HELENA — Tax cuts enacted by the 2021 Montana Legislature will total $50 million to $60 million a year, once fully in place – but the direct benefits vary wildly, from taxpayer to taxpayer, and won’t be felt by all.
For example, in the first year of an income-tax rate cut – 2022 – about 42 percent of taxpaying households, most of them in lower-income brackets, will see no reduction in their taxes.
Tens of thousands of those same households, however, will be dropped entirely from the tax rolls when income taxes are changed again – but that won’t happen until 2023, at the earliest, and perhaps not until 2024.
And, when it comes to property taxes, any reduction for the average homeowner is likely to be a very few percentage points – if their school district doesn’t raise any other levies, allowed under state law.
MTN News examined the on-the-ground impacts of a half-dozen major tax-cut bills passed by the Legislature and signed into law by Republican Gov. Greg Gianforte.
Majority Republicans, who sponsored all of the bills, say the overall package is meant to boost the state economy by making Montana’s income-tax rates more competitive with other states, attract and help business, and lower taxes for as many taxpayers as possible.
Democrats, who opposed the income-tax bills and some of the other proposals, argue the changes primarily help wealthy taxpayers and business – and give short-shrift to those who most need a break, which are the moderate- and lower-income homeowner and renter.
More on that debate later. But first, a quick look at who benefits – and who doesn’t – from these major proposals:
Income-tax cuts – Senate bills 159 and 399: Republicans took a two-pronged approach to cut state income taxes, starting with SB159, which lowers the top rate from 6.9 percent to 6.75 percent, starting in tax year 2022. Most of the benefits of this change flows to upper-income taxpayers, who pay the bulk of income taxes.
Almost two-thirds of the reduction goes to the top 10 percent of income-earners, according to a Revenue Department analysis, and 42 percent of taxpaying households will get no reduction.
But starting in 2024, SB399 overhauls the entire structure, by collapsing seven tax brackets into two, at. 4.7 percent and 6.5 percent, tying Montana taxable income to federal taxable income, and eliminating more than a dozen tax credits and deductions.
The resulting impact on taxpayers is much more diverse than SB159. Anywhere from 55,000 to 93,000 additional lower-income taxpayers won’t have to pay any state income taxes, because of the much higher federal standard deduction. And, winners and losers are spread throughout various income-tax brackets, with many higher-income taxpayers ending up paying more.
Each bill cuts overall income taxes by $30 million to $35 million a year, when fully implemented.
Business property-tax cuts – House Bill 303: The amount of business equipment exempted from property taxes was increased from $100,000 to $300,000. This change means an additional 3,300 small businesses will pay no property taxes on their business equipment, starting later this year, and the remaining 2,300 that still pay it will pay less, because of the higher exemption.
The change will cost the state about $7 million a year, including $6 million it gives to local governments and schools to offset their loss from the cut.
Property taxes paid by elderly homeowners and renters – HB191: This change expands an income-tax credit for low-income homeowners and renters 62 and older and earning $45,000 or less. About 15,000 taxpayers use this credit now.
But the expansion isn’t expected to change that number by much. Instead, it will increase the credit for those who take it, likely in the range of $100 to $200 per taxpayer.
Property-tax cuts for all – HB663: Although this reduction will affect the most taxpayers, its actual amount per household is difficult to track. The bill routes $10 million to school districts through a complex formula, and the districts can use that money to reduce local property taxes that support schools.
About 345 of Montana’s nearly 400 school districts will get the extra money. If each of them reduces property taxes equivalent to the extra money they get, the average reduction in school property taxes per taxpayer would be just under 3 percent.
However, the actual impact will vary from school district to school district, depending on how much state equalization aid they receive.
That $10 million to offset property taxes also could increase in coming years, if tax revenue from recreational marijuana increases beyond expectation.
Sen. Greg Hertz, R-Polson, who sponsored the income-tax-cut bills, told MTN News he would have preferred to implement the tax overhaul in SB399 next year, rather than 2024.
“My No. 1 goal was to simplify our (income-tax) system, and this does that,” he said in an interview last week. “The other issue had to do with fairness – it’s a fairer system and makes sure everybody is paying their fair share on their taxes.”
But Republicans decided to hold off on SB399 until they’re sure Montana’s tax changes don’t run afoul of the federal American Rescue Plan (ARPA), the federal Covid-19 relief bill passed by Congress this year.
ARPA includes provisions that say states cannot use the bill’s aid to reduce taxes.
Hertz said he doesn’t believe any Montana tax cuts passed this year use ARPA funds. But until that determination is final from the federal government, the Legislature decided to go with the simple top-rate reduction next year (SB159) and leave the overhaul until later, so Montana wouldn’t be forced to unravel a more complex change, he said.
Reducing Montana’s top income-tax rate is important because it’s now the highest among states in the region, he said.
“We need to be competitive with other states to attract higher-paying jobs in the state,” Hertz said. “And that’s where people will really benefit, with the opportunity to try to get a better job that pays more money.”
Democrats say this argument is fundamentally flawed, in two major ways.
First, comparing Montana’s income-tax rates to other states overlooks the fact that our state has no sales tax, and therefore is more reliant on income taxes to pay for services that citizens expect, like schools, public safety and public health, they say.
And, the biggest benefit of cutting income taxes inevitably flows to the wealthy, says Senate Minority Leader Jill Cohenour, D-East Helena.
“Their thought process is we’re just going to give a bunch of money to the highest-income people in Montana and that’s going to trickle down through the economy,” she says. “We already know that does not work.”
Cohenour also said more cuts should have gone to property taxes on homes.
“When I knock on doors and I talk to people, I don’t hear that `my income tax is too high,’” she said. “What I hear is that `My property taxes are out of control and I need help.’”
Cohenour sponsored a bill last session that would have provided cuts of up to $1,000 to lower-income homeowners and $500 to renters, but it was quickly killed by Republicans.
Hertz said unless Montana has another major taxing alternative – such as a sales tax – it will be difficult to significantly cut property taxes.