to the
citizens in smaller disticts.

EXCUSED:

Testimony for HB193 relating to allowing a budget increase above the
three percent cap for ambulance districts. It was moved to return the bill
back to the full committee “without recommendation.”

Sometimes a home may have some things not completed longer than
necessary. There may be boats, recreational vehicles placed on the
property. The owner is using all the services of the county and they are
not paying their fair share.

Taxpayers who are in a loss situation are not able to claim the ITC
because they have no tax liability to offset. This proposal will allow
taxpayers who have suffered losses to elect to be exempt from property
tax on personal property on new personal property acquisitions or
investments for two years in lieu of the ITC.

EXCUSED:

Unfortunately the legislation that created the mutual insurance holding
company system overlooked a state tax issue which makes it difficult if
not impossible for a company operating within the system to transfer
capital between said companies. Non-Insurance Holding Companies in
Idaho pay no federal or state tax on Inter-Company Capital transfers.

Mutual Insurance Holding companies with subsidiaries who pay premium
tax, as well as subsidiaries who pay income tax, are not able to transfer
capital between companies without paying a tax.

This legislation, if enacted would correct this oversight and allow mutual
insurance holding companies the opportunity to grow as was intended by
passage of original legislation in 1997.

In 1998 at the direction of Congress Medicare began creating a new
ambulance reimbursement fee schedule. The intent of this new fee
schedule was to reduce costs for Medicare patients. However, the new
fee schedule has also had a dramatic negative affect on ambulance
service providers.

Under the new Medicare fee schedule all ambulance providers in Idaho
must accept assignment on Medicare claims. That is providers in Idaho
must accept what Medicare pays as payment in full. The district is no
longer allowed to “balance bill”” the patient for the difference between the
billing charges and what Medicare pays for ambulance services.

Since April 2002 when the rules went into effect they have been closely
monitoring their revenues. The rule changes have reduced Ada County
EMS’s gross revenue by 22%. Additionally Medicaid and other insurance
carriers responding to the same rule change have cut their
reimbursements. Those additional cuts have served to reduce our
revenues even further with an overall loss of 23.91%. For Ada County
EMS that translates to a loss of $1,588,972.

Idaho Code Title 32-Chapter 39 delegates responsibility for providing an
ambulance service to the respective counties of the State. The Code
goes on to declare that operating revenues can come from property tax
and fees for service. It also authorizes creation of an ambulance district
which allows for a property tax levy of not to exceed four hundredths
percent of market value for assessment purposes. Most ambulance
districts around the state, there are 18, have their rates set well below the
maximum allowed by law. In Ada County the rate for 2003 is .000117687
or less than one-fourth of the maximum levy rate.

This legislation gives ambulance districts the ability to go to the voter and
ask them to approve adjusting the property tax levy up to the maximum
allow by law of .04%. The vote to do so must pass by a majority of 66
2/3% of the voters within the ambulance district.

Mr. Hagen past out copies

EXCUSED:

Alex La Beau, Idaho Association of Realtors; Mike Ferguson, Developer;
Dave Gunderson, Ball Ventures; Max Vaughn, Minidoka County
Assessor; Representative Clark; Randy Nelson, Associated Taxpayers of
Idaho

The Senate objections to the House Bill were that it did not include a
provision that the parcel would lose the agricultural land designation if (1)
the parcel was built upon by the owner of the sub-division for his own use
and title of the parcel did not change or (2) the developer would lease the
parcel for building of any kind and the title did not change. Also the Tax
Commission voiced their concern that HB488 may be unconstitutional in
creating a special assessment rate for an otherwise defined class of
property. To correct these objections the Tax Commission offered to write
an amendment that would address these concerns.

The amendment created by the Tax Commission, although addressing
the Senate problems, left out of the new Senate bill several of the
essential elements of the original legislation passed by the House. These
elements of the original bill were agreed to by several members of the
House, assessors, county commissioners and developers. It is now
necessary to correct the Senate amendments to satisfy the commitment
made to the above people.

HB488a did not provide a definition of “Improvement.” It may have been
construed to have applied to the whole sub-division thus making each
parcel ineligible for the agricultural tax rate. This needed to be clarified.

HB488a did not provide a definition for “Improvement” although this is the
event that triggers the loss of the exemption. HB488a also left out the
definition of “Intended Owner Occupant” and “Rural Home Site.”

