Quality Education Act initiative price won't be as high as reported

Widely reported claims that an Idaho education funding initiative actually would raise taxes by $570 million appear to be unfounded, and a drafting error in the initiative’s inflation factor originated in the Idaho Attorney General’s office.

“We now know it was an inadvertent typographical error that was made by our office in the Certificate of Review,” Chief Deputy Attorney General Brian Kane told the Idaho Press in an email Thursday. “The mistake is ours.”

Jared Walczak, vice president of state projects for the Tax Foundation, made the claims in a July 14 article headlined, “Idaho’s tax-hiking ballot measure is riddled with mistakes.” The claims were then picked up and trumpeted by the Idaho Freedom Foundation, which opposes funding public education.

“It will hike taxes for nearly every Idahoan,” claimed IFF Legislative Affairs Director Fred Birnbaum on July 26.

The Quality Education Initiative, proposed by Reclaim Idaho, the same grassroots group that sponsored the successful 2018 Medicaid expansion initiative, would raise an additional $323.5 million a year for Idaho schools, according to an analysis by the state Division of Financial Management.

If approved by voters, the initiative would raise income taxes on the state’s highest earners and corporations — the exact opposite of the Legislature’s direction on tax policy for the past two years. The corporate income tax, currently at 6%, would go back to 8%, the level it was at from 1987 to 2000, before the recent spate of tax rate cuts. Without changing any other tax brackets, the initiative also would create a new top income tax bracket for Idahoans who earn more than $250,000 a year for an individual, or $500,000 for a married couple filing jointly, and tax just the portion that they earn over those amounts at a new top rate of 10.925%.

Walczak contended that the initiative would inadvertently restore all of Idaho’s income tax brackets to their rates before the most recent tax cuts, because the full text of the initiative includes the law as it was written before that change. That’s how the law stood when the initiative was drafted.

“The ballot measure reprints the old, higher rates on incomes below the new threshold, potentially restoring the pre-2022 rates – a tax hike for everyone, not just high earners,” Walczak wrote.

The Idaho Attorney General’s office, in an email to Chief Deputy Secretary of State Chad Houck dated July 19 addressing the claims in the article, appeared to agree. But Kane, who wrote the email, said it was a response to a question that “analyzes the likely effect of the initiative if adopted.”

“It was not a commentary on the drafting of the initiative,” Kane wrote.

Mike Nugent, who was the Idaho Legislature’s chief bill-drafter for 26 years before his 2018 retirement, and who worked for the Legislature for 41 years, drafted the Quality Education Initiative for Reclaim Idaho.

He said Walczak was mistaken. Bills, or initiatives, are required by the Idaho Constitution and state law to include the full section of law that’s being amended, Nugent said. The changes are indicated by strike-throughs of wording that’s being removed, and underlining of wording being added. The initiative clearly shows that only applying to the new top bracket.

“This is not the first time we’ve ever had multiple amendments to a code section,” Nugent said. “There’s a mechanism to easily take care of this.”

The title of the initiative, the text of the initiative, the funding statement, which was written by the initiative sponsors, and the initiative’s fiscal impact statement, which was written by the state Division of Financial Management, all support that the only change being made was to the new top bracket. That is the only section in which there is strike-out or underlining.

Nugent said of Walczak, who is from Washington, D.C., “He’s probably never heard of the case Risch vs. Beitelspacher.”

That 1983 Idaho Supreme Court case held that the rules of the Legislature determine effective dates of legislative acts, and the court would not interfere in that. Nugent said based on that case, the Idaho Legislature’s bill drafting manual was prepared and has been followed for drafting of legislation ever since.

He also pointed to the Idaho Constitution’s Amendatory Act, in Article III, Section 18, which states that “the section as amended shall be set forth and published at full length.”

That’s why the initiative couldn’t just include the clause its sponsors wanted to change, Nugent said, but had to lay out the section of law in full as it stood at the point of drafting. He said when Idaho became a state, its legislators had, on average, a 6th-grade education. All acts had to include the full section and be read in full “so that the illiterate members would have an idea what they were voting on,” he said.

