Panel drafts plans for 10% cuts in income taxes

A Martz administration advisory council recommended Wednesday lowering state individual
income taxes by 10 percent, cutting top marginal tax rates from 11 percent to 6.9 percent and capping
how much in federal taxes Montanans can deduct from their state income taxes.

By CHARLES S. JOHNSON
Gazette State Bureau

If approved by the 2003 Legislature, this proposal would cut state income taxes by $56 million a year,
starting in 2004.
Montana is one of a few states in which residents can fully deduct their federal income tax from the state
income tax. The advisory council’s proposal would cap the maximum federal taxes that could be deducted from
state income taxes at $5,000 for single people, heads of household and married people filing separately. A
married couple filing jointly could deduct a maximum of $10,000 of federal taxes from their state taxes.
The council left it up to Gov. Judy Martz to decide which of two options to recommend to the 2003
Legislature for taxes on capital gains, which are the profits on the sale of property or investments. The first
option would reduce top capital gains rates to 6.9 percent from the current 11 percent, while the other option
would drop the top tax rate on capital gains to 5.9 percent.

Either options would lower income taxes by an average of $137 for Montana taxpayers. Under the first
option, 52 percent of households would pay less in taxes, 3 percent would more and 35 percent would see no
difference. For the second option, 49 percent of households would pay fewer taxes, 4 percent would pay more
and about 47 percent would pay about the same.
Martz appointed two other tax advisory councils. One was assigned to come up with a sales tax on tourist
items – to be paid by both Montanans and out-of-state residents – to raise the necessary $56 million annually so
the income tax cut doesn’t reduce state revenue collections. This will allow out-of-state tourists to help pay for
the cost of some of the income-tax cuts, administration officials say.
The other advisory council will work on a proposal for local-option taxes, subject to voter approval, for cities
and counties.
"I’m very pleased," Alme said afterward. "The two proposals we have in front of us address the two major
barriers we’re trying to address in economic development. It would solve the perception that we’re the highest
income-tax state in the country, and it would make our actual capital gain rates effectively lower."
With the special legislative session starting Aug. 5, Alme said, the pressing issue is the current condition
of the Montana general fund and budget.
But, he added, these tax proposals, which would take effect in 2004 if approved, are intended to improve
the long-term fiscal health of the state.
The council chairman, Senate Taxation Chairman Bob DePratu, R-Whitefish, also was pleased by the
recommendations.
"I really believe that this is an opportunity to give a real reduction to the great majority of the taxpayers, even
with the tourist tax."
If the panel working on the sales tax on tourist items come up with a good proposal, DePratu said, he
believes the two parts of the plan stand "a very reasonable chance" of passing at the 2003 Legislature.
"We’re hearing more and more Montanans talk about a sales tax and why don’t we get some of the tourists
to pay this," DePratu said. "We can’t go anywhere else without helping support another state through a sales
tax."
Sen. Jon Tester, D-Big Sandy, said he wants to see more of the tax reductions go to families with annual
income ranging from $40,000 to $80,000
"I’m not hearing from my district that tax breaks be given to the ultra rich," he said. "I hear a lot from my
constituents that we’re making (Montana) a playground for the rich."
It’s "good to be Santa Claus," Tester said, but he questioned whether the state can shift 40 percent of the
income-tax costs to out-of-staters paying a sales tax on tourist items.
"My concern is the middle (income) folks are going to see a tax increase when we’re all said and done,"
Tester said.

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