The amendment in HB136, in addition to the definition of “Plat” and “Rural
home site development plat,” clearly defines “Improvement” this makes it
applicable to only the individual parcels and not the sub-division as a
whole, thus preserving the exemption to undeveloped or unsold lots. Also
defined is “owner”, “Parcel” and “Sale.” All of these definitions are
essential to clarify the intentions of the original HB488 legislation.

HB488 amended 63-604 relieves the five acre of income- producing
requirement from the parcels in the sub-division. Without this amendment
to 63-604 no parcel or lot would be eligible for the agricultural tax rate.
HB488a omitted this amendment to 63-604. Without restoring this
qualification for the qualifying sub-divisions no parcel or lot would be
eligible for the exemption.

HB136 amends 63-604 to allow for parcels of less than five contiguous
acres, producing less than $1,000 gross income, or producing 15% of the
owners annual gross income to be eligible for the agricultural exemption.
This is a major reason to amend HB488a.

HB136 provides that the loss of exemption does not take place until
January 1 of the year following the event that causes the agricultural
exemption to be lost. Both HB488 and HB488a left the loss of exemption
to be determined by the assessor after a sale of the parcel or after
improvements are made.

Under the present law it is probable that, because of the gray areas of
eligibility, every claim for exemption could wind up in court. Some court
cases are now pending because of the ambiguity of the present law.

HB136 as currently drafted is unfair, unnecessary and is a significant
public policy departure from HB488 as approved by this committee and
from HB488aas and approved overwhelmingly by the House last year.
HB488aas was also signed into law by the Governor and was included in
the list of 58 tax relief bills he has said he was proud of approving during
the first four years of his administration. The list referred to is contained
in Item #1 in the handout.

Mr. Westerberg stated he was honored to participate in the crafting of
HB488 with Representative Raybould last year and appeared in tandem
with him before this committee in support of HB488. The purpose of
HB488 was to encourage economic development in some of Idaho’s
forgotten rural areas by allowing the owner of agricultural property outside
the limits of an incorporated municipality to attempt to develop that
property for residential or recreation use without risking financial ruin
before the lots created by the subdivision could be developed and sold.
Higher taxes that usually followed reclassification as a result of the
owner’s efforts to develop that property.

Item 2 of the handout is a copy of HB488 as originally approved by this
committee and the full House and sent to the Senate. Beginning on line
26 in subsection (3) it is clear that the intent of this committee and a
majority of the members of the House last year was to require the County
Assessor to continue to assess property in rural areas for which a plat
had been filed as agricultural property until that property had been
subdivided, developed and transferred to an owner whose intended use of
that property is as a residential or recreational home site.

In the new section 63-318 created by HB488 the House’s intent that land
treated for tax purposes as agricultural land continue to be treated as
such until such time as each individual parcel created by the rural home
site plat was sold to an intended owner occupant is very clear.

The intent of HB488 was obvious that members recognized that land in a
rural subdivision could not continue to be farmed at the same time the
initial improvements including access roads and utilities necessary to
attract potential owner occupants to the property were taking place.

Further evidence that the House version never intended to require a rural
home site development to continue to meet the definition of agricultural
property as HB136 would require, found on page 2 line 44, is where it
says “except as provided in section 35-318.”

Item #3 in the hand out is a copy of HB488 as amended in the Senate. It
is clear in HB488aas that the Senate agreed with the House’s intention
that parcels within a rural home site development were to continue being
assessed for tax purposes as agricultural land until that property had
been subdivided, developed and transferred to an owner who intended to
make it his or her recreational or residential home site.

HB488aas is current law in Idaho. Idaho property owners who are
attempting to use the law believe that it was the stated intent of the
legislature in enacting HB488aas to require each parcel or lot within a
rural home site development platted on land previously eligible for tax
assessment as agricultural property to continue to be appraised or be
reappraised and assessed as agricultural property until improvements
defined as the “construction of structures”, not including utilities, roads,
septic systems or similar site developments, are built upon the parcel
regardless of whether or not the parcel continues to meet the definition of
agricultural property.

Mr. Westerberg stated it was their interpretation of HB488aas has been
affirmed in part by temporary rules developed by the Tax Commission
after HB488aas became law. Note the underlined language 01 section c.
in item #4.