“In our bill-drafting manual, if you’re amending something, the deletion is struck through, and the added is underscored,” Mike said, “and it’s been that way since I started in the ‘70s.”

Nugent also pointed to existing Idaho law, in Title 73 of Idaho Code, which addresses multiple amendments to a single section of law. “If the amendments can be read into the section without conflict, such amendments shall all be effective and shall be compiled as if made by a single enactment,” the law says.

That means both this year’s successful tax-cut legislation and the initiative would be read together to resolve any conflicts, so the tax cuts for the existing, lower brackets would remain.

Nugent noted that there are multiple mechanisms in place for resolving conflicts between amendments to the same section of law, which start with the Idaho Code Commission. That panel can resolve those conflicts before they’re formally written into Idaho Code. Then, there’s the annual Codifier’s Corrections bill, which resolves errors and makes technical changes to multiple sections of Idaho state law each year. That bill is considered and voted on by the Legislature and goes to the governor for signature; it’s never been rejected.

“There are safeguards that are in place,” Nugent said. “To me, it’s a tempest in a teapot.”

Walczak also made two other claims about the initiative in his article, both related to the typographical error in the inflation factor.

All proposed Idaho initiatives go through a Certificate of Review process where the Idaho Attorney General’s office analyzes them for constitutionality, error or conflicts with other state laws. The 11-page review for the Quality Education Initiative, written by Deputy Attorney General Adam Warr and dated May 26, recommends a change in wording to resolve an unrelated style issue regarding the difference between “percentage” and “adjustment factor.” In the process, Warr inadvertently reversed which year should be divided by which year to adjust for inflation. Walczak wrote that the final wording results in “inflation-indexing in the wrong direction,” meaning each year, instead of rising, tax brackets would actually shrink.

Kane told the Idaho Press by email, “At the time of my July 19 email to Chad Houck, our office did not know how or when the denominator and numerator were reversed.”

Nugent said that’s exactly the type of typographical error that can be fixed by the Code Commission or the Codifier’s Corrections bill. “There’s multiple safeguards in place,” he said. “Even if I’m totally 100 degrees wrong on my opinion of what the codification is going to look like, it’s taken care of. The system is in place to remedy that.”

Kane said, “With regard to Mike’s analysis of the Code Commission and the codifier corrections bill, we are in agreement.”

Walczak told the Idaho Press in an interview that based on what he’s observed in other states, “A ballot measure is separate from the legislative process, and the concern here is that the Code Commission and the other processes normally available to conform these measures may not be available.”

But Kane noted that initiatives in Idaho are “a law of the state of Idaho on equal footing with every other law. In that regard, the Legislature is free to amend or repeal the initiative as it sees fit.”

He added, “As with any initiative, this office will be prepared to defend it if it is enacted and challenged.”

Walcazk said, “No one questions, obviously, that the Legislature can make any changes they want through legislation. Presumably if the Legislature simply came back and repealed what the voters adopted, supporters of the ballot measure would be dismayed by this.” He maintained that voters will see ballot text that’s “inconsistent with what the drafters said they want.”

Walczak also pointed to another factor in the bill’s drafting that he claimed would lead to a “tax cliff” that would substantially raise taxes for higher-income taxpayers in future years. That’s because the dollar amount calculated in the code language for the new top bracket is based on numbers in the state statute, as are all the numbers in that section, rather than on inflation-adjusted figures. The potential difference: About $90.

Idaho law requires the state Tax Commission to adjust state tax brackets for inflation each year, so that inflation alone doesn’t result in a tax increase for taxpayers. Those changes are promulgated by the Tax Commission and included in tax tables for use by taxpayers when they file their returns, but the numbers in the state law don’t change each year. The base year for the inflation adjustment to the existing income tax brackets is 1998; they are adjusted according to the Consumer Price Index for each year since then.

The base year for the inflation adjustment to the new top bracket was set at 2024; the initiative, if passed, would take effect for the 2023 tax year, for which taxpayers file returns in 2024.

Nugent said, “He’s really reaching, isn’t he? … If indeed he’s right and it’s not just an academic argument, that’s something the Legislature has three or four years to clean up.”

