Tax Cuts and Budget Tradeoffs

Tax policy and the budget are one subject viewed from two ends. A tax cut is a decision about revenue. A budget is a decision about what that revenue pays for. In 2025 and 2026 Idaho made large decisions on both ends in the same two years, and both ends were in the news at once: tax cuts were signed, a 3 percent holdback followed, and the Legislature cut agency budgets by about 4 percent in March 2026. This lesson lays out the tax decisions, in dates and dollars, as the documents record them. It does not argue that any of them was right or wrong. Lesson 05 covers holdbacks, lesson 06 the reserves and transfers, and lesson 04 the forecasts.

The flat income tax in one table

Idaho Code 63-3024 sets the individual income tax rate. Its subsection (2) now says the tax is computed at 5.3 percent of taxable income over $2,500 for single filers, and over $5,000 for joint filers, with the thresholds adjusted for inflation each year. The section's history note reads "added 2022, 1st E.S., ch. 1, sec. 5, p. 6; am. 2024, ch. 237, sec. 2, p. 824; am. 2025, ch. 13, sec. 3, p. 43." Each of those three entries is a bill.

Bill	Signed	What it did to the rate	Cost stated in the fiscal note
H.B. 1, 1st Extraordinary Session of 2022	2022	Created the flat tax; one rate of 5.8 percent beginning in 2023 according to the Legislative Services Office; included a one-time rebate according to the Idaho Center for Fiscal Policy	Not checked in this lesson
H.B. 521 of 2024	March 29, 2024	Individual rate from 5.8 to 5.695 percent	Individual income tax minus $46.9 million in FY2025 and minus $48.0 million in FY2026; corporate minus $12.2 million and minus $11.9 million. The same bill raised the share of sales tax going to school facilities
H.B. 40 of 2025	March 6, 2025	Individual and corporate rate from 5.695 to 5.3 percent; military pension exemption expanded; precious metal bullion gains removed from state taxable income	Minus $253 million in FY2026 ($240 million rate, $12 million pensions, $1 million bullion)

H.B. 40 passed the House 63 to 7 and the Senate 27 to 8 and applies retroactively to January 1, 2025. H.B. 521 passed 61 to 6 in the House and 23 to 11 in the Senate. Idaho EdNews reports that these were part of a 2025 session in which lawmakers approved far more tax cuts than the Governor had first asked for, which is the context for the dollar comparison below.

What else was cut in 2025

The same session passed more than a rate cut. Here are the bills as their statements of purpose describe them.

Bill	What it does	Stated cost
H.B. 40	Rate to 5.3 percent, military pension exemption, bullion	$253 million (FY2026)
H.B. 231, signed March 13, 2025 (chapter 56)	Food tax credit to $155 per person; option to claim actual sales tax paid on food, up to $250 per person, by itemizing. Under 63-3024A the credit was $100 in 2022, $120 in 2023 and 2024, and $155 for 2025 and after	About $50 million ($47 million from the higher credit, $3 million from itemizers) according to the proponent's note
H.B. 93, signed February 27, 2025 (chapter 9)	Parental Choice Tax Credit: refundable, up to $5,000 per eligible student ($7,500 for certain special needs students); priority for households under 300 percent of the federal poverty level	Maximum $50 million of reduced revenue; $49,869,200 left for the credit after administrative costs
H.B. 304, signed March 26, 2025 (chapter 175)	Property tax relief of $100 million a year starting in 2025: $50 million from the School Facilities Fund and $50 million from the Homeowner Property Tax Relief account	$100 million a year reduction to the General Fund, starting in FY2025

Adding the fiscal notes: $253 million plus about $50 million plus up to $50 million plus $100 million equals about $453 million. That is close to the $450 million in revenue reductions that the Idaho Capital Sun reports Governor Little expressed concern about on February 25, 2025, and it is more than the "more than $400 million in tax relief" that Speaker Mike Moyle cited on April 4, 2025, according to the same outlet. The difference is partly rounding and partly which bills are counted. A reader who sees "$400 million" or "$450 million" should ask which list of bills sits behind it.

