As the 2026 Legislative Session convenes on January 12th, the tax season begins. Moving forward, Idaho is facing a revenue shortfall with a projected 40 to 53 million dollar deficit by the end of FY2026. These estimates do not address the reconciliation to the tax cuts included in the One Big Beautiful Bill, which, when accounted for, could put the State close to $1 billion in the red.  With such a deficit looming, it is critical to look outside the box for solutions.

The Idaho Capital Gains Deduction tax section may be one place to look. Per Idaho Code 63-3022H, only 40 percent of the long-term capital gains from the sale of certain types of property is taxed by the State of Idaho.  This deduction is available to both Idaho residents AND non-residents.  In essence, this means that if you bought a second home in Idaho for $200K and sold it for $250K, you will have $50K in capital gains. While the federal government will tax you on all $50K, Idaho will only tax you on $20K.

This exemption is a huge benefit to Idaho residents – as well as to people in other states and other countries who own second homes or businesses in Idaho.  Yet non-residents, by definition, generally do not live, work, vote, and/or contribute to our communities on a daily basis. They often come from states that fund public education differently so doesn’t truly understand the revenue deficit faced and why. Idaho schools are working to create the future workforce (e.g. carpenters, welders, electricians, healthcare workers, and more) that our communities need. In actuality, non-residents often drive up the cost of housing that has a side-effect of reducing the amount of housing available for people who live year-round in our communities. As Idaho residents do, non-residents also benefit from the incredible beauty of our state, the fabulous recreational opportunities available just outside our doors, the closeness of our communities that so few people experience these days; on the other hand, their contributions for our public services such as our roads and public schools often lag.

According to the Idaho Tax Commission, non-military non-Idahoans excluded over $138M from their Idaho income tax returns in 2023.  At our 2025 flat tax rate of 5.3%, this represents over $7.3M in tax revenues.  In order to attempt to capture these dollars leaving the State, in November, 2025, a resolution asking our legislators to remove this capital gains deduction for non-residents only and use the resulting increased tax revenues for our public schools was presented and approved by school district trustees attending the annual Idaho School Board Association Convention.

This is not a huge amount of money on an individual basis.  If your next door neighbors are residents from another state most of the year and decide to sell their home (because Idaho is just too cold or dark in the winter!), and assuming they have a $50,000 gain on the sale of that home, under the current tax law, they will exclude 60% of that gain and only pay $1,060 in taxes.  Under the resolution, the actual taxes paid would equal $2,650.

As a prime example, Teton County is a county of about 12K residents on the border between Idaho and Wyoming.  According to a report dated July 2, 2025, 44% of the total assessed valuation of Teton County is owned by entities outside of Idaho; 46% of the owners reside outside of Idaho.  The cost of housing in Teton County doubled during the pandemic and has continued to increase; residents and county services struggle to keep up.  Property taxes paid by these second-home owners are low compared with those of many states.

Eliminating the capital gains deduction for non-residents would help our state cover a few more expenses for our schools. In short, considering out-of-the-box solutions is mandatory given the looming, poor revenue outlook for Idaho.

Margaret W. Hall, currently serving as a West Bonner County School District trustee

Kathleen Haar, former trustee of Teton School District