Subscribe for 17¢ / day

While Montana’s Republican-dominated Legislature doesn’t seem to have an appetite for any tax increases, as lawmakers gathered in Helena last week there were increasing rumblings about changing how major economic sectors are taxed to reflect a 21st century economy.

“We’re good at taxing barrels of oil, bushels of wheat, tons of coal,” said Sen. Llew Jones, a Republican from Conrad. “We’re not so good at taxing services.”

Jones and other legislators gathered in Helena to debate recommendations to make to Gov. Steve Bullock as he considers possible statewide budget cuts of up to 10 percent. The cuts are necessary because revenues have come in lower than expected.

Though the state is still bringing in more money than last fiscal year, it’s less than the estimates lawmakers used to build the state’s two-year budget, leaving a gap between what agencies planned to spend and how much money the state has to pay for it.

Democrats and Montanans poised to suffer most under the cuts, which if enacted could mean everything from fewer guards at the state prison to shutting down a program that helps babies and toddlers catch up to developmental milestones, have been increasingly vocal in support of Bullock calling a special session. They want him to ask lawmakers to revisit tax increases that were decisively shot down during this winter and spring's regular session.

That opposition remained strong last week.

“Net farm income in the state of Montana will be down 71 percent,” Jones said. “Folks ask why I am so adamantly opposed to a permanent tax increase? I don’t think it’s the right thing for Montana today. … In my district, there’s a whole lot of folks who are hoping to be able to keep their farms, pay their bills, and I’m not nearly as bad as the Eastern part (of the state).”

Sen. Eric Moore, R-Miles City, said his region of the state is feeling the effects of a 30-year drought, which hurts everyone from farmers to Main Street businesses. Natural resources like coal and oil drilling are also down. At the local 4-H sale this year, prices were 60 cents on the dollar compared to the last five years.

“Things are hard out there,” he said. “It’s not Grapes of Wrath, Dirty ’30s, but if it doesn’t rain next spring it’s going to be. These are real people we’re talking about raising taxes on and they don’t have a lot to spend on extra taxes.”

Rep. Nancy Ballance, a Republican from Hamilton, said that if a special session is called, it will be a temporary patch to get the state through to 2019, when the Legislature should seriously address Montana’s tax structure that’s more set up to get money from natural resources than the ever-increasing services sector.

“There are things in there that are just not making sense the way they used to,” Ballance said. “This can’t be the end of the process. The end game has to be … making a determination how we will go forward in this new economy.”

Democratic Sen. Jon Sesso, from Butte, echoed the Republicans.

“In 2019, as a legislative body in cooperation with the governor, it’s time to start looking at the overall revenue picture,” Sesso said. “Is it in sync with the 21st century economy? We are not in step with getting revenue out of those types of services?”

A 2017 report from the Bureau of Business and Economic Research at the University of Montana showed general fund revenue collections dropped from fiscal year 2015 to 2016 in two main categories, corporate income tax and oil and natural gas production. A significant portion of the corporate tax base is dependent on oil activity, according to the report.

Jones looks at places like Amazon, which don’t pay taxes in Montana to support the infrastructure used to get their goods to doorsteps, while at the same time taking away business from shops on Main Street. He also cited sharing-economy services such as Uber and Airbnb.

“There are new tastes and preferences and that creates a new economy,” Jones said.

An old but still relevant term many use to describe how government pays for services is a “three-legged stool,” said Patrick Barkey, director of the University of Montana Bureau of Business and Economic Research.

The three legs are property tax, income tax and sales tax.

In Montana, income tax reigns supreme. Of the state's seven largest revenue sources, which account for about 86 percent of general fund revenue, about 55 percent in fiscal year 2017 comes from individual income taxes. That works out to $1.168 billion.

This is where revenue estimates were the most off, down $70.3 million from the estimate lawmakers projected.

As for the other two legs, property taxes go to local governments and even suggesting support of a sales tax is a conversation-ender for many Montanans.

“We’re an income tax state, so when people make money we tax it,” Barkey said.

The state does have some sales taxes, such as taxes on lodging, but does not have a broad sales tax as most other states do.

Some suggest Montana’s third leg of the stool is natural resources, but Barkey questions that, saying that natural resource taxes are extremely variable and it’s not a very broad tax.

Oil and gas taxes only make up 2 percent of the seven largest revenue sources, or $46 million. Those tax collections were a $1 million over legislative estimates, due to an increase in the price of oil. But overall the state has seen a decline since 2015.

Barkey said it’s possible to bring the state back in line with some adjustment of taxes, but said the bigger question is how Montana is set up in terms of tax structure for the future.

“You can close a budget shortfall of a couple hundred million by changing the tax treatment of this and that,” Barkey said. “It is certainly feasible and maybe it’s rational, maybe it's wise policy. It’s something they are starting to ask in the evolution of Montana’s taxes — are we ready for the future? Are we leaning too heavily on a few things?”

It’s unclear how Montana could gain by looking at taxing purchases on places like Amazon, he said, since the state does not have a broad sales tax.  Just this year, Amazon started collecting sales taxes in states that levy that tax.

That could be used as a way to prop open the door to look at a general sales tax, Barkey said, something that has never been a very popular conversation in Montana.

Sen. Eric Moore, a Republican from Miles City, pointed to tapping money from tourists as much as possible. Yellowstone and Glacier national parks have both toppled tourism records in recent years, and Montana should look at ways to capture that opportunity.

“As long as a sales tax is taboo, we have to talk about how to tax the tourists,” he said.

Jones said the current emergency could be enough to spur the Legislature to take up the topic.

“The legislature responds to a crisis,” Jones said. “We need to have a general tax discussion and look at how our economy is now. Montana has changed.”