Montana’s Tax System: How Do We Stack Up?

Apr 15, 2014

By MBPC Staff

On Tax Day, we all spend some extra time thinking about how much we pay in taxes. Even more so for low- and middle-income families, who contribute a larger share of their income than high income people do. The difference is significant – Montana low-income families pay 6.4% of their income in taxes, compared to 4.7% of the wealthiest Montanans. 

The Institute on Tax and Economic Policy released a new report that compares the tax structure of each state and examines this issue of who pays.  

How does Montana stack up? There’s good news and bad news.  

First, the good:

• Montana’s tax system relies primarily on the income tax.
• Our income tax is progressive. This means as income goes up, the tax rate also goes up.
• Montana does not have a sales tax. The sales tax is one of the most regressive taxes, with poor families paying eight times more of their incomes in sales taxes than wealthier families.

And now the bad:

• Low-income families contribute more. Montana’s income tax kicks in at a very low income level. In fact, Montana is one of only a few states that impose income taxes on working families living in poverty. For a two-parent family with two children, Montana income tax rates begin at $12,500, roughly half of the federal poverty line.
• While Montana’s income tax has graduated rates, the legislature collapsed these rates in 2003. Now, all Montanans making more than $13,900 are taxed at the same rate.  Over half of the benefit of the changes went to families with incomes over $500,000 per year. 
• Our tax code values wealth over work. Montana taxes capital gains at an even lower rate than income earned by working. This tends to favor wealthy Montanans who make money on investments, compared to those earning an income from wages. Montana is one of only nine states that provides this tax break.
• Low-income Montanans pay a greater share of their income in property taxes than the wealthy, because in general the property tax rate for residential homes is the same for all homeowners no matter their income. Families in the lowest 20% of income level contribute about 3.5% of income toward property taxes, compared to only 2% of income for the wealthiest Montanans. 

All in all, Montana is in the middle of the pack when compared to other states.  But we could do more to help working low-income families. Twenty-four states have improved the disparity in the share of income going toward taxes by enacting state-based Earned Income Tax Credits, which lowers the taxes paid by working low-income families. 

As Montana families complete their taxes, policymakers should consider policies like the Earned Income Tax Credit to ensure a prosperous Montana.