(HELENA) The vast majority of Montanans will pay less in federal income tax after the new Republican tax reform bill takes effect in January, according to new analysis from the state Department of Revenue.
The Revenue Department analysis says more than three-quarters of the roughly 461,000 Montana households that file federal tax returns will receive an income tax cut of at least $50 a year and at least 2 percent of what they currently pay. About 20 percent of households will see a small change – an increase or decrease of less than $50 or 2 percent of their current taxes. Just over 1.5 percent will see a larger tax increase.
Overall, Revenue estimates Montanans will save a total of more than $746 million in federal income tax next year. Just under half of that savings – about $356 million – will go to the top 10 percent of income earners.
The average tax cut for a Montana household will be about $1,618 in 2018, but that will vary widely based on taxpayers’ income levels. For the top third of income earners, those making more than $64,000, the average cut will be $3,881. It will be $945 for a household earning between $64,000 and $20,000, and $307 for those making less.
President Donald Trump signed the sweeping tax reform into law Friday. Republican leaders have called it the most substantial change in the federal tax code in decades.
The plan reduces the top income tax rate for individuals, adjusts the other individual tax brackets, significantly cuts the corporate tax rate and increases the standard deduction taxpayers can take, among other changes. In addition, it repeals the federal Affordable Care Act’s requirement that individuals purchase health insurance or pay a tax penalty.
Because the tax law goes into effect next year, people will start seeing changes next month in the amount withdrawn from their paychecks. However, there won’t be any large changes in taxpayers’ returns for 2017, which must be filed by April.
Webb Brown, president and CEO of the Montana Chamber of Commerce, said his group supported tax reform as a way to make American businesses more competitive with those overseas.
“The bottom line here is almost three-quarters of a billion dollars will now stay in Montana, and stay in the economy here,” he said. “We’re excited about what that will mean in increased economic activity.”
In addition to breaking down the tax bill’s effect on individual Montanans, the Revenue Department analyzed what changes it could bring to the state budget. In a memo to Gov. Steve Bullock’s budget office, Revenue director Mike Kadas said provisions in the bill might reduce state revenues by millions of dollars.
Kadas said the state could lose $29 million in individual income tax during the 2018 tax year. He said the biggest reason is a change to “pass-through” businesses, which do not file corporate taxes, but instead pass their income directly to the individuals who own them. The tax reform allowed many of those businesses to deduct up to 20 percent of that income from their taxes.
Revenue also estimates Montana could receive $17 million less in corporate tax in 2018. Kadas said that would be mostly due to a change allowing businesses to deduct more of the costs for new equipment and other investments.
Kadas’ memo also highlighted the possibility that the tax bill could trigger automatic federal spending cuts – including $24 million a year in mineral leasing payments for Montana. That concern is based on a 2010 law that requires offsetting cuts if legislation would otherwise lead to an increase in the national deficit. However, congressional leaders have announced they intend to waive that law as part of a year-end spending agreement.
Brown said the Montana Chamber is concerned both about the federal deficit and about the effects the tax reform could have on state revenues, especially after a budget crisis led to a special state legislative session last month. But he said the new law should be a positive change for Montana overall.
“We believe in the long run, this is beneficial,” he said. “So now we have to get to work on how we can make the adjustments in Montana.”
The Revenue Department’s analysis is based on the tax year, which runs from January to December. The governor’s budget office still has to make its own determination of what the changes mean for the state’s financial picture. State budgeting is based on a fiscal year that runs from July to June.
Kadas said Revenue has only begun to analyze the tax reform’s effects on Montana.
“It’s a 500-page bill that fits into several thousand pages of code,” he said. “I think everything that you see now is preliminary, and we have to have time to kind of work through the details of it.”
Montana’s congressional delegation was split on the tax reform plan. Republican Sen. Steve Daines and Rep. Greg Gianforte both supported it, saying it would give Montana families a needed tax cut and provide a boost to the state’s economy. Democratic Sen. Jon Tester voted against the plan, saying too much of the tax relief went to the wealthiest Montanans and criticizing the repeal of the individual health insurance mandate.