H.B. 559 of 2026: a conformity bill, not a rate cut

Every year the Legislature decides whether Idaho's income tax code follows changes Congress made to the federal Internal Revenue Code. In 2025 Congress passed the law commonly called the One Big Beautiful Bill Act, or HR1. Because Idaho starts from federal numbers, a federal change flows into state income unless Idaho opts out. The 2026 Legislative Fiscal Report says estimates for conformity ranged from $140 million to $263 million, and the Legislature chose a middle path.

H559, signed February 10, 2026 as chapter 1 (House 59 to 9, Senate 28 to 7), is retroactive to January 1, 2025. According to its statement of purpose the bill conforms fully to the federal law with two exceptions. It keeps Idaho's historic practice of not conforming to bonus depreciation. And for research and experimentation expenses, amounts from 2022 through 2024 that are already being amortized continue on their five-year schedule, while expenses from 2025 onward conform. The bill also prevents a business from using the same research expenses for both a federal-style deduction and an Idaho credit. The Legislative Fiscal Report describes the research provision as a "phased-in approach" that impacts business taxes.

The fiscal note says minus $155 million in FY2026 and minus $175 million in FY2027. As a share of the FY2027 revenue projection the Legislature adopted ($5,816.6 million before H559 and the liquor account bill), $175 million is about 3.0 percent. That is the size of a rate cut. It also arrived in the middle of a year that already had a shortfall, which the Fiscal Report says added to the projected deficit and was part of the reason the Legislature passed the roughly 4 percent cuts in S1331 (lesson 06 has the arithmetic).

The Governor's January 2026 budget put the conformity cost at $155 million in FY2027 in the Legislative Budget Book, then the Legislature's number grew to $175 million. The LBB figure is a recommendation and the Fiscal Report is the result. Quote the one you mean.

The Parental Choice Tax Credit and the budget

The credit in H.B. 93 is a tax expenditure, not an appropriation. The state gives the money back as a refundable credit against income tax, so the cost shows up as less General Fund revenue. Because the cap is a revenue cap and not a line in a budget bill, you will not find it in the appropriation bills that lesson 08 reads.

The record on 2026 follows. Applications opened in January 2026. An opinion column in Idaho EdNews by the president of the Mountain States Policy Center reported that 5,907 families had applied for 12,960 students as of the Friday before the first window closed in March, and noted that full funding at $5,000 each would total $64.8 million, above the cap. The Idaho Capital Sun reported on July 17, 2026 that the State Tax Commission announced the $50 million cap had been reached and applications were closed. As of the Tuesday before that announcement the Commission had received 7,019 applications covering 12,497 students after a May reopening. The two counts are not the same measure (families against applications), so do not subtract one from the other.

The arguments, by who holds them:

• Supporters say the credit gives families control and makes private schooling more affordable (the position reported for supporters in Idaho EdNews). The Mountain States Policy Center column argues the state could save $51.8 million if every applicant is leaving public school, because families cannot use both. That is the author's estimate and the column is labeled opinion.
• Opponents include the Boise School Board, which passed a resolution calling for repeal or at least a freeze, the Idaho School Boards Association, the Idaho Education Association and Reclaim Idaho, according to Idaho EdNews. Save Our Schools Idaho, a group of educators, warned the credit could grow past $300 million a year and strain public school staffing and special education, as reported in October 2025. That figure is the group's projection, not a fiscal note.

Both sides cite the same cap. Supporters point to the cap as the cost; opponents point to what happens if the cap rises. Neither position can be verified until the Legislature changes the cap or does not.

Arguments about the income tax cuts

Here the record is rich, and the fair way to present it is by speaker.