HB136 makes two fundamental policy reversals to this premise. It strikes
the word previously and allows the exemption only on land actively
devoted to agriculture on or after January 1, 2002. It was always his
understanding and the understanding of his client that one of the
fundamental purposes of HB488 was to provide some relief to those
existing rural developments whose parcels were being taxed as
residential property even though the parcels had not been sold nor any
improvements had been constructed on them.

Eliminating the word “Previously” in HB136 is an attempt to make the law
consistent with the Tax Commission’s temporary rule which seeks to draw
a line in the sand of time and allow the exemption to only those
subdivisions platted on land actively devoted to agriculture in 2001.

They believe the Tax Commission’s temporary rule and the like
requirement in HB136 is inconsistent with Idaho’s constitution which in
Article 7 section 5 requires uniformity of taxation. For this reason, his
client and other land owners attempting to seek relief under HB488aas
are challenging this rule in court.

He suggested that HB136 be held or send it to a subcommittee and craft
a new amendment to 630602FF as proposed in item #8. This direct
approach to remedying the slow selling rural residential developments
from being made unprofitable by taxes before the lots can be sold
eliminates the need of anyone to worry about whether or not a parcel
should or should not continue to meet the requirements of agricultural
classification. The suggested language in item #8 also recognizes the
declining state of Idaho’s economy in all counties and would apply
consistent tax treatment of rural home site developments in all 44
counties.

Mr. Westerberg concluded his testimony saying that if the committee
believed refinements to the current law are necessary, they would
welcome the opportunity to sit at the table with members of this committee
and County Assessors and see if we can work out our differences.

HB488 was an incentive to help the economics and growth in eastern
Idaho. He had put millions of dollars to develop the subdivision and the
county assessor is putting him out of business.

intended.

It was their impression that if property is being used as agriculture
property even if it is subdivided and small lots are being sold, that the rest
of the property should qualify for the agriculture exemption if it is still
being used as agriculture property. The trigger is “use.,” If not being used
as agriculture it is something else.

We understand the concerns of the opponents of this bill and we share
their concerns. However we believe the concerns they express can be
best served by an old law that was originally passed by this body several
years ago. It was called the “developer discount.” Unfortunately the law
was held unconstitutional. It is their belief that all of the interested parties
could get together to review the ruling to see if there is a way to fix it. We
have already had offers from county representatives to do just that. This
would address the issues raised by the opponents and be the cleanest
way to deal with the problems.

In the mean time we believe that HB136 should be passed as written. It is
an appropriate clarification to the law and taxation of subdivided
agriculture land. We ask you to support it with a do pass recommendation
to the House floor.

It cost a lot of money for infrastructure to get this property developed.
HB488 allowed us to pick up the exemption. HB 136 eliminates the
possibility of economic development. Many million dollar homes are being
built that will have higher property taxes to bring more money into the
county.

HB488 was good for developers and urged the committee not to pass
HB136 because the timing is not right. He said HB488 has not had
enough time to work.

From the House Revenue and Taxation Committee minutes of last year
testimony in support of HB 488 indicated quote, “The act before you will
remove one very significant barrier to rural economic development by
eliminating the requirement of the county assessor to reclassify
agricultural property simply because the owner of that property has
notified the county of his or her intentions to develop that property by the
filing of a subdivision plat in accordance with and as required by law.”

There is no such requirement for assessors in Idaho Code. There may
have been a few assessors that disallowed the agricultural exemption in a
platted subdivision for some reason. However the vast majority of the
assessors continued to grant the exemption if the subdivision met the
requirements of 63-604 I.C. which defines Land Actively Devoted to
Agriculture.

To prevent such a misinterpretation Section (2) (1) (a) of House Bill 136
states: “provided however, that the recording of a plat of a subdivision
shall not by itself cause such failure,” referring to the agricultural
exemption. This provision therefore clarifies that the Assessor may not
revoke the agricultural exemption on property solely because the
subdivision was platted.

The agricultural exemption was passed by the legislature so Idaho
farmers and ranchers could be economically competitive with surrounding
states with similar exemptions. Agriculture is one of Idaho’s major
economic resources and needs to be preserved. Section 63-602FF, I. C.,
as added by Section 2, Chapter 341, Session Laws of 2002, eroded the
agricultural exemption. HB 136 is good legislation and policy and will
restore integrity to the agricultural exemption.

