With backing from Republicans, two bills to cut the state's highest income tax rate — a top proposal from Republican Gov. Greg Gianforte — have passed the Legislature.
Another of Gianforte's priorities, to raise the business equipment tax exemption, also advanced after stalling out in committee and being amended to increase the tax break for businesses.
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, when the second bill passed Tuesday, Senate Bill 399, takes over. 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.
Both of those bills passed the Legislature on mostly party-lines and now head to Gianforte's desk.
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.
House Bill 303 contains Gianforte's proposal to raise the business equipment tax exemption. The bill originally bumped the exemption from the first $100,000 of equipment to $200,000, but after an amendment earlier this week, that's now at $300,000. That bill passed the Senate on a 39-11 vote Tuesday, picking up support from eight Democrats, and needs the House to approve of amendments made there before it advances to Gianforte.
A new fiscal note estimating the impact to the state hasn't been produced yet, but lawmakers said the amendment would likely double the hit to the state's general fund, meaning it would cost the state about $7.6 million. The state will use general fund dollars to offset the loss to money for schools paid for through the bill. Earlier estimates showed it would reduce the number of businesses paying the tax by 4,000.
The amendment put on the bill Monday in the Senate Finance and Claims Committee also includes language to make the bill compliant with provisions in ARPA. That includes letting the governor's budget director review and lower the exemption level.
Sen. Tom Jacobson, a Democrat from Great Falls, raised concerns about previous structural imbalance in the state budget, meaning it overspent anticipated revenues.
Sen. Ryan Osmundson, R-Buffalo, said a recent status sheet showing bills pending and how they balance against anticipated revenues shows the state is in the black $24.7 million and the end of the two-year budget, with an ending-fund balance of $480.5 million.
That cushion led to the amendment to increase the exemption level, Osmundson said Monday.
"We were waiting to see what our structural balance looked like," Osmundson said. " ... That's why we held this bill so long, to see if that was something we could do."
An amendment made to HB 2, the state budget, on Tuesday removed the costs of HB 303 from the budget, resulting in a net effect of reducing general fund dollars offsetting local impacts by $1.04 million in the first year of the budget. The business equipment tax revenue goes to local governments.
Another part of Gianforte's proposal, Senate Bill 184 to exempt owners of certain businesses that open in Montana and employ a set amount of people from paying capital gains taxes on a sale of their business, has also passed the Legislature and is heading to Gianforte.
In a press conference Tuesday, Senate President Mark Blasdel, R-Kalispell, estimated the impact of all the tax reductions passed this session to be about $120 million.
Blasdel said the cuts were offset by "re-aligning government."
"We're looking for any kind of efficiencies we can do and ways we can operate more efficiently," Blasdel said.