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Guest Opinion: Sales tax would be costlier than income tax
Economic development and job creation are top priorities for the Martz administration. A competitive
business environment, including tax rates, is critical to creating, retaining and recruiting responsible
businesses that provide good paying jobs.
By DAVE GIBSON and KURT ALME
In mid-March, the Governor’s Office of Economic Opportunity completed a series of 15 listening forums
around the state. During these sessions, Montanans provided numerous issues and strategies for improving
Montana’s ability to facilitate job creation.
A portion of every meeting focused on Montana’s tax structure. Those meetings confirmed that some
Montana taxes, such as corporate income taxes and residential/commercial property taxes, are competitive in
our region.
Cutting income taxes
However, Montana’s individual income taxes are not competitive. To address that problem, we need to cut
income taxes in Montana. That cut needs to be done in a way that benefits all of us to improve our ability to
invest and purchase. As part of the tax cut, we need to be sure we fix two particular income tax problems:
At 9 percent to 11 percent, Montana has the highest stated individual income tax rates in the region,
leading to the perception that we are a "high tax state." This often keeps businesses and individuals from
even considering Montana as a place to locate, or encourages them to leave.
Perception aside, in our region Montana taxpayers face the highest marginal tax rates on capital gains.
This keeps some from investing in the state, and induces others to leave the state to avoid high rates of
taxation on one-time gains from the sale of farms, ranches and other businesses.
Revenue-replacement options
Where would the state find the capital to make an income tax cut? We have to be sure that all taxpayer
revenues are spent as efficiently as possible. However, if in our current economic climate, budget reductions
cannot generate enough revenue to make a decrease in the income tax rate feasible, we must look at other
revenue-replacement options to offset a proposed income tax reduction.
In a recent conversation with of Montana State University economist Doug Young, he noted the benefits of
exporting a state’s tax burden to nonresidents instead of placing high rates on capital gains incomes, which is
common among small and start-up businesses. This is consistent with what many Montanans have told us. In
the listening forums and through many other avenues, they have expressed concern that nonresident tourists
utilize our state’s public services and facilities with little contribution toward their costs.
When the discussion turns to taxing tourists, many people raise the possibility of eliminating the state’s
individual income tax altogether, and replacing it with a broad-based, statewide sales tax. What you may not
know is that this approach is likely to result in a tax increase for Montanans and a decrease in capital in the
state, which would have serious negative economic effects. Let’s take a moment and see why this would
happen.
Total individual income tax is anticipated to be about $556 million for tax year 2001. Since non-residents
already pay 7 percent of our income tax and would only pay about 10 percent of a general sales tax, a
dollar-for-dollar swap with a general sales tax would decrease Montana taxes paid by residents by about $20
million. So, where is the tax increase mentioned above?
Questions of deductibility
State income taxes can be deducted for federal tax purposes, but state sales taxes cannot. Eliminating the
state income tax would increase the amount of federal income taxes paid by Montanans by approximately $100
million. The combined federal/state impact on Montana taxpayers is an increase in taxes of about $80 million.
In our travels throughout the state, Montanans have requested that we look at ways for tourists to pay their
fair share of government services. We are fully committed to doing so. However, if we want to avoid a tax
increase to Montanans, we are faced with the challenge of finding a different revenue-replacement source than
a general sales tax to fund an income tax reduction. We commit to seeking out all available options with the
goal of reducing the tax impact to Montanans, and creating an environment conducive to the retention and
creation of good-paying jobs.
Dave Gibson is chief business officer in the Montana Governor’s Office of Economic Opportunity. Kurt Alme
is director of the Montana Department of Revenue.
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