Representative Clark provided hand outs of spreadsheets containing five
sheets. Each sheet contained a different aspect of the sales tax
distribution formula as follows: (1) Schedule (1) reflects county by county
the county portion of the revenue sharing distribution, Actual FY2002
distribution of $30,597,111.92, Adjusted FY2002 distribution of
$29,890,824.12 with a decrease of $796,287.80. Schedule (2) reflects
the city portion, city by city, of the revenue sharing distribution; Actual
distribution for FY2002 of $30,597,111.92 , Adjusted distribution
$29,890,824 a decrease of $706,287.78. (3) Schedule of the counties
base and excess portion,FY2002 distribution, Actual distribution
$21,361,426.93, Adjusted FY2002 distribution $21,16,043.73 decrease of
$196,383.20. (4) Schedule of the city’s base and excess portion of the
distribution, actual FY2002 distribution, adjusted distribution
$16,889,461.39 a decrease of $427,863.20. (5) Schedule of special
purpose taxing districts base and excess portion of the distribution, actual
FY2002 distribution $8,354,734.19, adjusted distribution $8,346,455.89 a
decrease of $7,094.22.

Representative Clark expounded the fact that the foregone balances for
all local government entities increased from 2001 to 2002 by 17.63%.
Attached charts reflect the foregone balances and a chart listing the
balances individually. Charts reflecting the property tax budgets and the
formula used for the distribution of revenue sharing monies effective for
the September 2001 distribution. Also a list of authorized additional
property tax budget authority above the 3% cap.

He concluded his presentation by saying the committee has the ability to
freeze revenue with a savings of approximately $ 5 million a year. He
suggested that the bill be amended to sunset in four years.

Mr. Nelson stated he could see longer-term property tax increases without
the future increasing growth of the sales tax revenue source. There might
be more of Idaho’s many taxing districts seeking more options to raise
taxes and fees without this revenue source growing.

Many parts of Idaho do not enjoy the normally stronger economy that
Idaho’s state sales tax comes from and preserving revenue sharing in its
current formula is a way to share some of that growing revenue source.
Revenue sharing helps keep stability in our tax system. In times like
these he could see why the state might need the growth of this revenue
for state appropriations such as school funding which also makes its way
back to local communities.

EXCUSED:

Senator Burkett listed the following facts about quarterly payments. Only
two states do not currently follow the national standard of collecting
income tax quarterly. The United States government instituted quarterly
payments in 1943 to provide a funding boost to help fund a wartime
economy. Quarterly payments reduce the number of filings from five to
four for most filers. Quarterly payments will even the flow of revenue to
the state and is a more business-like approach to revenue collection.
Quarterly payments alleviate the one-time “hit” experienced by taxpayers
who must now pay an entire year’s taxes at one time.

This plan would provide the revenue needed in FY03 to balance the
budget without sacrificing education and essential services.

He provided a handout reflecting the state public school property tax
replacement yearly since 1996. In FY2003 the amount was $68.9 million
and property assessment values increased 6.7% since 1996.

The purpose of this legislation is to cap forever the dollar amount to $68.9
to be distributed as property tax relief for school support.

As a part of this change process, the federal government has entered the
picture in an unprecedented way with their initiative, “No Child Left
Behind.” Yes, they have provided some funding, but will it be enough?
Will it be targeted to a special group? Will there be flexibility in how the
federal money is spent? No one can answer these questions at this time.
However, if funding for this program follows the same financial pattern as
that which was developed for federal mandates for special services, it will
be minimal, it will be targeted and it will allow little flexibility. In fact the
federal government agreed to provide 40% of the cost of our current
special services programs but now provides approximately only 17% of
this cost. That places a heavy burden on the state and the local school
district.

In many states where they have embarked on a similar reform movement,
they have found it takes a 25-30 percent increase in state funding as
reported by Bill Roberts who has done considerable research into this
issue. An increase of this magnitude is certainly not an expectation in
Idaho. However school districts need to continue to receive an increase
in property tax replacement money into the future to offset costs that will
result as these initiatives are implemented, as well as to maintain current
operations.

HB126 does the following: 1. Reduces the state’s responsibility to follow
through with property tax replacement in an on-going basis to local school
districts. 2. Reduces the Districts’ ability to capture the increased market
value each year that was in place prior to Gov. Batt’s property tax
replacement bill. A district will lose twenty-five cents on each dollar of
increased market value. 3. Another concern, besides the loss of money,
is that HB126 could very well initiate a tax shift. Currently, 50 districts use
the supplemental levy to provide financing for programs. Would the
amount of those overrides increase to replace lost funds? Would more
districts have to resort to supplemental levies in order to replace those
lost funds?

