Big changes to the property tax system aren’t the only pieces of legislation impacting the City of Boise’s bottom line.
In early 2020, the Idaho Legislature passed a bill reforming Idaho’s sales tax distribution system with an eye toward making tax dollars flow more equally to cities across the Gem State. This change means that although the State of Idaho took in a record-breaking haul of sales tax dollars, the City of Boise will not be getting as much back for services as it would have expected to under the old system.
Proponents of the change say this reform helps equalize the sales tax revenue cities of all sizes take in, allowing even the smallest cities to pay for the services they need. But, for the City of Boise, this change adds another constraint to its budget along with the caps on property tax revenue instituted in the 2021 session.
According to revenue projections, the new formula could cause Boise to lose out on a cumulative $44 million by fiscal year 2026 it would have otherwise taken in.
How does sales tax revenue sharing work?
It might seem counterintuitive, but just because you buy something in Boise doesn’t mean your sales tax money heads right over to city hall to be spent.
Sales tax revenue in Idaho is collected throughout the state before heading to the Idaho State Tax Commission. From there, all of the tax money is redistributed to localities statewide based on a formula set by state law. This means localities all get a share of the total equal to a per capita rate, not the amount of money spent within their borders.
Prior to the 2020 law change, sales tax was distributed around the state using a decades-old formula based on property valuation and personal property. This formula resulted in quite a disparity between the amount of money certain cities were receiving, with high property value cities like Sun Valley and other resort areas taking in far more than others. It resulted in different amounts ranging from $40 per person for some cities to roughly $500 per person in others, with even similar-sized cities getting different amounts.
Assistant Majority Leader Rep. Jason Monks, R-Meridian, wanted to change that. His goal in writing the 2020 legislation was to build a new formula slowly equalizing all of the sales tax revenue across the state, while not cutting funding from cities on the higher end of the spectrum.
Instead of using property values and other factors leftover from the early days of property tax collection, this new formula is largely based on population. To equalize the amounts, every city will now receive an additional 1% in tax revenue on top of what they were already getting, regardless of the amount the city received previously.
The losses start for cities receiving sales tax numbers above the statewide average beyond that 1% when the rest of the additional revenue they would have gotten under the old system will instead be paid out to cites below the average. Monks said the idea is to use this formula to make the system more equitable and then return at a later date when all cities are receiving roughly the same amount per capita and rework the formula moving forward.
How does this impact Boise?
Boise officials say creating a formula based on population doesn’t tell the whole story.
Eric Bilimoria, the City of Boise’s budget director, said this change means the amount of sales tax money Boise will receive is based on the number of people who live in city limits. This might work in other cities, but because of Boise’s central business district and a high number of commuters, it means the city has to provide more services than what might be predicted for the number of people who live in the area.
“From the City of Boise’s perspective, we are an economic engine for the state,” Bilimoria said. “Lots of activity has thrived here and our daytime population is higher than our nighttime population, so we need to provide additional police services and a whole slate of services for people within the city throughout the course of the day. None of that was accounted for.”
In fiscal year 2020, Boise received $21 million in sales tax revenue from the state. Sales tax revenue skyrocketed the next fiscal year by 18%, but because of the change in formula the City of Boise only took in $21.2 million for the year. If the formula hadn’t been changed, Boise would have received $25 million.
‘You would dry up small towns’
Monks said cities like Boise will still get as much as they were under the previous formula, but it will make the overall system better. He said revenue sharing, instead of having each dollar be individually collected and sent to the city where it was spent, keeps the lights on in smaller cities without a lot of commercial space. It also reduces the administrative burden on businesses by not requiring them to track every sales tax dollar and send it to the proper city.
“(Cities are using sales tax revenue) for the police, the fire department and streets or for whatever they have for city expenses and you take a community that doesn’t have a shopping district that still has a significant population and they happen to do their shopping in the next town over, why should that other town get all of those tax dollars to support that other city?” Monks said. “You would dry up small towns.”
When asked about Boise’s situation, Monks said the same argument can be made for rural cities that have to use their fire department resources to respond to emergencies from Ada County residents who use their backcountry for recreation but pay no taxes.
Idaho Association of Cities Executive Director Kelley Packer said her organization did not weigh in on this issue because of how differently it impacts cities across the state, but she said in her personal opinion and from talking with experts it has helped create a more equitable system. This change also helps property tax costs in smaller cities because it doesn’t force them to rely so heavily on property taxes to cover costs, Packer said.
“There are a myriad of different services that have to be provided regardless of if you have five people in your city or if you have 205,000,” Packer said. “The difference is it’s always going to be expensive, but you still have to provide those services and now you have a smaller number of people to pay for those services so having those sales tax numbers be more equitable means those smaller city don’t have to charge as high a property tax rate because they have a smaller base.”