The year was 1931 -- just fifteen months after the stock market had thrust our country and state into the Great Depression. Idaho’s major source of revenues, property taxes, had fallen sharply as land values plummeted, leaving the legislature and Governor Ben Ross facing huge budget shortfalls After much debate, Idaho passed its first income tax law entitled the Property Relief Act of 1931.

For more than a quarter century, Idaho struggled to implement the state’s unique tax system. More and more ‘tax collectors’ were hired to audit Idaho citizens who failed to conform to the complex state rules that were incompatible with federal tax law. Finally, in 1959, Idaho became the first of 22 states to adopt the federal Internal Revenue Code as the basis for calculating state taxable income. For 45 years since then, Idaho has saved millions of dollars by avoiding the necessity of creating and maintaining its own tax laws and by relying on information shared from IRS audits to collect taxes due. Idaho has been tempted from time to time to divorce itself from the federal rules, but good public policy has always prevailed. Until 2003.

The governor and legislature once again find themselves faced with a struggling economy and budget shortfalls. In an effort to boost the national economy, Congress passed the Job Creation and Worker Assistance Act. In order to stimulate capital expenditures and create additional jobs, the act allows businesses to accelerate their deduction for depreciation of new assets (vehicles, farm equipment, breeding livestock, store fixtures, office equipment, etc.) purchased over a three-year period beginning September 11, 2001. Under the "bonus depreciation" provision, a business that spends $10,000 on a new computer system may elect to deduct $4,400 this year, $2,240 next year, and the balance of $3,360 over the next four years. Without the bonus depreciation, the same company would deduct $2,000 this year, $3,200 next year, and the balance of $4,800 over the next four years. The bonus provision simply results in an acceleration of the depreciation allowed, nothing more than a timing difference. Any tax savings resulting from the ‘bonus depreciation’ the first year is repaid in following years with smaller depreciation deductions. In the end, it all comes out even.

But tax savings to the citizen mean lost revenues to the state. Although these revenues would only be deferred, Idaho needs the money now and wants to abandon its long-standing relationship with the federal code by disallowing the ‘bonus depreciation.’ Some estimates claim the provision will reduce state revenues between $8 million and $18 million the first year. (A $12 million impact would be about 3/5 of one percent of Idaho’s $1.9 billion budget.) This amount would drop dramatically the second year and even more the third. Succeeding years would result in greater revenues under the bonus depreciation provisions than the state would receive if it did not conform.

We cannot ignore the cost of conformance to federal tax code, but let us not forget the costs of nonconformance:

Idaho farmers, ranchers, dairies, retailers, small businesses across our state will be required to keep two sets of books -- one for federal taxes and one for the state -- with separate depreciation schedules and asset basis calculations. Adjustments, both negative and positive, will have to be made between federal and state tax returns for up to 23 years! Yes, this only applies to assets purchased during a three-year period, but those assets are depreciated over periods up to twenty years. To make matters worse, if any of those assets is disposed of before it is fully depreciated, a separate calculation of the gain or loss will be required for the Idaho income tax return and additional adjustments made. This is a tax on our citizens -- not only of money, but of time and personnel and resources. This is waste. And to intentionally create waste is bad public policy.

Let us not forget the cost to the State Tax Commission of administering tax compliance under two different sets of tax code.

The ‘bonus depreciation’ provision was added to the Job Creation and Worker Assistance Act to stimulate business growth and create jobs. Idaho borders six states. Three of them have no income tax and the other three have all conformed to the ‘bonus depreciation.’ Unless Idaho also conforms, the Gem State will be a nonconforming ‘ISLAND’ among conforming states, putting us at a huge disadvantage in trying to grow current businesses and attract new business investment.

Nonconformance will adversely affect tax policy in this state for the next twenty years, regardless of what future legislatures do to correct our mistake. There are a dozen ways to raise taxes in this state -- nonconformance is the worst of them. I do not believe today’s solution should create a complex and expensive problem for tomorrow -- and up to twenty years of tomorrows!

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