This legislation changes the legal standard from one that requires proof
that an assessment is manifestly excessive, arbitrary and capricious or
fraudulent and oppressive, to one that requires simply that the
assessment is erroneous. It changes the burden of proof to satisfy that
standard from a “clear and convincing” burden to the normal
“preponderance of the evidence” standard applicable to most civil cases.

We have consulted legal counsel concerning the effects of this legislation
and have been advised that it will have a major impact on county
government. Lowering the burden of proof from clear and convincing
evidence to the proposed standard of “a preponderance of the evidence”
as proposed in this legislation will increase the volume of appeals to the
Board of Equalization, to the Board of Tax Appeals and to the District
Court. Further, he had been advised that this will cause the burden of
proof to shift to the county government as soon as the above standard is
met.

The rule of law that has prevailed for the past 50 years is generally stated
as follows: “The County Assessor’s valuation of property for purposes of
taxation is presumed correct and the burden of proof is on the taxpayer to
show by clear and convincing evidence that the taxpayer is entitled to the
relief claimed.” Dilution of this standard will undoubtedly increase appeals
and have a dramatic impact on the County Commissioners in their service
as the Board of Equalization, the County Clerk in his or her ministerial role
of recording the Board of Equalization’s proceedings, the Prosecuting
Attorney as the county’s legal counsel in these matters and of course the
Assessor and staff.

The present law has served us well. The Board of Equalization and
Board of Tax Appeals share an informal approach to resolving valuation
and other assessment disputes. A lawyer is not required and in most
cases is unnecessary. Valley County rarely relies on counsel in these
matters and he thinks we get along pretty well. Generally the Assessor
attempts to reach a settlement with appellant prior to appearing before the
BOE. The taxpayer is provided with copies of the Assessor’s entire file as
well as other evidence that may have been requested to demonstrate
comparable sales and other data.

He urged the committee to seek their opinion on this matter. County and
State government can ill afford the costs of increased litigation. At a time
when funding is short we need to find processes that will reduce rather
than increase litigation. Finally Mr. Banbury said it can be argued that it is
unwise under any circumstances to lower the burden of proof as provided
in this bill. There is no mandatory disclosure bill in Idaho making the
Assessor’s task difficult at best.

EXCUSED:

The statement of purpose reflects that the increase would give smokers
economic incentive to quit smoking. Other tobacco products receive a
comparable tax increase. This proposal provides that approximately five
percent of the tobacco tax revenues are targeted to fund six of the nine
elements of a comprehensive tobacco prevention and control program
recommend by the Center for Disease Control and endorsed by both the
American Heart Association and the Coalition for a Healthy Idaho.

The fiscal impact will increase tax receipts from tobacco sales from the
current amount of $26,900,000 to $90,000,000. General fund revenues
from the tobacco tax will increase from $9.2 million to more than $67
million. Four million dollars of the tobacco tax is also dedicated to six
elements of a comprehensive tobacco prevention and control programs.

The purpose of this proposed legislation is to appropriate a portion of the
tax levied on tobacco for one year to develop a state suicide prevention
plan. There will be a one time decrease in revenue of $5,500 from the
Public School Income Fund and a decrease of $5,500 from the

department of Juvenile Corrections.

Original motion to HOLD HB193 passed on a voice vote.

EXCUSED:

Residential values have been rising faster than the value of other kinds of
property. Once the homeowner reaches the upper limit, at about
$120,000 market value, there is no longer mitigation for inflation. So
taxes increase at an accelerated rate. Since 1990, total residential
property taxes in Idaho have increased by 164.5 percent while the total for
all non-residential property has increased by 77.3 percent. The current
maximum homeowner’s exemption was established in 1983 and has
never been adjusted for inflation.

Cities, counties and other local taxing districts could collect the same
amount under the budget cap. Annual increases in property tax
collections going to schools as a result of inflation in residential values
would be less than without this change. If five percent, the increase in
taxable value would be $5,500 rather than $6,500 and the increase in
money for schools would be $16.50 rather than $19.50. If it increases by
ten percent, the increase for schools would be $33 rather than $39.

Mr. LaBeau agreed with Senator Kennedy that residents are pushed
around because of the different classification. However this is not the
right way to go at this time.

