Numbers dispel myths of Montana’s ‘high’ income tax

You hear it all the time at the 2003 Legislature, during debates over state tax policy:

Montana has the highest or one of the highest state income taxes in the region — or the nation — and this stratospheric tax is chasing away business in the state.

By MIKE DENNISON
Tribune Capitol Bureau

In reality, however, the myth of Montana’s high income taxes (for most taxpayers) is just that: A myth.

A Tribune examination of state income taxes for five sets of hypothetical taxpayers, including examples of the wealthy, shows that Montanans generally do not pay the highest taxes in the region.

In fact, the income taxes paid by these hypothetical Montanans usually ranked third- or fourth-highest out of the five states examined: Montana, Idaho, North Dakota, Oregon and Utah.

Here’s a quick look at some of the Tribune’s findings:

# For the average taxpayer, Montana’s income taxes often are lower than those in Oregon, Utah and Idaho.

# For a couple earning $150,000 without any capital gains — a family among the top 2 percent of the state’s income-earners — Montana income taxes still rank behind those of Oregon, Idaho and Utah.

# For middle-income and wealthy couples with capital gains income of $50,000, Montana income taxes tend toward the higher end, but are not the highest.

# Montana is not the only state in the region that taxes capital gains at the same rate as other income. Utah and Oregon share that distinction.

# Oregon has the highest state income taxes in the region, while North Dakota’s are the lowest.

Today at the Legislature, the Senate will debate Senate Bill 407, which contains Gov. Judy Martz’s proposal to cut Montana income taxes overall, cut the top rate from 11 percent to 6.9 percent and give a tax break to those with capital gains income.

The Martz administration argues that Montana’s top income-tax rate — the highest in the nation — is scaring away wealthy investors who might start businesses in Montana. The tax on capital gains, which are taxed like regular income, is a particular roadblock, it says.

Capital gains are profits on the sale of a business, property or stock holdings.

David Gibson, the administration’s chief business officer, said that while income taxes paid by many Montanans are not relatively high, there’s no getting around the "perception" that Montana has high rates.

"We’re getting hammered in the national press that we’re a high-tax state," he said.

Potential investors and businesspeople look at the top 11 percent rate and look no further, Gibson said.

Gibson compares Montana to a business that advertises extremely high prices, but trusts that people will come inside the store to find that prices really aren’t that high. No business would operate that way, he said.

Gibson also said Montana’s income structure — with its high rate and no exclusion for capital gains — can be especially punitive to wealthy business developers.

When asked why the state tax code should be altered with the hope of benefiting and influencing this very tiny segment of the population, Gibson replied that they are the ones who create jobs.

Attracting even 50 more of these people to Montana could create thousands of jobs, he said: "I just think that we’re missing a lot of those folks."

Sen. Jim Elliott, a Democrat from Trout Creek, is a vocal critic of the Martz plan to cut state income taxes and replace the revenue with a sales tax on selected items.

He said there’s no hard evidence that Montana’s income taxes are widely discouraging business activity by the wealthy in Montana: "It’s all hearsay."

Revenue Department statistics show that the number of taxpaying householders earning more than $500,000 a year in Montana has increased in recent years, and tax structure is not the sole determinant of people’s economic behavior, Elliott said.

If there’s any problem with "perception," the business community and Republicans are more to blame than anyone, he added.

"In my 11 years in the Legislature, I have never heard anyone in the Republican government or the Chamber of Commerce do anything but bad-mouth Montana as a place to do business in," he said.

The high rate also could be lowered without reducing state income taxes by the $37 million in SB407, when the state is in dire need of revenue, Elliott adds.

The income tax cuts and revision, however, have strong support among Republicans.

SB407’s sponsor, Sen. Bob DePratu, R-Whitefish, said any accountant will tell you that they advise people with large capital gains to move to other states to avoid Montana taxation.

SB407 not only reduces the taxation of capital gains, but also imposes sales taxes on tourists to help pay the difference, he said.

"I feel that we have to make a change so that our stated tax rate is competitive," DePratu said.

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