• Senator Doug Ricks, the Senate sponsor of H40, said the bill helps families pay less in taxes and keep their money and stimulates the economy. Senator Joshua Kohl argued that in hard economic times the best response is to cut taxes and fees. House Speaker Mike Moyle said after the bill passed that the state was delivering its largest income tax cut (all as reported by the Idaho Capital Sun). The Mountain States Policy Center praised Idaho's tax relief in a January 2025 newsletter.
• Senator Melissa Wintrow called H40 "irresponsible" during economic uncertainty and cited a study by the Idaho Center for Fiscal Policy estimating a family earning between $55,000 and $91,000 would save about $127 under it. Senator Jim Guthrie said he supports tax cuts but that H40 did not meet his standard for balance and fairness, and he cited uncertainty from federal job cuts and tariffs. Senator Jim Woodward also voted no.
• Governor Brad Little called for $100 million in tax reductions in his January 2025 State of the State address. On March 6, 2025 he said he supported tax relief but stressed that the budget must balance under the Idaho Constitution, and on February 25 he expressed concern about the $450 million of reductions that passed that session, according to the Idaho Capital Sun.
• The Idaho Center for Fiscal Policy, a nonprofit group in Boise that the Capital Sun describes as nonpartisan, published a report in November 2025 finding that five income tax laws from 2021 through 2025 reduced state revenue by almost $4 billion over five years. It reported an average annual cut of $20,407 for the top 1 percent of earners (income of $738,300 and up) and $33 for the lowest 20 percent (under $31,100). It named H.B. 380 of 2021, H.B. 436 of 2022, H.B. 1 of the 2022 special session, H.B. 521 of 2024 and H.B. 40 of 2025. The Capital Sun did not describe the modeling method, so ask the group for it.

Supporters of the cuts answer that Idaho's revenue has been strong, that income left in taxpayers' hands is spent in the state, and that a flat tax is simple. Opponents answer that a rate cut helps people in proportion to what they owe, that the lost revenue could have funded schools, roads, public safety and Medicaid, and that a smaller revenue base limits the response to a recession. Each of those is a policy argument. What the sources do establish is the arithmetic: the cuts happened, the notes put numbers on them, and in FY2026 collections ended below the prior year.

FY2026 general fund revenue (LSO year-end monitor)	Change from FY2025
Total: $5,675.5 million	Minus $201.8 million (minus 3.4 percent)
Individual income tax	Minus $56.4 million
Corporate income tax	Minus $70.1 million
Sales tax	Plus $125.7 million
Product taxes	Plus $1.7 million
Miscellaneous revenue	Minus $202.8 million

The monitor adds that the Tax Relief Fund distributed $50.9 million to the General Fund and $234.1 million to property tax relief, school district facilities and other state programs in FY2026, and that the Division of Financial Management counted the General Fund distribution as sales tax revenue rather than miscellaneous revenue for FY2026. That reclassification matters when you compare sales tax and miscellaneous revenue to the prior year, because part of the sales tax gain and part of the miscellaneous revenue loss shown above may be one item moving between lines. The monitor does not say how much.

State and local: what the cuts did not touch

Most of the changes above are state taxes. Property tax is the local tax, and the state's role is relief: the $100 million a year in H304 comes from a reduction to the General Fund, and it moves through accounts created by H.B. 292 of 2023. H521 of 2024 raised the share of sales tax collections going to the school district facilities fund (the statement of purpose describes the increase as from 2.25 percent to 3.25 percent of collections) and redirected lottery dividends to it. The fiscal note shows $125.0 million a year of sales tax going to the School Modernization Facilities Fund and $25.5 million (FY2025) and $27.1 million (FY2026) to the District Facility Fund. Local property tax rules, including the 3 percent cap, are in the local government course, state property tax relief is in the property tax course, and how districts use state money is in the school board course.

Questions and answers

What is Idaho's income tax rate now?

