Will reducing Idaho’s state income tax rate raise our Family Prosperity Index?

Probably not. That’s just wishful thinking by a conservative blowhard. In an article on September 1, 2017 titled Following Trump’s speech, time for federal and state tax relief Idaho Freedom Foundation president Wayne Hoffman predictably called for a lower state income tax rate. That article also was printed as an editorial in the Idaho Press-Tribune. He did not give a number, but perhaps would settle for half the current top rate of 7.4% (3.7%) or a nice round one like 3%.  

Wayne said: 

“….Idaho is plagued by the highest income taxes in the intermountain region, with its top marginal rate of 7.4 percent. Further, that top rate is not reserved for the wealthy: It kicks in at just about $11,000, meaning a youngster earning minimum wage at a burger shop, such as my 17-year-old son, is in the state’s top tax bracket. It’s the punchline of a not-so-funny joke I often tell in describing Idaho’s wayward tax policies.

High tax burdens are, unquestionably, holding our state back. On the American Conservative Union’s Family Prosperity Index, which measures the well-being of families in individual states, Idaho performs fairly well, coming at a No. 3 in the latest survey. Idaho should hold that top spot, but the state’s confiscatory taxes continue to hurt our ranking.”

I’d say instead that Idaho did extremely well by ranking third. There is a two-minute YouTube video about the Family Prosperity Index (FPI). There is a very detailed 152-page report about the 2017 Family Prosperity Index.

Wayne also had mentioned our highest income tax ranking in a previous article on September 25, 2015 titled Tax law rewrite should be open to the public. I discussed it in a blog post on October 5, 2015 titled Using graphics to see an argument more clearly. 

As is shown above, the census bureau defines the Intermountain region to consist of six states: Arizona, Colorado, Idaho, Nevada, New Mexico, Utah. But it’s not that useful, since it only includes two of our six neighboring states - our southern ones Nevada and Utah. Anyhow, let us look at how those Intermountain states rank on the (Family Prosperity Index) and also list their [Income tax rate], and {Sales tax rate}. Income tax rates and sales tax rates for 2017 both came from the Tax Foundation web site. They are:

Utah                  (7.24), [5.0%],   {5.95%}

Idaho                 (6.23), [7.4%],   {6.0%}

Colorado           (5.93), [4.63%], {2.9%}

Nevada             (4.46), [0.0%],   {6.85%}

Arizona             (4.42), [4.54%], {5.6%}

New Mexico      (3.58), [4.9%],   {5.125%}

Utah had the highest Family Prosperity Index (FPI), (and North Dakota came in second (6.32), [2.9%], {5.0%}). Note that New Mexico, with the lowest FPI in this group (and the second lowest of all states), had almost the same income tax rate (and a lower sales tax rate) than Utah did. And Nevada, with no income tax at all, also ranked lower in FPI than Idaho did.  

How about instead comparing Idaho with our six neighboring states (as shown above)? Now the FPI rankings are:

Utah              (7.24), [5.0%], {5.95%},

Idaho             (6.23), [7.4%], {6.0%},

Wyoming      (5.78),  [0.0%], {4.0%},

Washington  (5.54),  [0.0%], {6.5%},

Montana       (5.23),  [6.9%], {0.0%},

Oregon          (4.84), [9.9%], {0.0%},

Nevada          (4.46), [0.0%], {6.85%}

The average income tax rate is 4.17%, so reducing ours to 3.7% or 3.0% would make it less than average. That wouldn’t help AT ALL in competing with three (half) of our neighbors who have NO income tax.  But all three states with no income tax also ranked lower in FPI than Idaho did. And so did Oregon, with the highest income tax rate, but no sales tax. Even this sample of 1/7 of the states shows clearly they have adopted quite different strategies for getting funds to run their governments.  

Next I tried looking at the relation between income tax rate and FPI for all fifty states. As shown above in a graph there is no obvious connection to suggest lowering tax rate would increase FPI. Like Utah, California (5.16), [13.3%], {7.25%} is an obvious outlier with its high income tax rate. Idaho has a higher FPI than all seven states which have NO income tax:

Idaho              (6.23), [7.4%], {6.0%}

South Dakota (5.94), [0.0%], {4.5%}

Texas             (5.89), [0.0%], {6.25%}

Wyoming        (5.78), [0.0%], {4.0%},

Washington    (5.54), [0.0%], {6.5%},

Alaska            (4.86), [0.0%], {0.0%}

Florida            (4.58), [0.0%], {6.0%}

Nevada          (4.46), [0.0%], {6.85%}

As shown above, I also looked at the relation between sales tax rate and FPI for all fifty states. Again, there is no obvious connection.

Finally, as shown above, I looked at the relation between the sum of the income and sales tax rates (part of the total tax burden, ignoring property taxes) and FPI for all fifty states. States which lowered their income tax rate might be expected to compensate for that loss of revenue by raising sales tax rates. But there is no obvious connection between tax burden and FPI.

Why is there no connection? The Family Prosperity Index is very complicated. Table 1 on page 12 of the 2017 report shows there are six indexes (factors) which contribute to it: Economics, Demographics, Family Self-Sufficiency, Family Structure, Family Culture, and Family Health. And each of those factors are composed of five sub-indexes. For example, Table 2 on page 23 shows that the Economics sub index is composed of: Private Sector Share of Personal Income, Real Per Household Personal Income, Cost of Living, Entrepreneurship, and Unemployment. On page 17 of the report they note that:

“Personal income comes from two sources: the private sector and the public sector. The distinction between the two sectors is important because only the private sector creates new income. The public sector, in contrast, can only redistribute income through taxes and spending. More specifically, public sector spending consists of personal current transfer receipts (Medicare, Medicaid, Social Security, etc.) and government employee compensation (federal, state, and local).

This information is important because there is a significant positive correlation between per household personal income and the private sector share of personal income. Ref (1). Put simply, the larger the private sector in a particular city or state, the greater the per household personal income in that community. When examining the lower 48 states, on average, a one-percentage point decrease in the size of the private sector yields a decrease in per household income of approximately $3,300.

Of course, correlation does not equal causation; however, there are two states that allow for a very strong natural comparison to better show causation—New Hampshire and Maine. These two states are similar in many areas—geography, climate, demographics, and culture—but they diverge significantly in their approach to public policy.”

Results for those states are:

New Hampshire (5.01), [5.0%],   {0.0%}

Maine                 (4.53), [7.15%], {5.5%}

As shown above, when we plot Real Per Household Personal Income as a function of Private Sector Share of Personal Income, there indeed is a correlation. (I have shown the data points for Hawaii [blue] and Alaska [gray] in different colors).

Let us look at the six scores for Utah and Idaho that contribute to their overall FPI rank. For Family Structure Utah ranks #1 (7.46) while Idaho is #2 (6.77). For Demographics Utah ranks #1(9.12) while Idaho is #4 (7.39). For Family Health Utah ranks #1 (6.30) while Idaho is #6 (6.07). For Family Self-Sufficiency Utah ranks #1 (7.26) while Idaho is #11 (5.59). For Family Culture Utah ranks #2 (6.39) while Idaho is #8 (6.34). For Economics Utah ranks #3 (6.92) while Idaho is #15 (5.50).

But there is no obvious correlation between FPI and state income tax rate. Wayne is dreaming!