Reduced school property taxes reduce the total property tax budget by
$451,110 but the overall tax rate goes from 1.454% to 1.456% a .138%
increase. The owner-occupied residential and all other property tax rates
also will increase by .138%. Although there are less overall property
taxes collected, this does not offset the $150,378,000 Homeowner
exemption shift to other taxpayers.

EXCUSED:

This bill, when enacted, will treat mutual insurance holding company
systems the same as non-insurance holding companies with respect to
inter-company capital transfers.

The Federal tax system does not treat insurance holding and non-holding
companies differently with respect to inter-company transfers. This is a
state matter. The bill will amend Section 41-3821 as stated on page one,
lines 8-22 of the bill.

This language reaffirms that insurance companies will continue to be
subject to Idaho premium tax. It also states that a subsidiary insurance or
other company may issue a dividend or distribution, which he had referred
to as capital transfer, to the mutual holding company or an intermediate
holding company within the mutual holding company system. Such
dividend or distribution shall be excluded from Idaho taxable income of
the recipient company just as it would be if the transfer were made in a
non-insurance holding company structure.

Such exclusion from taxation shall not apply if in the preceding year the
subsidiary insurance company’s liability for Idaho premium tax was less
than the Idaho income tax would have been if the insurance subsidiary
had been subject to Idaho income tax rather than premium taxation. This
language results in zero fiscal impact to the State.

Mr. Mackey concluded his testimony by saying to the best of his
knowledge there is no opposition to this bill It was their understanding
that the Sate Tax Commission and the Department of Insurance does not
oppose this bill.

EXCUSED:

Mr. Speaker noted that Idaho’s market place is a long way from
population centers and this would allow the ITC to be a useful purpose
providing incentive for business to stay in Idaho. California, Oregon,
Canada and other surrounding states are competing with Idaho for
companies to come to here. This changes the statewide philosophy of
the ITC to keep existing businesses and attract new growth.

The Statement of Purpose reflects that taxpayers who are in a loss
situation are not able to claim the ITC because they have no tax liability to
offset. This bill will allow taxpayers who have suffered losses to elect to
be exempt from personal property tax on new eligible property
acquisitions/investments for two years in lieu of the ITC.

In response to a question relating to the $665,000 cost to schools Dan
John, State Tax Commission, stated the Tax Commission prepared the
fiscal note but now find it is understated and should be about $1.8 million
loss to schools for the second year.

What is the effect of a qualified investment in property that is not personal
property under Idaho property tax law? Can a taxpayer somehow benefit
from such an investment under the provisions of this bill? Will qualifying
investment property truly be limited to personal property?

Certain property such as construction and mining equipment may be
moved from county to county and used in a variety of settings and
locations. In such circumstance the “home” county will bear the burden of
exempting the property but the investment in the property will operate to
the economic benefit of other counties. How can this inequity be
resolved?

The income tax law includes provisions for the State Tax Commission to
recapture the investment credit claimed if the property is sold, suffers
early disposition or otherwise ceases to qualify for the credit. Is there a
process in place to share the credit recaptured by the State Tax
Commission with the counties and other taxing districts who have been
deprived of the property tax revenue?

Once the credit has been used what is the value of the personal property
placed on the assessment rolls? House Bill 317 is silent as to what that
value might be such as the original value or value at the time the credit
ends or some other form of depreciated value.

Finally this legislation provides that this relief is only available to a
taxpayer whose Idaho taxable income in the second preceding year is
negative. It is quite possible that although an individual taxpayer
sustained a significant business loss, his non-business income, from
investments for example, may cause his taxable income to be a positive
figure. Is this legislation intended for corporations only? If intended for
individuals or partners, shareholders in S-Corporations and beneficiaries
of certain trusts, would it be more appropriate to specify a negative Idaho
adjusted gross income? Is this legislation intended to deny relief to such
a person?

EXCUSED:

This proposed legislation would amend the Idaho Code to allow fire
protection districts to impose and collect a uniform fee from property
owners in the district to defray the cost of equipping and maintaining the
district. Currently fire protection districts are funded through a levy on all
taxable property within the district. The total amount of the uniform fees
collected during any one fiscal year under this proposal could not exceed
the total revenue that could have been collected as a result of the
maximum levy authorized in Section 31-1420 Idaho Code. Any such fee
imposed would be in lieu of, not in addition to, any tax levy. Except for the
limitation imposed on the amount of the uniform fee that could be
imposed, this proposed bill would give fire protection districts the same
flexibility in raising revenue as is currently enjoyed by recreation districts.

