Two GOP-backed bills intended to work in tandem to lower the state's top income tax rate advanced in the House on Thursday, with more clarity about how they work together and provisions meant to keep the state from losing billions in federal aid.
At the start of the legislative session in January, Republican Gov. Greg Gianforte said his goal was to get the rate, now at 6.9%, below 5%, but acknowledged it would be an incremental effort.
Gianforte argued a lower rate would make Montana more competitive with surrounding states when it came to attracting businesses, though those places also have different tax structures, namely a statewide sales tax.
Sen. Greg Hertz, a Polson Republican, ended up carrying two bills that at times appeared to be competing in efforts to accomplish Gianforte's mission, though debate on the House floor Thursday made clear they're meant to now work together.
Republicans have backed both proposals throughout the process, saying a lower rate would bring businesses to Montana and eventually lead to more tax revenue from more higher-income earners. Democrats have opposed the bills, saying research shows people don't locate based on income tax policies and the legislation would mean negligible benefits for lower- and middle-income earners.
People are also reading…
Senate Bill 159 cuts the state's top income tax rate from 6.9% to 6.75%. The reduction is expected to mean about $34 million less for the state's general fund because it would cut the amount of income tax paid by that figure.
It would take effect first and be in place until 2024, if the second bill, Senate Bill 399, is also approved. That legislation broadly simplifies the state's income tax system to just two brackets, one at 4.7% and one at 6.5%.
It would make Montana's taxable income levels and standard deductions mirror the federal ones, as well as eliminate nearly two dozen tax credits.
That bill would mean a $29.4 million reduction in taxes paid, equaling the same hit to the state's general fund.
While the tax credits would go away upon passage of SB 399, the change in tax rates and brackets would take place after SB 159 expires.
The bills also both now have a contingency section that would stop the tax cuts if they ended up putting the state's share of money from the American Rescue Plan Act at risk.
The federal law passed earlier this year, to provide relief to states because of the financial fallout from the pandemic, has a provision that the money — $2.7 billion in Montana's case — can't be used to offset net revenue reductions.
Republicans have said the state will see revenue boosts from things like recreational marijuana, meaning plans to cut income taxes are safe. Democrats have disputed that. Democrats have also raised concerns SB 399 makes broad changes and came too late in the session to get proper consideration. They also argued an interim committee that's been tasked with reviewing the state's tax credits should have time to complete its work.
Republicans hold majorities in both the House and Senate.
The contingency language in Hertz's bills is appearing in other bills too, like one advanced Thursday to dramatically increase a tax credit that can fund private or public schools in Montana, from $150 to $200,000. That legislation, which was also amended to allow more direction by those claiming the credit over what schools their money benefits, advanced from the Senate Finance and Claims Committee on Thursday.
In support of Hertz's bills, Rep. Becky Beard, the Elliston Republican who heads the House Taxation Committee, said the proposals would draw businesses to the state.
"This bill in tandem with the other tax bills this sessions demonstrates the governor's commitment to incrementally and responsibly reducing our top income tax rate below 5%," Beard said.
House Minority Leader Kim Abbott, a Helena Democrat, said middle-income earners will get just over a dollar a month in benefit from the tax cuts in the bills.
"The average person in our community can barely buy a cup of coffee with what they'll get from this," Abbott said, adding studies have not shown people move to a state because of tax rates.
Beard countered that on a community level, a place like Yellowstone County is estimated to see $4.4 million more circulating in the local economy because of the cut.
Both bills moved to the House Appropriations Committee on Thursday and will need final approval in the House and the Senate to OK the House's changes before they reach the governor.