Mike Ferguson, who was Idaho’s chief economist for 26 years under six governors, was involved in the drafting of the inflation indexing provisions in the current law a quarter-century ago. “If the goal right now is to establish a new bracket at $250,000 and inflation-adjust it going forward, then that’s just a mechanical process,” Ferguson said. “I don’t know why you’d have to go back to ’98.”

Luke Mayville, co-founder of Reclaim Idaho, a North Idaho native, political scientist with a Ph.D. from Yale University and the author of a book about U.S. President John Adams, said the base year for the new top bracket was intentionally set at 2024. And the figures were calculated the same way they are for existing brackets, to apply the new marginal rate to those who are earning $250,000 a year or more – or $500,000 a year or more for a married couple – as of now, not as of 1998.

The initiative, like existing law, shows a calculation for how the new top bracket would apply, providing a dollar figure plus the new percentage. That dollar figure reflects the lower rates in the law applying to the first $250,000, or $500,000, of the taxpayer’s income, because only the portion above those amounts would be subject to the new, higher rate. “We’re providing a non-indexed number,” Mayville said. “It seems very clear to us that that’s the correct way to write that number into our initiative, because that’s consistent with the other tax amount numbers provided.”

The Tax Commission, after calculating inflation adjustments, provides the actual tax rates to taxpayers when it publishes tax tables for filers.

Walczak combined the $90 difference between the indexed and non-indexed dollar amount in the initiative for the new highest bracket with the potential reverse-inflation indexing to suggest that high earners would face a growing “tax cliff” that he said would apply to owners of small businesses in Idaho, which typically don’t pay the corporate income tax rate, and instead pass through their income as their owners file it on their individual returns.

According to the U.S. Small Business Administration, small businesses, defined as those with fewer than 500 employees, made up 99.2% of all businesses in Idaho in 2021 and provided 56.2% of the state’s jobs.

“This is where the jobs are,” Walczak said. “The vast majority of all pass-through business income in Idaho and every other state is on returns of more than $250,000. … That puts a lot of small-business owners at a competitive disadvantage in Idaho.”

He provided a link to an IRS spreadsheet from 2019 showing the breakdown of Idaho tax filers, including those who reported any business, partnership or S-corporation income. The spreadsheet showed that 24.4% of Idaho returns showed some business or partnership income, and 70% of those returns were for $200,000 or more. However, it also showed that among all individual income tax filers in Idaho, just 1.3% were individuals with $200,000 or more in income or married couples filing jointly with $500,000 or more in income.

The IRS data didn’t break down how many individuals were at or above $250,000, so the total percentage who would be affected by the new top rate is lower than that.

Walczak said of his organization, the Tax Foundation, “We do not take positions recommending for or against legislation, or ballot measures, for that matter. We are highlighting policy concerns as well as drafting concerns.”

“Even looking at the direct undisputed intent of this measure, the parts that everyone would agree that this is supposed to do, it would create the highest top marginal rate between New York and California,” he said.

Mayville said, “In Idaho, we practically have a flat tax for a large percentage of income earners, where middle-class Idahoans pay the same income tax rate as those earning $2 million a year. … It is common sense that you would have a higher tax bracket for those earning $500,000, $1 million or $200 million a year.” He added, “The initiative would keep in place lower tax rates for the first $500,000 that a high-earning couple makes.”

Nugent’s role with the Legislature for all those years was a nonpartisan one, and he continues to be nonpartisan in retirement. He said he’s always worked with “both sides of the aisle.”

Among others he’s helped with bill-drafting since his retirement, at their request, were Lt. Gov. Janice McGeachin and Reps. Judy Boyle, R-Midvale, and Julianne Young, R-Blackfoot, when they were drafting a bill for the 2020 special session of the Legislature on immunity from liability over coronavirus claims. Though three other versions were introduced during the special session, it was the bill Nugent helped draft that passed.

He said, “It’s not my first foray into this.”

Betsy Z. Russell is the Boise bureau chief and state capitol reporter for the Idaho Press and Adams Publishing Group. Follow her on Twitter at @BetsyZRussell.

This article was first published Aug. 13 by the Idaho Press and reprinted with permission.