His nickname "Butch" was the result of a few schoolyard fights which resulted in minor bruises; Catholic nuns had initially nicknamed him "Clem" after a character in the Red Skelton Show. He graduated from St. Teresa's Academy (now Bishop Kelly High School) in Boise in 1962. Otter graduated from high school at age twenty – a childhood accident involving gasoline severely burned his younger brother and forced Otter to take a year off. He worked throughout high school as a janitor, theater usher, and lawn boy.

In 1964, Otter married Gay Simplot (b. 1945), the sister of Scott Simplot and only daughter of J. R. Simplot. After 28 years of marriage, the couple amicably divorced in 1992. The marriage was later annulled by the Catholic Church. In 2006, Otter married his longtime girlfriend Lori Easley (b. 1967), a former Miss Idaho USA, in Meridian on August 18.

Otter briefly attended St. Martin's College in Lacey, Washington, returned to Idaho and attended Boise Junior College, then earned his B.A. in political science from the College of Idaho in 1967. He was the only member of his family to graduate from college, and made the dean's list in his last term. He served in the Idaho Army National Guard's 116th Armored Cavalry from 1968–73.

His first bid for elective office was in 1972; he won a seat in the state legislature from Canyon County, and was re-elected to the House in 1974 serving until 1976.

In January 1977, incumbent Democratic Governor Cecil Andrus was appointed U.S. Secretary of Interior under President Jimmy Carter. Lieutenant governor John Evans, a Democrat, succeeded Andrus and Otter announced in June his intention to run for governor in 1978. In the six-man Republican primary in August, Otter ranked a close third with 26.0% of the vote. Allan Larsen, the House Speaker from Blackfoot, won the nomination with 28.7% of the vote, followed by Vern Ravenscroft of Tuttle, with 27.6%.

After Ronald Reagan won the presidency in 1980, he appointed Otter to the administration's Task Force on International Private Enterprise, the World Bank's Agricultural Advisory Committee, and the Center for International Private Enterprise.

In 1986, Otter returned to Idaho politics and was elected lieutenant governor, and reelected in 1990, 1994, and 1998. He served under three different governors, Democrat Cecil Andrus, and Republicans Phil Batt and Dirk Kempthorne. In 1991, when the Idaho Senate was evenly divided between 21 Republicans and 21 Democrats, Otter's tie-breaking votes kept the body under GOP control. Midway through his fourth term in 2001 (14 years), Otter resigned to take his congressional seat in Washington, D.C.; he is the longest-serving lieutenant governor in Idaho history.

Prior to becoming governor, Otter was lieutenant governor (1987–2001) and then served three terms in the U.S. House of Representatives from the first district. With his victory in 2014, he has won ten elections in a row.

In August 1992, Otter was pulled over on Interstate 84 near Meridian for suspicion of driving under the influence. He said the arresting officer observed him swerving as he was reaching for his Cowboy hat, which had been blown off by the wind in his open car. Otter offered several explanations for failing the field sobriety test including: his stocking feet were stung by weeds and gravel, he had run eight miles (13 km) and his knee hurt, he was hungry, and that he had soaked his chewing tobacco in Jack Daniel's. A jury convicted Otter in March 1993, and he was sentenced to 72 hours of community Service and 16 hours at an alcohol treatment program, fined $700, and had his license revoked.

He publicly admitted the incident could end his political career; it likely forced him to abandon an anticipated run for governor in 1994 and instead seek re-election for lieutenant governor. Phil Batt won the gubernatorial election for the first Republican victory in 28 years.

On economic issues, he has voted for a 2001 bankruptcy overhaul requiring partial debt repayment. He supports a balanced budget amendment to the US Constitution and supports broad-based tax cuts including eliminating the estate and marriage taxes. He has voted to reduce the marriage tax by $399B over 10 years. He has supported expanding free-trade agreements with nations such as Singapore and Chile. Otter has voted to end offshore tax havens and promote tax credits for small businesses. He has voted to raise 401(k) limits & making pension plans more portable.

In the general election, he faced Democrat Jerry Brady in the November 7 general election. Brady, the former publisher of The Post Register in Idaho Falls, had run for governor in 2002, losing to incumbent Republican Governor Dirk Kempthorne. Otter was initially considered an overwhelming favorite, given his popularity and Idaho's strong Republican lean. However, the race was far closer than expected in the last weeks of the campaign. A poll conducted for the Idaho Statesman and Boise ABC affiliate KIVI showed Otter ahead of Brady by only a single point– a statistical dead heat. According to the Statesman, it was the first time in over a decade that the governor's race has not already been decided 10 days prior to the election. State Republican Party chairman Kirk Sullivan told the paper that the race appeared to be closer than normal because of a strong national trend against the Republicans. Otter pulled away in the final week, and won the election 53%–44%, the closest gubernatorial race since 1994.

Otter voted to authorize the 2003 invasion of Iraq.

In December 2005, Otter announced his candidacy for the gubernatorial seat in 2006. Otter won the May Republican primary with 70% of the vote, defeating three opponents

On January 11, 2007, Otter announced his support for a "gray wolf kill," in which all but 100 of Idaho's recently recovered population would be eradicated, pending the forthcoming U.S. Fish and Wildlife Service removal of the wolves' federal protections under the Endangered Species Act. Otter even remarked that he would be first in line to purchase a tag to kill one of the animals. This position drew criticism from many Western environmental and animal advocate groups, including Priscilla Feral, President of Friends of Animals who called for a boycott of potatoes from Idaho.

In April 2011, Otter issued an executive order prohibiting Idaho state agencies from implementing the federal Patient Protection and Affordable Care Act.

In 2013, the Corrections Corporation of America (CCA) confirmed that an internal review showed the corporation had falsified records involving about 4,800 employee hours over a period of seven months, at its Idaho State Correctional Center. In 2014 a subsequent KPMG audit showed the actual overbilling was for over 26,000 hours. Otter ordered Idaho State Police to investigate to see if Criminal charges should be brought. Otter had received a total of $20,000 in campaign contributions from employees of the company since 2003. In March, the state announced that the FBI was taking over the investigation, as well as investigating CCA operations in other states. In January 2014, Otter announced that the state would take back the operations of the prison. In May 2016, CCA, which had by then changed its name to CoreCivic, was found in contempt of court for having failed to comply with a court order regarding the Idaho State Correctional Institution. In an apparent attempt to increase profits, the company had been assigning too few staff to the prison and it submitted false staffing reports in order to appear to be in compliance.

In November 2014, Otter was elected to a third consecutive term as governor.

For the United States presidential election in 2016 Otter endorsed fellow Republican John Kasich.

In July 2017, Texas Attorney General Ken Paxton led a group of Republican Attorneys General from nine other states, and also including Otter, in threatening the Donald J. Trump administration that they would litigate if the President did not terminate the Deferred Action for Childhood Arrivals policy that had been put into place by President Barack Obama. Tennessee Attorney General Herbert H. Slatery III subsequently reversed his position and withdrew his participation from the proposed suit on August 31. Slatery went further to urge passage of the DREAM Act.

Otter published an article in The Ripon Forum magazine. In the article, Otter discussed that he had led many trade missions to Asia-Pacific countries, fostering relationships with companies in Seoul, Taipei, Taiwan and Ho Chi Minh City. Otter brought a delegation to Taiwan that resulted in Idaho’s Micron Technology becoming Taiwan’s largest direct U.S. investor.