STORY CONTACT: Neil Meyer, (208) 885-6335, nmeyer@uidaho.edu
MEDIA CONTACT: Bill Loftus, (208) 885-7694, bloftus@uidaho.edu

The sales tax in Idaho, as in many states, is considered fair by many citizens because they pay the tax only when they spend their money, and avoid it by not spending, says University of Idaho agricultural economist Neil Meyer.

The Idaho sales tax fails the fairness test, however, because it taxes only goods and not services, said Meyer, UI extension public policy and rural economic development specialist at Moscow.

At one time, exempting services from sales taxes made more sense, Meyer said. The fairness scale began to tilt, however, with the shift of both population and economic activity to cities, catalogs and cyberspace.

A higher proportion Idaho’s economic activity revolves around services ranging from financial, medical and legal services to car and television repair.

"As consumers have spent more on services, one could argue that those systems that put taxes only on goods need to be adjusted," Meyer said.

Another trend reflects the rise of the service economy, Meyer said. City residents fare better than their country cousins.

One study, Meyer said, estimates that 58 percent of Americans’ income goes to services. Most services tend to be concentrated in urban areas.

In Meyer’s study, Idaho’s urban area consists of Ada and Canyon counties. Residents of the two counties account for 32 percent of the state’s population, yet collect 38 percent of Idaho’s personal income, earning on average 13 percent more than the statewide average.

Put another way, the state’s economic engine runs leaner in urban areas, fewer people getting paid more. Rural residents, 68 percent of the population overall, produce $29 billion or 59 percent of the state’s sales. Urbanites, 32 percent of the population, produce $20 billion or 41 percent of sales.

But the tax collections do not necessarily match. Here’s the catch:

Compare $1 million of an agricultural product, say potato chips, processed for export and $1 million of a manufactured product from an urban area, say computer chips, and the difference in taxes becomes clear.

The potato chips generated more than $3.6 million in sales through purchases of potatoes and wages, etc. All but $533,000 is spent in rural areas.

The computer chips, a product of a capital-intensiveü high-wage urban industry, generated $3.7 million in sales. All but $1,760 of the spin off economic activity occurred in the urban area, however.

The agricultural product produced in a rural area generated $91,500 in property, sales, income and corporate taxes, $10,400 more than the manufactured product from an urban area.

Although the two products generated nearly identical property tax receipts, and the manufactured product generated substantially more corporate taxes, the urban collection of sales and income taxes lagged those in the rural areas.

If Idahoans decide to revamp the sales tax system, the road would have its share of bumps, Meyer acknowledges.

He knows prospects for a tax on medical services would leave many people cold. Idaho collects sales taxes on food, another item just as necessary for survival. He adds, "We could handle the tax on medical services the same as we do taxes on food, through a tax credit on our income taxes."

Meyer says his purpose in analyzing the state’s tax system is to promote discussion of the issues. "I believe the principle of perceived fairness is extremely important. No one likes to think they’re paying more than their fair share."

Meyer and colleagues R. Garth Taylor, Marisa C. Guaderrama and Steven S. Peterson reported on their analysis in the November issue of Idaho Economics published by the UI Cooperative Extension System.