Montana’s path to economic recovery and future prosperity is dependent upon the state budget, made up with our tax revenues. While MBPC and the revenue coalition succeeded in killing numerous tax cut bills that would have resulting in over $900 million in lost revenue each biennium, once fully phased in, the 2021 legislature passed tax cut bills that will cost over $100 million in lost revenue each biennium.
The largest revenue losers were individual income tax cuts, packaged together as SB 399 and SB 159. SB 159 lowered the top income tax rate from 6.9 to 6.75 percent until tax year 2024. This tax cut primarily benefits the wealthiest, with over 80 percent of the tax cut going to the top 20 percent of Montanans.
SB 399, which goes into effect as SB 159 phases out, drops the top income tax rate even further to 6.5 percent. As a result of this bill, there are over 100,000 Montanans, spread across the income spectrum, who will see tax increases. This bill also opens Montana’s tax system up to additional volatility by restructuring income tax to tie into the federal system at federal taxable income, as opposed to adjusted gross income. Due in part to these volatility concerns, following the 2017 federal tax reform, only 5 states remain that tie into the federal tax system at this point. In addition, SB 399 eliminates 17 tax credits with little opportunity for the legislature to consider the merit of each credit. While tax simplification is a laudable goal, more forethought is needed for an efficient tax system. This bill moves Montana in the wrong direction.
Another costly bill was HB 303, which increased the business equipment property tax exemption to $300,000 from $100,000. Business equipment tax has been cut numerous times in Montana’s recent history. In 1989, the tax rate was cut from 11 to 9 percent for all companies. In 1995, the rate was cut in the next three subsequent years, from 9 to ultimately 6 percent in 1997. In 1999, the rate was further reduced from 6 to 3 percent and the legislature established a tax exemption for the first $5,000 value of equipment. The 2005 legislature increased the exemption level from $5,000 to the first $20,000 in value. The exemption was raised again in 2009 to $100,000. Then the 2013 legislature lowered the rate to 1.5% for business equipment valued between $100,000 and $6 million. As a result of these changes, the numbers of businesses paying business equipment tax have dropped from over 36,000 in 2000 to less than 9,000 before the passage of HB 303.
While HB 303, similar to policy decisions in the past, provides additional general fund dollars to backfill the amount related to local taxing jurisdictions, the reality is that in the last 25 years, homeowners in Montana have seen their property tax obligation grow in relation to owners of business equipment.
In the end, the 2021 legislature passed over 20 tax cut bills. Unfortunately, the vast majority of these bills preferentially benefit the wealthy, exacerbating income inequality in this state. Legislators have chosen to prioritize those who already have more than they need over those struggling to get by. Thanks to the work of the revenue coalition and other partners, Montana saw $100 million in tax cuts this session rather than $900 million. Going forward, MBPC will continue to educate legislators and the public about the effects of tax cuts already passed and any yet to be proposed.
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.