As lawmakers await clarity on their ability to cut taxes and still be eligible for billions in federal coronavirus aid, the Legislature continues to debate proposed tax reduction measures.
The House Taxation Committee earlier this month amended a bill that’s a key part of Republican Gov. Greg Gianforte’s tax package and would lower the state’s top income tax rate. The amendment to Senate Bill 159 more than doubled the amount of that reduction. The change would result in an $84.7 million hit to the state's general fund in fiscal year 2025, up dramatically from the $30 million reduction from the original bill.
It's one of several bills to lower taxes that some are concerned could run afoul of provisions in the American Rescue Plan Act saying Montana would not be eligible for about $2.7 billion in aid if net revenues are reduced. The state does plan to increase some taxes, notably adding a 20% tax on recreational marijuana, and Republicans argue that means there won't be an overall drop in revenues.
Rep. Becky Beard, who chairs the House Taxation Committee, said last week she’s holding Gianforte's income tax cut bill in her committee for more work.
On Wednesday, that same committee heard a proposal from Rep. Fiona Nave, R-Columbus, to cut property tax rates for residential and some commercial properties, as well as agricultural land. A fiscal note estimates the bill would result in a $26.9 million hit to the state’s general fund, though there would also be substantial effects for local governments. The drop in taxable value under the bill would be about $239.4 million across all property classes affected.
Nave said she brought the bill because lawmakers hear frequently from constituents about rising property taxes. While emphasizing she didn’t want to be critical of Gianforte's income tax cut proposals, it was property tax reductions people were actually asking for.
“I’m bringing a property tax bill because Montanans want property tax reduction. They're not so interested in income tax reduction,” Nave said. “The major difference between the governor's income tax reduction bill and this bill is that the governor is targeting out-of-state entrepreneurs, hoping to bring them here to invest and this bill gives tax relief to current Montana citizens.”
Nave said she was “not slamming the governor in any way,” but doing a comparison to point out the hit her bill would be to the state’s general fund was the same as Gianforte’s original income tax cut.
“The governor's proposed income tax reduction only saves middle-class Montanans around $45,” Nave said. “The property tax reduction will save the owner of a $300,000 home about $42, but as you know … as the taxable value goes up and it's multiplied by a percentage then the amount that you pay increases. And again the governor's income tax reduction is targeted towards out-of-staters hoping to get them to bring their businesses here, property tax is targeted at current Montanans.”
Nave asked for the bill to advance to have a conversation about what’s the best approach.
“It's a choice on whether to go the property tax route, or whether to go the income tax route. So ultimately what we would like is to be able to have this discussion with the governor on which is a better way to go.“
Rep. Matt Regier, a Republican from Kalispell, said he thought there was room in the budget for both Gianforte and Nave’s plans.
With the exception of agricultural and forest land, Montana property is taxed on market value and most property, including residential, is valued on a two-year appraisal cycle. The state collects revenue from 95 mills plus another 6 mills levied for the university system.
A document produced in November by the Montana Department of Revenue shows that for residential properties, the market value is estimated to increase 12% from 2020 to 2021 in the state.
Regier said Nave’s bill would provide for neutrality on the property tax the state collects as the value of homes, and therefore taxes paid by owners, goes up.
In opposition to the bill, Rose Bender with the Montana Budget and Policy Center said the legislation, combined with other tax cuts under consolation, puts Montana at risk of conflict with the provision in ARPA.
Bender also said the legislation was an inefficient way to mitigate property tax burdens and pointed to another bill, a so-called circuit breaker, that was heard in the Senate Taxation Committee on Wednesday.
Sen. Pat Flowers, D-Belgrade, is carrying Senate Bill 386, which would create an income tax credit for both homeowners and renters to offset property taxes for low- and middle-income residents.
The average credit would be $1,000 for a homeowner and $500 for a renter, and about 35,000 people would qualify, Flowers said.
“Montanans have been asking to get property tax relief done,” Flowers said. “That is why I’m bringing this policy in front of the committee again.”
The bill is similar to Senate Bill 10, legislation that came out of the interim revenue committee, that would have also created a circuit-breaker program. The term "circuit breaker" is meant to draw comparison to an electrical breaker that stops overloads.
Flowers’ bill, however, offsets the hit to the general fund created from the tax credit by adding a new top income tax bracket for people with taxable incomes of more than $500,000 and taxing them at 8.9%. With that new tax bracket, the state’s general fund would see a boost of $13.7 million in fiscal year 2025, even when accounting for the property tax credit.
“Since 2003 Montanans who work minimum-wage jobs pay about the same tax rate as millionaires in our state, so by restoring a top income tax bracket … we can pay for property tax relief with some revenue left over,” Flowers said.
Asked if Democrats thought this bill would meet a different fate than SB 10, which was voted down on party lines with Republican opposition earlier this session, Sen. Jill Cohenour, an East Helena Democrat and minority leader in the Senate, said the minority party was hopeful.
"We have to have hope that on behalf of the folks in Montana and that we're advocating for that legislators will take this seriously, that they are going to look at the ... proposals that are put forward and what it means to the totality of the budget in Montana and what it will mean to the specific people that we said we were going to come here and take care of," Cohenour said.
Cohenour also raised concerns about structural imbalance in the budget, which means at this point pending legislation that spends money outpaces revenue estimates. She said the revenue in the circuit-breaker bill would help offset that.
Before the session, legislators said the budget was overspending anticipated revenues by about $50 million. The most recent status sheet shows ongoing expenditures exceed ongoing revenues by $99.3 million, though not all bills included on the sheet will become law.
The House Taxation Committee last week heard an update on revenue projections that forecast an increase of $352 million above what was predicted before the session started for the coming three years. The committee has not yet voted on setting an official revenue estimate.