Over the upcoming week, the state Legislature will take up several of the policies proposed by Gov. Greg Gianforte in his inaugural state budget.
Gianforte, the state’s first Republican executive in 16 years, has dubbed it “Tax Reform Week.” In an interview last Friday, the governor said his goal is to provide “broad-based tax relief to individuals, low-income folks and small business” through incremental changes that he wants to start this session and expand on later in his term.
Business organizations in the state support the proposals from Gianforte, as his plans align with what the groups have long called for. The governor argues things like raising the business equipment tax exemption, dropping the top income tax rate and eliminating the capital gains tax for some entrepreneurs will result in more investment and jobs in the state, overall boosting the economy. Republicans, who hold the majority in the Legislature, have also indicated they back the plans.
Democrats believe the policies would place the wrong emphasis on helping those who are financially secure already and don’t need the assistance like lower-income people do. Budget-watchers who advocate for equitable taxes say such plans have been tried — and failed — elsewhere.
Business equipment tax
One of the first bills lawmakers will debate would raise the exemption for the business equipment tax from $100,000 to $200,000.
“The business equipment tax is one that's particularly problematic, because it generates a lot of paperwork for small business, and it (disincentives) capital investment, which ultimately creates jobs,” Gianforte said.
House Bill 303, the Business Investment Grows (BIG) Jobs Act, has its first hearing Tuesday in the House Taxation Committee.
“Montana is one of the few states that has a tax structure like this, where essentially the business equipment tax is ... an annual sales tax on all the equipment in a business. So when you invest in your business, you pay more tax,” Gianforte said.
Bridger Mahlum, government relations director for the Montana Chamber of Commerce, said Friday the business equipment tax has been a “bread-and-butter” issue for the Chamber of Commerce since the tax’s inception.
The Chamber’s position is the tax makes Montana less competitive in attracting business in comparison to other states, particularly neighboring states, Mahlum said.
“When business owners can move capital as easily as they can in this day and age, we have to look at every facet on how to make Montana more competitive,” Mahlum said. “To be able to go $200,000 tax-free on business equipment is really a big deal as far as the bottom line for these folks who are bringing in operations and creating jobs in our state, especially those manufacturers who are equipment-heavy in what they do.”
Manufacturers, especially those whose in-house work moves from scratch materials to end products, will likely see the most benefit from the proposal, Mahlum said.
“We believe that reducing, and maybe eventually eliminating, the business tax will encourage manufacturers in Montana to keep that entire supply chain process and manufacturing process in Montana,” he added.
To “keep local communities whole,” the bill uses general fund dollars to backfill the loss for local governments, school districts and tax increment financing districts that would otherwise see less money from raising the exemptions.
“All of these reforms, we are shifting the tax burden, but we’re not going to disadvantage local communities,” Gianforte said.
The bill does not yet have a fiscal note, which is prepared by the governor’s budget office, to estimate how it might hit the general fund. Projections show the change will affect about 4,000 businesses who would no longer have to pay the tax; about 1,500 of those are small farms, Gianforte said.
Tim Burton, executive director for the Montana League of Cities and Towns, said the backfill is encouraging. The state’s mill levy is frozen at half the rate of inflation and can’t be lifted to cover that cost, he said, so without the general fund shift local jurisdictions would be left to jack up taxes to continue services like police, fire departments, administrations, parks and recreation.
“It’s critical,” Burton said Friday. “That would mean we’re operating with a budget less than a prior year.”
Burton said his organization still needs more time to look over the bill, but he likes what he sees so far.
But Heather O’Loughlin, the co-director of the Montana Budget and Policy Center, said the state has already cut the business equipment tax rate six times in the last two decades, meaning reductions have already targeted many of the state’s smaller businesses.
In 2013, the former Democratic Gov. Steve Bullock and Republican state Sen. Bruce Tutvedt worked on a bill that then exempted about two-thirds of the state's businesses from paying the tax.
While Gianforte called the backfilling with general fund dollars a shift, O’Loughlin said it amounted to a cut to the state’s general fund.
State Sen. Jill Cohenour, the minority leader in the Senate and a Democrat from East Helena, said Friday she’s seen huge fluctuation in general fund revenue over her legislative career, and that tapping the fund to cover the loss of tax revenues elsewhere worries her when it comes to the state being able to respond to emergencies.
Gianforte argues that as businesses see lower tax burdens, they’ll increase investments in their operations and hire more people, which will grow the economy and raise income tax collections over time.
“If you let people keep the fruits of their labor — a smaller percentage of a larger number ends up being more revenue for the state," Gianforte said.
Gianforte said Friday his long-term goal is to eliminate the business equipment tax for all small businesses in the state, as well as continue to cut income tax rates.
“That's really the approach we've taken with all our tax reductions is these are significant but modest advancements,” Gianforte said.
Individual income tax rate
Another change Gianforte proposes is to drop the state’s top marginal income tax rate from 6.9% to 6.75%. Senate Bill 159 is carried by Sen. Greg Hertz, R-Polson, and has its first hearing Thursday in the Senate Taxation Committee.
Gianforte said the legislation would affect half the state's taxpaying residents. The taxable income threshold for people in that tax bracket is $18,400. Taxable income is the part of a person's income that is taxable after any allowable deductions from their gross wages.
The state last adjusted its personal income tax rate 18 years ago, moving it from 11% to 6.9%. Gianforte argues that made the state competitive at the time, but since then other states have dropped their rates more. He often cites a statistic that Montana’s individual income tax rate is the second-highest in the region.
The governor's office has lined up economists to testify in support next week that the state’s income tax rate is “probably one of the greatest determinants for entrepreneurs establishing residency in the state," Gianforte said.
While his goal is to drop the rate more, Gianforte said he’s constrained by the budgetary challenges from the pandemic.