5.3 percent on taxable income above a threshold ($2,500 for single filers, $5,000 for joint filers, adjusted for inflation), under Idaho Code 63-3024(2), as amended in 2025. The 2025 amendment applies to tax year 2025 and after.

Is the corporate rate the same?

The H40 statement of purpose says the bill reduces the flat individual and corporate rate from 5.695 percent to 5.3 percent. For the corporate rate check the statute section that sets it before quoting it.

How big is the food tax credit?

Under 63-3024A it is $155 per person for tax year 2025 and after. A taxpayer may instead claim the sales tax actually paid on qualifying food, up to $250 per person, by itemizing. A 2026 bill (H605) proposed a larger credit for seniors. The bill page I checked showed it printed and filed on February 9, 2026 with no later action, but that page is unofficial; confirm with the final journals.

What did H.B. 304 do?

It provides $100 million a year of property tax relief starting in 2025, from the School Facilities Fund and the Homeowner Property Tax Relief account, and the fiscal note records it as a $100 million General Fund reduction.

Who wrote the fiscal notes I see on bills?

The disclaimer says a proponent of the bill. The Legislative Services Office publishes its own General Fund tracking in the Budget Monitor, including a table of legislation with fiscal impact.

Why did a federal law change Idaho's budget?

Because Idaho's income tax starts from federal definitions. Unless the Legislature passes a conformity bill that opts out of a provision, federal changes flow through. H559 chose which to adopt, and the Fiscal Report counted the cost.

Where can I see how these tax changes fit in the whole budget?

The Legislative Fiscal Report's General Fund Budget Report has the revenue lines, including the H559 amounts. Lesson 01 of this module shows the sources of General Fund revenue and lesson 08 shows how to read the spending side.

Hard questions

"If revenue is higher than forecast, why were the cuts and tax breaks both needed?"

Revenue beat a forecast, not the prior year: FY2026 collections ended 3.4 percent below FY2025 and $165.4 million above the Sine Die estimate. The forecast that set the budget was low, and the tax changes came on top of it. Supporters of the tax cuts point to the revenue beat as evidence the state can afford them. Governor Little said in 2025 that the budget must balance under the Constitution and that he was concerned about the size of the reductions. Both statements are in the record. The test each side proposes is different: one asks whether collections exceed spending, the other whether the base budget is sustainable.

"Do tax cuts pay for themselves?"

The fiscal notes in this lesson do not assume they do. They score each cut as a loss of revenue. Supporters argue that growth offsets part of it; the Idaho Center for Fiscal Policy report treats the cuts as a nearly $4 billion revenue reduction over five years. The sources I read contain no independent Idaho study measuring the offset, so the claim cannot be settled here.

"Is it fair that a flat tax cut gives more dollars to higher earners?"

The arithmetic is not in dispute. The Idaho Center for Fiscal Policy reports averages of $20,407 for the top 1 percent and $33 for the lowest 20 percent over the five laws. Supporters answer that a flat rate treats every dollar of income the same and that higher earners pay more tax in the first place. The Parental Choice and food credits are structured differently: a fixed amount per student or per person. Whether the system is fair is a values question, and the lesson's job is to give you the numbers.

"Does the school choice credit help or hurt public schools?"

The credit's cap is $50 million. Supporters say it costs the state less than educating the same students. Opponents say it draws on revenue that could fund the schools and could grow. The sources record both claims and a first-year result of 7,019 applications covering 12,497 students after the reopening. No source I read measured the effect on any district's budget. The Tax Commission and State Department of Education data, and next year's budget requests, will start to show it.

"Why does a rate cut passed in 2025 show up in a 2026 budget fight?"

Because the revenue is lost every year after, and the budget has to be balanced every year under the Constitution (lesson 05). H40 was retroactive to January 1, 2025. Its first full-year effect fell in FY2026, the same year the August 2025 forecast fell $375.5 million below the original. Lesson 06 shows how the Legislature balanced that year.