The Idaho House Revenue and Taxation Committee introduced legislation Friday that would align the state’s tax code with federal changes, resulting in an estimated $155 million annual reduction in state revenue. The bill proposes retroactive implementation to January 2025, setting up a debate over timing and fiscal impact as lawmakers weigh competing budget priorities.
House Bill 519 would conform Idaho’s tax code to roughly 39 provisions in the federal One Big Beautiful Bill Act, including eliminating state taxes on tips and overtime pay, increasing standard deductions, and expanding relief for residents over 65. The changes would take effect for the current tax year rather than the next fiscal year as Governor Brad Little’s budget recommends.
How Idaho Handles Federal Tax Conformity
Idaho uses static conformity, meaning the legislature votes annually on which federal Internal Revenue Code provisions the state will adopt. This differs from rolling conformity, where states automatically update their tax code to match federal changes.
According to the Tax Foundation, 17 states use static conformity for individual income taxes, with 10 of those current as of January 1, 2025. Meanwhile, 20 states plus Washington D.C. have rolling conformity for individual income taxes, and 26 states plus D.C. use rolling conformity for corporate taxes.
“Sometimes we just change one number and roll the date forward,” Rep. Jeff Ehlers, R-Meridian, told the House Revenue and Taxation Committee. Ehlers is sponsoring the conformity bill.
The annual conformity vote typically ranks among the first pieces of legislation to move through Idaho’s legislature. The decision affects how easily Idaho residents can file their taxes and how closely state deductions and credits mirror federal ones.
What’s in the Proposed Bill
The bill would adopt most provisions from the One Big Beautiful Bill Act, with one notable exception. Idaho would continue its historical practice of decoupling from bonus depreciation, which allows businesses to immediately write off certain expenses.
The largest revenue impacts come from two provisions: eliminating state tax on overtime pay would cost $54.5 million annually, while increasing the standard deduction would reduce revenue by $39.5 million. The remaining $61 million comes from eliminating taxes on tips, expanding deductions for seniors, and business-related provisions for capital investments and research.
Many of these federal provisions sunset in 2028. Ehlers said the retroactive effective date ensures Idaho taxpayers receive four full years of benefits rather than three.
“We wanted taxpayers to get all four years of that benefit,” he said in an interview with idahonews.com.
Competing Cost Estimates and Budget Concerns
The $155 million estimate represents the midpoint of projections from the Idaho Tax Commission and Idaho Tax Foundation, which range from $111 million to $192 million. Both Ehlers and Governor Little settled on $155 million as the most likely annual impact.
However, other estimates paint a different picture. The Tax Foundation’s national analysis pegs Idaho’s cost at $167 million to $284 million. Rep. John Gannon, D-Boise, warned the committee that states like Arizona, Colorado, and Indiana found their conformity costs “significantly higher” than initial projections.
“There’s a lot of data points that give me confidence in that number [$155 million] being a reasonable number to pick for our projections,” Ehlers said.
The Idaho Freedom Foundation called the $155 million cost “small relative to overall revenues and is easily affordable,” arguing there’s “no reason to delay the tax cut.”
But Gannon cited examples from other states where similar conformity decisions proved more expensive than anticipated. In some scenarios discussed by lawmakers, costs could reach $500 million to $800 million if Idaho’s experience mirrors Indiana’s.
Timing Dispute: Retroactive vs. Delayed Implementation
The key disagreement centers on when the changes take effect. House Bill 519 proposes retroactive implementation to January 2025, impacting fiscal year 2026. Governor Little’s budget recommendation delays implementation to the next tax year, affecting fiscal year 2027.
The retroactive approach would hit state revenues immediately. Little’s budget protects K-12 education funding while holding higher education steady, but his plan cuts enrollment growth aid. His approach provides more budgeting cushion, especially as legislative revenue forecasts exceed his projections by $130 million for fiscal year 2026.
The Idaho State Tax Commission noted that retroactive implementation creates immediate challenges. The commission would need to update systems and train tax professionals on the changes for the January 2026 filing season. Delaying implementation would allow more time for preparation and taxpayer education.
Governor Little’s budget chief Lori Wolff said the administration’s cost calculations “track with Utah,” which faced similar conformity costs around $155 million.
What This Means for Taxpayers and Businesses
If the bill passes with retroactive implementation, Idaho taxpayers who earned tips or overtime pay in 2025 could see refunds or need to amend their returns. Service workers and hourly employees stand to benefit most from the overtime and tips provisions.
Residents over 65 would receive additional deductions on top of existing property tax relief. Idaho’s 2026 property tax reduction program applies to households with 2025 income at or below $39,130 after medical deductions. Applications for that program run from January 1 through April 15, 2026.
Businesses would gain from capital investment and research credits but would not benefit from bonus depreciation due to Idaho’s continued decoupling from that provision.
The four-year window before federal provisions sunset means taxpayers need to plan accordingly. If the bill passes, benefits run through 2028. If implementation delays to next year, benefits would only cover 2026 through 2028.
The $155 million annual revenue reduction could affect future state budgets, potentially leading to tighter spending on education and other programs. Some lawmakers worry that if actual costs exceed projections, the state may need to reverse course or find offsetting revenue.
The bill includes one small revenue offset: ending the home energy efficiency credit would bring in an additional $4 million annually.
Taxpayers should monitor the bill’s progress through the legislature and consult tax professionals about how conformity changes might affect their 2025 returns. The Tax Commission will provide updates on implementation timelines and filing procedures as the legislative session continues.
Sources
House Bill 519, Idaho Legislature