“It's a modest decrease, but it's what we can afford right now. It’s, as I like to say, directionally correct,” Gianforte said.
As the economy recovers and more people move back to the state and bring their income tax revenue with them, as Gianforte believes the change will prompt, it would amount to “down payments” that would allow the state to drop its rate more in the future.
Cohenour pointed to a study showing the state’s highest earners will benefit most from the change. The tax cut would equate to a reduction of about $1,314 in the tax bill for the top 1% of those in the state, or people who earn $509,000 or more annually.
An analysis of the proposal by the Institute on Taxation and Economic Policy found that people earning from $40,000-$63,000 would see a reduction of about $14.
“That means the folks that need it the most are not going to get any assistance,” Cohenour said. “It’s very concerning to me that they put forward a bill that puts money in the pockets of the wealthiest Montanans and leaves behind the local communities that need help most.”
O’Loughlin said that both studies nationally and evidence within the state shows cutting tax rates doesn’t result in significant economic growth.
“Montana cut income taxes pretty considerably in 2003, more than half of those tax cuts went to households earning more than half a million annually. And studies have shown that it didn't result in increased additional economic growth above what we were seeing nationally or what would have occurred without those tax cuts. Nor did we see a net migration of high-income households,” O'Loughlin said.
O’Loughlin also points out comparing Montana to surrounding states is challenging because they have different tax structures, especially things like a statewide sales tax.
Gianforte answered a question about that critique by saying Montanans have made clear they don’t support a sales tax.
“We are showing here through good fiscal management we can bring our rate down and bring it down further and not jeopardize essential services,” Gianforte said.
The “Montana Entrepreneur Magnet Act,” another proposal laid out by Gianforte when he introduced his budget in early January, will be carried by Senate President Mark Blasdel, R-Kalispell. Senate Bill 184 doesn't have a hearing scheduled yet.
The bill would eliminate capital gains taxes on the sale of stock for a business that has operated for at least five years in Montana, has more than half of its corporate officers living in the state, and had 30% of its employees living in the state for the prior 12 months and at least 25 full-time employees living in the state for three years.
“A couple other states have tried something like this, but I think this may well be one of the most important things for bringing high wage jobs to the state,” Gianforte said. “And the beauty is it costs zero over the next biennium.”
Entrepreneurs are highly mobile, the governor said, and he wants to make Montana an attractive place for them to land.
“If entrepreneurs are the golden geese that lay the golden eggs, we want them all to fly to Montana and lay their eggs here,” Gianforte said.
Gianforte himself came to Montana and did something similar, starting RightNow Technologies in Bozeman and later selling the company to Oracle for $1.8 billion.
The effects have been lasting on Gallatin County, which has become a tech hub in the state. And while Gianforte said “most communities do not want to be Bozeman, there’s no reason why what we did in Bozeman couldn’t be done in Chinook or Havre or Sidney, and it would be sensitive to that local community. This is one way to say ‘Montana is open for business’ and we want all our Montana entrepreneurs to come home.”
O’Loughlin said numerous studies show there’s little evidence that businesses makes their choices on where to locate based what Gianforte is proposing.
“The marginal impact of state tax policies on business decisions, if you think about the infrastructure in the area, the education system, certainly there are qualities Montana has like the outdoors and recreation, those types of things play a bigger role in an individual’s decision on where to start a business,” O’Loughlin said.
She argued that plans like increasing broadband access in the state and making public schools more attractive do more to draw companies to Montana, and that taking away state dollars for those efforts to offset tax cuts could be detrimental.
Michael Mazerov, senior fellow with the national Center on Budget and Policy Priorities' State Fiscal Project, has extensively studied income tax cuts Kansas implemented in 2012 that also targeted higher-income residents.
Five years into the so-called Kansas Experiment, the state faced major challenges to pay for basic services like roads and education after revenues fell by hundreds of millions of dollars.
Mazerov said Gianforte’s plans were concerningly similar to Kansas’ story, though they’d have far less impact because they were smaller in scale — Kansas, for example, entirely cut taxes on some businesses and slashed its top income tax rate by nearly 30%.
“That was a much deeper tax cut than anything being contemplated right now in Montana,” Mazerov said. “ … If cuts that deep in income taxes on business and entrepreneurs didn’t succeed in improving the state’s economy but actually really damaged it because it resulted in budget cuts, deferral of road maintenance, other cuts in the budget, certainly what’s being contemplated in Montana is not going to do anything for the economy. It’s just that much less money that’s available for education.”
Gianforte does have a bill, carried by Rep. Llew Jones, R-Conrad, that aims to create about 1,000 partial scholarships for employers to send their workers for training in the trades. House Bill 252 has its first hearing Tuesday in the House Taxation Committee.
“This could be carpentry, plumbing, electrical, welding, machining, meat cutting,” Gianforte said.
The tax credit will pay up to 50% of tuition for an employee, up to $2,000 a year per worker and $25,000 for an employer annually.
“As I talk to small business owners and other sectors, the No. 1 issue when I asked the question ‘What do you need to do to double the size of your business?’ The answer is always the same — a skilled workforce. So that's what this is targeted at: helping small businesses grow their own,” Gianforte said.
The proposal to pay for the program, at $1 million, also comes from the state’s general fund.
Another bill coming is meant to help offset the costs of some of Gianforte's other proposals. It would move the state from using a three-factor test in determining corporate taxes to one factor.
The three factors are how much property a company owns in the state, how big their payroll is in the state and how much they sell in the state. The proposal that will be carried by Hertz will shift to just using the factor of how much a company sells in the state. Gianforte said this would target the Amazons of the world and reduce burdens on local businesses.
A fiscal note for the bill is not yet available, but Gianforte said it would bring money into the state, possibly as much as $20 million annually.