News

Income tax spawns confusion

Here are a few tax facts to chew on for the next few months as government officials
and legislative candidates debate the best way to end a perception that Montana has
the highest personal income taxes and that it is inhibiting economic growth and
development.

By JIM GRANSBERY
Of The Gazette Staff

The perception problem is this: Montana levies an 11 percent rate on taxable incomes
in excess of $75,400. Taxable income is what remains after all deductions and exemptions have been applied
to the adjusted gross income of a worker.
Montana has the highest marginal rate among the seven states in the region that have personal income
tax. The marginal rate is the additional tax on each dollar of income over the threshold of each tax bracket.
But because Montana allows taxpayers to fully deduct federal income taxes and the federal government
allows Montana taxpayers to itemize deductions for state income taxes paid, the effective rate for the high end is
about 7 percent, not 11 percent.

A real problem is, How does the state eliminate
the perception without eliminating a huge chunk of
revenue – revenue that for the most part pays for the
general fund expenditures of the state. It is those in
the higher tax brackets – 9, 10, or 11 percent – who pay
the bulk of the income taxes collected.
That is the conundrum that Kurt Alme, director of
the Montana Department of Revenue, and his staff are
wrestling with as they try to devise a tax strategy for the
next Legislature. During a recent economic
development listening session in Billings, Alme read
two or three letters from out-of-state residents who
were considering moving to Montana but were
amazed by the 11 percent rate. Alme said that red flag
is scaring many high-income earners from moving to
the state with their capital.
In 2000, the top 2 percent of Montana taxpayers
paid one-third of the more than $518 million collected
in income taxes. The 14.5 percent of taxpayers who
paid at 9 percent or more paid two-thirds of the
income tax flowing into the state’s checkbook.
A strategy for bringing the perception in line with
reality and be revenue neutral – not increase or decrease the taxes collected – would be to eliminate deductions
or credits, Alme said.
He said eliminating the federal deduction on the state income tax and pushing down the rates would solve
the perception problem and the revenue would be about equal to the amount collected now.
"You could take the 11 percent and push it down to 7 percent and then follow through with the rest of the
brackets," Alme said. "Then you could no longer say Montana had the highest rate."
A legislative proposal during the 2000 special session to do that was abandoned.
Another way of approaching the problem would be to increase the taxable income threshold, Alme said.
"That would reduce taxes throughout the brackets," he said. It would also reduce revenue to the state.
Alme emphasized he was not advocating anything at this point, that eliminating federal deductibility was a
possible solution to discuss. It would require educating the public and legislators.
"We would have to explain it and convince them," he said.
Alme said any tax structure should be fair.
"Every level should pay a fair share," he said. "It should be simple, easy to administer and competitive. That
(competitiveness) is more important at the state level."
Montana has tried for two decades to make its tax system competitive. It has given hundreds of millions of
dollars in tax cuts since 1981. A the same time, the state’s economy has continued to move toward the bottom
of the economic list. The state has eliminated the business inventory tax, cut the coal severance tax in half, and
reduced the business equipment tax from 12 percent to 9 percent to 6 percent to the current 3 percent.
When the business equipment tax went from 12 percent to 9 percent, the lost revenue was recovered in
three years and from 1989 to 1995 increased from $75 million a year to $102 million a year according to DOR
figures provided to then-Sen. Tom Keating, R-Billings. In 1995, Keating successfully pushed legislation to
ratchet the rate down one point a year for three years. Then in 1999, the Legislature reduced the rate from 6
percent to 3 percent. The latest legislation contains a trigger mechanism that reduces the rate from 3 percent to
zero in increments, based on growth in the state’s economy.
Alme said he had no perspective on the economic benefit of the past reductions.
"It is my impression that taxes are an impediment to development," he said. "There is some positive impact
(from tax cuts), but how much, is a good question.
"It is hard to isolate the impact of a tax element," he said. "I am unaware of any study that has isolated a tax
cut and then extrapolated to results.
"We draw conclusions from theory and anecdotal evidence," he said.
Alme has been collecting ideas from Gov. Judy Martz’s economic development listening sessions being
held around the state. Alme and his staff plan to incorporate as many of the ideas as possible into a tax policy
strategy for the governor and for the Legislature.
"We are looking for an appropriate framework," he said. "There is no real time line. We don’t want to rush it.
We need to look at the history.

Jim Gransbery can be reached at 657-1288 or at [email protected]

http://www.billingsgazette.com/index.php?id=1&tts=1&display=rednews/2002/03/18/build/local/55-taxbrackets.inc

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