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From Governing’s
Looking at the state’s tax structure, however, it’s hard to tell the economy has changed. Montana has no general sales tax and relies on severance tax receipts for a large portion of its budget. A recent decline in copper mining and logging has made it impossible for natural resources to hold up the state treasury. “As late as the mid-1980s, we received as much from natural resource taxes as other states received from sales taxes,” says Doug Young, professor of economics at Montana State. “Since then, our tax system has been short one of the legs of the stool.”
The budget faces a $230 million gap in the next biennium, equal to 9 percent of the general fund. With income taxes already as high as 11 percent, and with Montanans paying more per capita in gas taxes than anyone else in the country, the state is up against a wall. Some residents are actually going through a wall — prisoners ineligible for parole are being released early to save money. Although Montana has seen its economy shift from mining to tourism, and now attracts 10 million visitors a year, its tax structure doesn’t take advantage of this. Tourists pay gas taxes and a statewide bed tax of 4 percent, but the state is losing billions of other sales tax dollars they could be contributing. Montana estimates that for the average weeklong tourist visit, it collects $34 in taxes. Wyoming collects $122, and Utah $239. A proposal from Governor Judy Martz would change that. She’d like a 4 percent selective sales tax, targeted at tourism-related items, such as restaurant food and rental cars. She may push for legislation allowing communities to levy a local-option tourist tax as well. Martz hopes her plan will make Montana more attractive to businesspeople reticent to move to a state that currently has a top marginal income tax rate of 11 percent and a high capital gains rate. These factors have attracted negative press from business publications such as Bloomberg Personal Finance and Kiplinger’s, which rank its business climate as the worst in the country. In fact, the negative press for the income tax may be somewhat undeserved, since the state allows full federal deductibility of its income taxes, reducing the actual tax burden considerably. The income tax rates are steeply graduated, so few pay the top rate. There is an unlimited deduction of medical insurance premiums as well. The capital gains tax is the one that really makes the state problematic for entrepreneurs. The effective capital gains rate of 9 percent is the highest in the country, causing headaches for any resident who wants to realize a major one-time gain. “As a tax adviser, it’s almost malpractice for me not to say, ‘Here’s an option: Move to Nevada,’ ” says Tim Bartz, a Helena accountant who served on a recent income tax advisory panel. “Here I am; I like Montana, but I have to advise people that their best choice is to leave the state.” Martz’s tax plan would use the tourist tax revenue to pay for a 10 percent income tax cut and a reduction in the capital gains rate. Although it would be a step toward structural balance, it’s designed to be revenue-neutral and would do nothing to address the $230 million shortfall. More helpful on that score would be a re-examination of the business equipment property tax, which was lowered sharply in the 1990s. This tax cut made things more fair and competitive by cutting the number of property classifications from 20 to 12, but it cost the state a great deal of money through reductions in the percentage of property value taxed. The system is still somewhat uneven, with some classes of equipment, such as energy pipelines and some utility distribution systems, taxed at much higher levels. Yet another property tax headache: To satisfy a ruling on school finance in the late 1980s, Montana greatly increased its statewide property tax, which now accounts for one quarter of total property tax revenue. But property is reassessed only every six years, so to avoid the shock of huge increases, the state has attempted to phase in a combination of annual rate changes, valuation changes and exemption levels. While this may be fairer, it is extremely confusing. With three variables moving simultaneously, it is nearly impossible for residents to understand their property tax bills. The state’s tax technology is adequate, but the effort to buy a fully integrated tax information system has run out of steam. Phase I of the planned integration, covering business, withholding and unemployment insurance taxes, was implemented in 1999. The system still has problems with the accuracy of its data. Phase II, which would have integrated individual and corporate income tax data, was supposed to be completed by fall 2001, but problems cropped up, and delivery was pushed back to 2004. This past November, the Revenue Department decided to abandon the system, losing the $12 million that had already been spent. Copyright © 2003, Congressional Quarterly, Inc. Reproduction in any form without the written permission of the publisher is prohibited. Governing, City & State and Governing.com are registered trademarks of Congressional Quarterly, Inc. |
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ust outside Butte, Montana, sits a large hill that once supplied 41 percent of the world’s copper. In the late 1800s, when it was nicknamed “the richest hill on earth,” Montana’s per-capita income was the highest in the nation. A century later, Butte’s copper mines have another designation: They comprise the largest Superfund site in the country. And Montana has another ranking: 46th in per-capita income.