Senator Kennedy stated there would be no fiscal impact on the general
fund in FY2004. It would reduce payments for “circuit breaker” relief of
$775,000 in FY2005 and indexed thereafter. It would reduce payment of
school replacement fund in FY2006 of $110,000. The property tax
reduction to eligible households in 2005 would be $1.8 million. The
reduced property tax and replacement funds to school districts beginning
in 2006 would be $505,000. There would be no effect on other taxing
districts’ property tax revenues and $1.4 million would shift to remaining
tax base in 2005.

In response to a question relating to a tax shift, Senator Kennedy
responded and agreed that it will cause a tax shift.

Assuming that the estimated disability population would be 127,938 the
criteria for those to qualify under HB 207 the additional homeowners
property tax exemption in 1005 would be $1,853,690. The reduced
payments for “circuit breaker” relief are also assumed to be in the
$775,000 range with the annual growth factor thereafter.

Increasing the threshold in current statute will exempt approximately 750
employers from this requirement and return them to calendar month filers.
Three hundred employers retain the “split month withholding”
requirement, about the same number of employers affected when the
legislation was enacted in 1983.

The “split monthly” status for payroll reporting is complicated and does not
match with federal requirements.

There used to be one ledger that contained all payroll related information
for each year. Now the over-lapping quarters and different sets of
standards to balance twelve and half months of withholding tax against
twelve months of W2’s. Hard copies in old files have to be accessed and
thirteen months of reports that include information from three different
calendar years has to be manually calculated to arrive at the correct totals
for any inquiries.

The “split monthly” system has been burdensome for all businesses and
especially for the Tax Commission. She stated that she was certain there
have been numerous reporting errors made. Their cross-check against
the Federal quarterly and year-end reports no longer applies and now it’s
too easy to unintentionally submit the wrong information.

EXCUSED:

At the time of the Governor’s address the national average of cigarette tax
was an average $.062 per pack. Other states have since increased the
cigarette tax and this is no longer the national average. The tax would go
into effect on June 1, 2003 generating $28.7 million in revenue.

This legislation increases the sales tax from 5% to 6.5% for the period
May 1, 2003 through June 30, 2006. The last time the sales tax was
increased was in 1986 and this proposal is different in that it is only a
temporary increase for only 3 years. It modifies the sales tax distribution
formula for the period June 1, 2003 through July 31, 2006 so that the
percentage of sales tax distributed to revenue sharing is decreased from
13.75% to 10.6%, thereby distributing all of the additional revenue
expected from the rate increase to the General Fund. It increases the
annual permit fee for amusement devices from $35.00 to $45.00 for the
period May 1, 2003 through June 30, 2006. This fee is in lieu of sales tax.

Representative Field distributed a copy of an Attorney General’s opinion.
(Attachment #1) She said the current statute for a fifteen percent
surcharge is not being used and is deleted in this bill and adds a two
percent surcharge to be designated as a dedicated fund. She also
distributed a chart depicting the distribution of the liquor profits.
(Attachment #2)

EXCUSED:

Currently these companies receive only half of the exemption benefit.
They are exempt from paying sales tax on raw materials used in the
production process. They are not exempt from paying sales tax on any
capital, repair or supply items used in the production process as are other
manufacturing businesses in Idaho.

The competition in the neighboring states receive the full advantage of
their states’ production exemptions, hence the competitive disadvantage.
HB 265 provides wood pellet and firelog companies in Idaho full
exemption under the Idaho manufacturing sales and use tax exemption.
It provides the full exemption by striking out the reference to 63-3266G,
heating materials, from existing legislation.

Representative Eskridge said Idaho has already lost much of our forest
related employment in his district. Passage of this bill would help to keep
Lignetics and the four similar companies like it competitive and able to
stay in business. Lignetics employs 51 people and in 2002 had a total
payroll of $1,077,249. Not a large company by any means, but an
important part of his district’s economic base.

With permission from The Chairman Representative Eskridge read the
following remarks from Senator Keough, co-sponsor of the bill. “Although
this appears to be giving a “new exemption”, it really is not as other wood
products companies receive the same exemption. Because Lignetics
makes fuel pellets they somehow got carved out from the exemption”.

