T-minus 2 days until Tax Day…Hooray! Why are we so excited about tax day you ask? Because it is through our taxes that we collectively invest in things like roads, public safety, schools, and so much more. Our taxes make our state a better place to live and raise a family, and that is something to celebrate. Over the next several days we’ll explore taxes in Montana. Today, let’s examine who pays taxes in our state and how fair our tax structure is.
The non-profit, non-partisan Institute on Taxation & Economic Policy recently released a comprehensive report on the distribution of taxes in all 50 states. Montana’s overall tax system is regressive, which means that low-and-moderate-income individuals pay a greater share of their income in taxes than do wealthier Montanans.
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Portion of Family Income Paid in Taxes. Source: Institute on Taxation & Economic Policy[/caption]
As you can see, in Montana, low-income individuals put more of their earnings in taxes than do high-income individuals. Those with annual earnings less than $19,000 pay 6.1% of their income in taxes but those earning more than $435,000 a year only pay 4.7%. Why are families living on lower incomes (who arguably need the money more) paying a greater share of their income to pay for schools and roads than those making the most?
To understand how Montana’s tax system stacks up, let’s look at three tax types (income, property, and sales) and how these types of tax influence tax fairness. Generally speaking, property and sales taxes are regressive, which again, requires lower-income folks to pay a greater share than high-income folks. This is easy to understand for sales tax – when a sales tax is imposed on a good, that tax is the same regardless of the purchaser’s income. Property taxes also tend to be regressive, because housing costs tend to be larger in proportion to the income of low-income households than high-income households. For example, a family making $50,000 a year may own a home costing $150,000 or three times their income, while a family making $1 million per year may own a home costing $500,000, or half their income. We also know that renters pay a portion of the property taxes paid on rental properties because the taxes are “passed through” by the landlords when setting the rent amount.
Both of these regressive taxes impact low-income families. In many states, sales tax represents a significant portion of total tax revenue, and this has a negative impact on low-income families. And while Montana doesn’t have a sales tax, many Montana families face certain smaller fees or taxes that act similarly to a sales tax. And finally, as Montana relies heavily on property tax revenue, low-income families certainly face this regressive tax to a greater extent.
When it comes to income taxes, Montana’s income tax is progressive and it helps offset who pays taxes. The highest earners pay 3.8% in personal income taxes while the lowest pay less than 1%. Policymakers have put in place the income tax, because those with higher incomes have a greater ability to pay and contribute a greater share of their income for essential government services. But, there is still work to be done. Montana is one of five states to impose income taxes on families living in poverty.
The pie chart below shows exactly how much of Montana’s total revenue is gathered from income, property, and sales taxes as well as other taxes like the severance tax collected from the oil and gas industry.
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Source: Montana Department of Revenue. Biennial Report (2012-2014).[/caption]
While not perfect, Montana’s tax structure is better than most. In fact, we are ranked 47Th most unfair state (or 3rd most fair!) in terms of state and local taxes. Of course, like all states, we can improve. Legislators could do this by adopting policies, like a state earned income tax credit. Policies like these enable Montana’s low-income families to keep more of their earnings, which stimulates local economies, and requires those who can afford it to pay a greatest share of their income in taxes.
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.