Major changes to taxes urged

The state’s economic development czar urged an advisory council Thursday to propose major
changes to overhaul Montana’s income taxes to make them competitive in attracting jobs as rates in
other states.

By CHARLES S. JOHNSON
Gazette State Bureau

"What we’re striving for is to remove the red flags to get us in the ballpark," said Dave Gibson, the state’s
chief business officer.
Montana’s income tax rates now range from 2 to 11 percent, with the top rate on taxable income of more
than $74,000 being the nation’s highest. Because Montana taxpayers can deduct their federal income taxes
from state income taxes, the effective rates are lower.
He said the top rate of 11 percent "is really hurting us."

"In a global economy, and we’re there whether we like it or not, high-wage jobs in the future are in the
high-knowledge sector," he said, adding, "We have to adapt to the changing world, or we’re going to be left
behind, as we have been in the last 30 years."
Gibson said Montana often draws criticism for its tax rates in state-by-state comparisons in financial
publications. Other speakers said this is sometimes a perception problem because the comparisons fail to
accurately reflect the complete picture.
"We have a perception of being a very high tax state," Gibson said. He said if the state can drop the top rate
to 6 or 7 percent, the state would have a good message to use to recruit businesses.
"It’s not a perception," said Doug Young, an economics professor at Montana State University. "In reality, we
are a high income tax state among the top four or five in the country."
Larry Finch, Revenue Department tax researcher, said Montana has real, not perceived, problems not only
with the top marginal income tax rate but also with capital gains tax rates.
Several speakers, including accountants, told how some owners of farms, ranches and businesses in
Montana often move out of state to save on vast capital gains when selling their operations.
The Income Tax Advisory Council, appointed by Gov. Judy Martz and headed by Sen. Bob DePratu,
R-Whitefish, is one of three panels assigned to come up with tax proposals for consideration in the 2003
Legislature.
"It doesn’t take a scientist to know where we’re headed," Martz told the panel. "And we’re not headed in a
good direction now."
Martz said she wants the committees’ recommendations by August so she can gather public comments
before taking the ideas to the 2003 Legislature. She has proposed in broad terms reducing income tax rates,
cutting income taxes by 10 percent and making up the lost revenue with a sales tax on both Montanans and
non-residents on tourist-related purchases.
The committee began by examining at six broad options presented by the Department of Revenue. Some
of the ideas had been introduced in past legislative sessions.
After some discussion, the panel tossed out some and decided to focus on these options, with variations,
at future meetings, according to Revenue Director Kurt Alme:

One that would eliminate federal income tax deductibility, reduce the top marginal rates and
provide for a 10 percent tax reduction across all income brackets. One downside is that 38,000
households or 10 percent of all households would face higher income taxes under this option.

Another similar one would duplicate the first option but work on minimizing the number of
people who would wind up paying higher taxes on the option. This option reduced the number
of households paying higher taxes to 31,500.

One idea suggested by Jerry Driscoll, executive secretary of the Montana AFL-CIO, to limit the
amount of federal taxes that can be deducted from state taxes at $3,000.

The panel also asked that the department bring more research to its next meeting June 20 on
Montana’s capital gains taxes and look at reduced tax rates or exclusion of a percentage of the
gain.

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