Gov. Martz offers plan to cut state income tax

Gov. Judy Martz on Monday proposed cutting state income taxes by 10 percent or $66 million
annually, while imposing a sales tax on tourist items, possibly including restaurant meals and alcoholic
beverages, on both Montana and out-of-state tourists to make up the lost revenue.

Gazette State Bureau

"After months of study and review, today, on tax day, I am announcing a proposal for the largest income tax
cut in more than 30 years for the people of Montana," Martz said at a press conference. When she ran for
governor in 2000, Martz pledged she would cut income taxes if she were elected.
Her proposal also includes cutting Montana’s top marginal income tax rates and capital gains tax rates,
which she said deterred the state from attracting and retaining businesses. One possibility is to end
Montanans’ current ability to deduct their federal income taxes from their state income taxes.

The governor also suggested studying the
possibility of giving local governments the power, if
voters agree, to levy local option tourism taxes.
Martz said she would appoint three committees to
work out the details. One would work on the income
and capital gains tax reductions, and another would
figure out how to replace lost revenue with a tourist
tax.. The third panel will study the possibility of
authorizing a local option tourist tax on goods and

The package will be presented to the 2003
Legislature. If approved, the tax plan would take effect
in 2004.
"While economic growth and more tax revenue
will be the long-term benefits of this reduction, in the
short term we will need to find another source of
revenue," she said. "That source is nonresident
tourists. Montana has the lowest taxes on tourists in
the entire Rocky Mountain region."
She said tax dollars of Montanans provide the
public works and law-enforcement services that
tourists rely on, adding: "It is now time for Montana
visitors to support those necessary services."

"By exporting tax and importing revenue, we are shifting the tax burden off the shoulders of Montanans," she
said. "This shift will put more money into the pockets of Montanans to spend and invest and into services."
State Sen. Dan Harrington, D-Butte, who has served on legislative tax committees for years, said the
proposal would give wealthy taxpayers a break, while hurting lower income people.
"The lower income will probably be taken off the tax rolls, but they will be hit by the tourists. Sixty-five percent
of that (bed) tax is paid by the people of Montana. You’re raising taxes on the people of Montana."
Said Stuart Doggett, president of the Montana Innkeepers Association: "This is, of course, a whole new
dynamic of reducing taxes and using this to fill in. It’s a recognition of the tourism industry and what a driving
force it is. It’s something we should take a look at."

He cited statistics that nonresidents pay 60 percent of the lodging tax, while Montanans pay 40 percent.
Here are the details of the proposal, offered by state Revenue Director Kurt Alme:
Income tax reduction. Alme said the specific details have not yet been determined, but he said there is
one parameter: "It has to be a tax cut for all Montanans." Alme said Montana’s residential and business
property tax rates and corporate income tax rates are generally competitive with states in the region.

However, Montana’s top marginal income tax rates, from 9 to 11 percent, are the highest in the region, he
said, and Montana’s effective marginal capital gains tax rate is also highest in the region.
"This often keeps businesses and individuals from even considering Montana as a place to locate or
encourages them to leave," he said.
"That keeps some people and businesses from investing in Montana and causes others to leave the
state," Alme said.
Eliminating Montanans’ ability to deduct federal taxes from state income taxes would allow the state to
reduce the top marginal income tax rate and effective capital gains rate to less than 7 percent, which Alme said
would be competitive regionally.

Tourism tax. Alme said the state needs a tax in which nonresidents would foot the bill for a significant
portion. He estimated that 77 percent of bed tax revenue is collected from non-Montanans.

Besides the bed tax, Alme said the state could consider imposing tourist taxes on restaurant meals and
alcoholic beverages, rental cars, admissions to tourism attractions, rental of recreational equipment and other

"It is important to note that under such an option, Montanans would pay a portion of this tax when they buy
these items," Alme said. "However, the tax Montanans would pay under a tourist tax would be more than offset
by the savings from the 10 percent income tax reduction."

He said Montana now has the lowest taxes on tourists in the region.
A local option tourist tax. A committee will explore whether to allow local governments, with voter
approval, to add on local option tourist taxes to help pay for some of the costs of tourists.

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