With the Montana legislature in full swing, how Montana’s tax system stacks up to other states, and how we can make it better, is at the top of many minds.
In October, the non-partisan Institute on Taxation and Economic Policy (ITEP) released their annual Who Pays? Report. This report compares the fairness of the tax systems of all 50 states, looking at what share of income is paid in state and local taxes in each income bracket.
A regressive tax system is one where someone at lower income levels pay a higher proportion of their income in taxes than someone at higher income levels.
A progressive tax system is just the opposite. Someone with higher income would pay proportionally more of their income in taxes than someone with less income.
Montana’s tax system is regressive, meaning families living on low- and middle-incomes pay a higher percentage of their income in taxes than high-income households. In Montana, families making less than $18,000 a year pay 7.9 percent of their income in state and local taxes while the top 1 percent of taxpayers (those making more than $448,500) pay 6.5 percent of their income in state and local taxes.
Although Montana’s system is regressive, our state ranks 43 on ITEP’s Inequality Index. To understand why eight states do it better, we need to look at three tax types: sales tax, property tax, and income tax.
One of the reasons that Montana’s tax system is less regressive than some states is our lack of a statewide sales tax, as we explain in more detail in this report. Taxpayers with low- and middle-incomes spend a larger proportion of their income on goods and services than higher-income taxpayers. Thus, sales taxes are regressive. While Montana does have a few sales and excise taxes that are more proportionally paid by households with lower- and middle-incomes, the impact of these taxes is much smaller on Montana’s overall tax system than a general statewide sales tax.
Next, let’s look at property taxes. Montana has a statewide property tax system. Property taxes are regressive because households with low- and middle-incomes tend to spend more of their income on housing than higher-income households. For example, a household earning $50,000 a year may own a house worth $100,000 or twice their annual income while a household earning $1 million a year may own a house worth $500,000 or half of their annual income.
Individual income tax is Montana’s largest source of tax revenue. Montana’s graduated income tax schedule is a progressive feature of the individual income tax, but as a taxpayer reaches the top income tax rate at $17,900, one-person households within 150 percent of the federal poverty level and three-person households within 100 percent of the federal poverty level are paying the top tax rate. A top tax rate on higher-income households would improve the fairness of Montana’s income tax system.
While Montana is ahead of some states in the progressivity of our tax system, there is still room to improve. This session, the Montana Legislature has the opportunity to pass a top tax rate on households earning $400,000 or more. This would help fund schools, roads, bridges, and public services each year while making Montana’s tax system more equitable.
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.