“The costs of losing the jobs and the subsequent tax dollars generated
from those employees paying income tax, sales tax, property tax, etc is a
far greater hit to Idaho’s economy. In fact this is an investment that will
more than pay for itself as a result of keeping the company here.”

There was a discussion period relating to competition with bordering
states and the fiscal impact was questioned.

EXCUSED:

He said he did not relish the fact that he was there to deliver what he
thought we all feel is bad news. Our economy in Idaho and the nation has
been bouncing along the bottom now for almost two years. We have had a
number of holdbacks, budget cuts, base reduction whatever you prefer to
call them which have totaled nearly $200 million. We have borrowed from
one-time sources of money to help get us through some of the difficult
times, but now those sources are dry. The bad news is that whatever
scenario plays out this legislative session, it appears with growing certainty
that it will involve some type of revenue increase.

Mr. Whitlock said HB 379 proposed a temporary increase in the sales tax
of 1.5 cents. The increase is effective May 1, 2003 which sunsets on June
30, 2006 and generates an estimated $240,3 million in FY2004. The bill
will help the state regain solid financial footing for both FY2003 and
FY2004. Just as important , it also gives us stability and time prior to
FY2007 to begin to make whatever structural and programmatic changes
in state government necessary to ensure that the state budget is balanced
when the temporary increase sunsets in June 2006.

Some have suggested in this time of fiscal crisis that a preferred option
would be to eliminate certain exemptions and broaden our tax base.
House Bill 379 buys you the time to thoughtfully and responsibly do that.
Still others have suggested that we need further structural changes on the
expenditure side. House Bill 379 buys you time to thoughtfully and

responsibly adjust budgets rather than order massive reductions that
eliminate or hamstring services and programs that are needed and
expected by the citizens of Idaho.

As he mentioned to the committee on Wednesday, the last time the sales
tax was increased was in April 1986, seventeen years ago. The conditions
then were similar to what we are experiencing today.

The legislative history for that time period shows the sales tax rate had
remained at 3% since its inception in 1965 until the mid 1980’s: it went
from 3% to 4% in March of ’83; then to 4.5% in June of ’83; then back to
4% in July of ’84; and ultimately to 5% in April of ’86. In 1987 the
Legislature affirmed the 5% sales tax.

There were four changes in three years. Tax policy and the state budget
were in a constant state of flux throughout that time. Those disruptions
were not conducive to economic stability, much less growth.

One way to minimize the impact of this increase, particularly for those
individuals in lower income brackets, is to increase the grocery tax credit
which the Governor proposed in his Executive Budget recommendation for
FY 2004. Our budget has incorporated the $5.5 million reduction in
revenues based on expanding this tax credit.

Mr. Whitlock said he knew there are a number of revenue generating
proposals that are beginning to be discussed. Please keep in mind that
this revenue proposal is based on a consumptive aspect of our economic
model. It does not adversely affect the performance of investment
strategies or incentive conditions.

This proposal represents an opportunity to capture substantial nonresident
economic impacts such as those experienced in the tourism industry. This
sales tax proposal recognized that changing the base of current
exemptions of the sales tax code would be problematic for many vendors
as well as purchasers. This proposal does not change the relationship.
Nor does it apply to services that have been previously excluded from
sales tax coverage.

HB 379 does not alter the sales tax paradigm on which the state has been
based since 1986. It applies only to the rate being charged and to the
point in time when the increase returns to its former 5% level. It does not
require extensive record keeping to implement nor does it require
documentation or record keeping after the sunset provision has been met.

Outside of changing the rate and designating a total allocation of the
increase to the general fund it does not require anything different of
vendors. The exemptions, the reporting and the mechanics of collection
remain exactly as they are today.

Mr. Whitlock concluded his remarks saying that the intent of this measure
is to allow the state to provide stability in our programs and services at a
time they are needed most by our citizens. It is important and he would
characterize it as imperative that we balance the budget with as much
stability in tax structure and budget expenditures as possible. It is
important to retain our standing in the bond markets so that state and local
government can enjoy substantial cost savings for many years to come. It
is important to retain Idaho’s reputation as a state that provides an
environment favorable to business and citizens through a strong system of
education, public safety and infrastructure programs. House Bill 379
accomplishes these things.

They further recognize that no tax increase is popular, however they also
recognize that no one wants services reduced that are vital to the health,
safety, education and welfare of Idaho citizens.