Did you know that a provision included in the federal CARES Act, passed by Congress earlier this year, could result in the loss of $137 million in state general fund revenue for Montana? But the good news is that Montana can do something about it. The Revenue Interim Committee’s subcommittee studying Montana’s state and local tax system had their last meeting August 25. In addition to the four thoughtful tax fairness proposals the interim subcommittee passed last meeting, the subcommittee voted to move forward a bill decoupling the state from federal business tax breaks passed in the federal CARES Act. Here’s a quick summary of the CARES Act provision and why it’s so important for the state to take action.
What does the federal CARES Act do?
The Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted by Congress in March, providing direct support for individuals, businesses, and states impacted by COVID-19. One lesser known provision in the CARES Act allows businesses to take additional net operating losses (NOLs) against income, reducing their taxes. Under the CARES Act, passthrough businesses can carry their NOLs back up to five years for 2018, 2019, and 2020 and increase the amount of NOLs that businesses can carry forward.
Why does this federal change impact Montana state revenue?
Montana is one of less than half of states with rolling conformity with the federal tax code. That means that if Congress decides to make a change, the Montana budget is affected without having a say. Many states choose to have rolling conformity with the federal tax code, so in cases like this where there is a potentially huge revenue loss due to a decision made by Congress, they have a say on whether or not to make that change. This is especially important for states who are required to balance their budget every year, unlike the federal government.
What does the proposed state bill do?
This bill currently being considered in the Revenue Interim Committee would simply maintain the status quo for businesses to calculate their net operating losses (NOLs) as they did prior to the pandemic. HJ 35-08 would decouple from provisions that allow business owners to carry back NOLs for five years from 2018, 2019, and 2020, forcing the state to pay businesses refunds immediately, rather than allowing them to take their losses on the regular schedule.
Without action, all of these business tax cuts in the CARES Act will force the state to pay companies big refunds at a time when the state does not have any extra money lying around. Businesses would still receive the federal expansion of NOLs, and would be able to claim them in Montana as they always have. Plus, Montana would have a slightly easier time balancing our budget this coming session.
Now is the time for the Montana Legislature to ensure that Montana has fighting chance to fund the services we Montanans rely on, especially during this pandemic. Our communities need access to mental health supports, good schools, healthy food, and good infrastructure. Let’s start the 2021 session heading in the right direction for Montanans.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.