Montanans toiling on their 2012 tax returns should know that state lawmakers are considering bills that could vastly change the tax forms and state income tax structure in tax year 2014.
Bills introduced by Republicans in the House and Senate aim to simplify the Montana income tax code. Both bills would base Montana’s tax on a percentage of federal taxable income with just a few adjustments. Present Montana law includes dozens of adjustments for deductions and credits.
Senate Bill 282, sponsored by Sen. Bruce Tutvedt of Kalispell, would reduce the number of individual income tax rates to two: 4 percent for taxable income under $7,800, 5.9 percent on taxable income over that amount.
That proposal would reduce Montana’s highest marginal rate from the present 6.9 percent, a change that Tutvedt said is exciting because people looking to move to Montana will see the lower rate and be more likely to locate here, he told The Gazette in a phone interview this week. His bill also would eliminate the marriage tax penalty that presently forces most two-income couples to file separate Montana returns.
However, some very low income taxpayers would see their income taxes increase under SB282. Presently, income of less than $7,300 is taxed at rates varying from 1 percent to 3 percent.
Both bills also would reduce corporate tax rates and eliminate some corporate deductions and taxes.
Tutvedt said he wrote SB282 to be revenue neutral and succeeded in staying within half of a percent of that goal. Because income tax is the state’s largest revenue source, half a percent still amounts to projected revenue decreases of $4.5 million annually.
Tutvedt’s bill mostly offsets the lower tax rate by eliminating deductions and credits. The bill would preserve the endowment tax credit that encourages planned giving to Montana charities and it would tax capital gains at 1.75 percent.
60% savings on process
House Bill 532, introduced by Roy Hollandsworth of Brady, would eliminate those two tax breaks, too, and proposes one flat tax rate of 5.5 percent for all individual taxpayers.
The fiscal note for SB282 projects that its reforms would reduce tax return processing by an amazing 60 percent and, when fully implemented, save the Department of Revenue $1.3 million annually because fewer tax season temporary staff members would be needed.
At a Feb. 21 hearing for SB285, proponents included representatives of the Montana Association of Certified Public Accountants, Montana Taxpayers Association, Montana Chamber of Commerce and Montana Medical Association.
Those testifying against the bill are concerned about the loss of tax credits that encourage recycling, energy efficiency, renewable energy and using Montana as the location for films and commercials. The bill also would eliminate a tax deduction on public pensions for retirees with income under $30,000.
The fiscal note for HB532 says it would save the state $10 million a year by eliminating the elderly homeowner and renter tax credit. That credit was claimed on 2011 returns filed by 16,593 low-income seniors.
Tax reform is a complex undertaking. These voluminous bills reflect a great deal of work and commendable goals of simplifying taxes for Montanans.
But the tax laws must be fair as well as simpler. As lawmakers consider tax reform, they should strive for balance that improves the system without penalizing Montanans who can least afford to pay more.