On Thursday, the Senate Taxation Committee will hear Senate Bill 105, repealing the water’s edge election for corporate income tax purposes. The water’s edge election represents a multi-million dollar giveaway to large multinational corporations operating in Montana, and SB 105 aims to level the playing field for Main Street businesses across the state while also ensuring we have adequate revenue here in Montana to invest in our communities.
What is the water’s edge election, and why should we eliminate this corporate tax break?
First we need a refresher on combined reporting, which is the way Montana taxes corporations. Many large companies consist of a parent company and its subsidiaries. Combined reporting requires a parent company to add its income and its subsidiaries’ incomes for the purposes of state corporate income taxes. Montana then taxes its share of the total income based on the level of activity in Montana as a percent of the company’s total activity. States without combined reporting are vulnerable to a wide array of tax avoidance strategies by corporations which usually involve artificially shifting profits to subsidiaries that are in states without corporate income taxes or that do not tax a specific type of subsidiary.
Combined reporting ensures that corporations pay their fair share of taxes in Montana based on their corporate activity in Montana. In addition, it levels the playing field for smaller Montana-based companies that do not have subsidiaries across the country to which they can shift profits.
Montana requires worldwide combined reporting, which means that corporations with common ownership must report all income worldwide basis. Montana provides an exception to this rule, called the water’s edge election, which allows multinational corporations to only report their income within the borders of the United States, rather than their worldwide income. In exchange, these companies agree to pay a 7% tax rate, rather than the normal rate of 6.75%. The number of corporations that filed a water’s edge election in Montana increased 226% from 2007 to 2012.
There are some limits to the water’s edge exclusion. If a subsidiary is located in a country that is a known tax haven, the corporation may not exclude that subsidiary’s income even under the water’s edge election. In order for this exception to be useful and avoid inappropriate income shifting, the list of tax havens must be updated regularly in Montana law. Unfortunately, the Montana legislature has failed to update the list of tax havens in past sessions.
A cleaner way to address the inequities and level the playing field for Montana small businesses would be to eliminate the water’s edge election entirely. The Governor has called for the elimination of the water’s edge election in his budget, and the Senate Taxation Committee will hear Senate Bill 105 to do just that. The bill will eliminate the ability of multinational corporations to shift profits overseas without paying state corporate taxes reflecting actual operations in the state. We need out-of-state corporations to pay their fair share for the schools, roads, and bridges they rely upon for the success of their business.
MBPC recently wrote a report on how Montana taxes corporations. You can read that full report Policy Basics: Montana Corporate Income Taxes.
The start of the 2017 Montana legislative session is a great time to talk about two major incentives for state and tribal governments to work together to address mutual concerns—devolution and overlapping areas of governmental responsibility.
The term “devolution” stems from the so-called New Federalism reforms of the 1990’s and refers to the practice of devolving federal resources and administrative responsibility of federal programs to tribes, states, and local governments.
The intent of these policies was partly to give local governments greater freedom in determining how best to meet the needs of their respective citizens. However, they also allowed for the diminishment of federal administrative and fiscal responsibility for those programs; or in other words, they were tied to decreases in federal aid. Because of this—and the fact that an array of state and tribal governmental activities, programs, and responsibilities overlap—there is a great incentive for tribes and states to work collaboratively to maximize the impact of their available resources.
For tribes, devolution was largely evidenced in the passage of the Tribal Self-Governance Act of 1996, giving tribes the ability to compact management of one or more federal programs serving their reservations and the freedom to redesign the programs and reallocate funds for these efforts.
For states, devolution was seen primarily in the area of welfare reform. In 1996, the Personal Responsibility and Work Opportunity Reconciliation Act transferred financial resources and authority for federal income assistance programs to states. This transfer generally took the form of federal block grants to states for providing public services.
Some of these funds are passed through to tribal and local governments, who are eligible to administer a small number of programs.
According to a 2015 Center for Budget and Policy Priorities analysis of the 13 major housing, health, and social services block grant programs, funding for all but one has shrunk in inflation-adjusted terms since their inception—and in some cases, dramatically. Since 2000, the combined funding for the 13 block grants fell by 27 percent, or $14 billion in 2015 dollars.
In addition, block grant funding often cannot adjust to changes in need. Programs like SNAP (formally food stamps) grow by need. In block grants, the funding levels are set, so if a recession occurs and more people need help, the program must make the tough choice between serving fewer people and reducing the services per person to serve more people.
For both tribes and states, funding shortfalls complicate the administrative freedom that results from devolution. These decreases in overall program aid have put pressure on both tribal and state governments to either find ways to supplement program budgets or cut services for those programs—or sometimes both.
Thus, tribes and states have a vested interest in collaborating to maximize their resources when working to achieving some very significant mutual goals, including addressing the basic needs of their shared citizens and strengthening their shared economies.
For the past few months, Montanans have been hearing about the current shortfall in revenue in this past year than the legislature previously projected. This reality will make this biennium’s budget debate tougher than the past few sessions. While targeted cuts are likely in the face of this leaner revenue projection, it is also important to remember that the investments we make – from quality schools, improved roads, and public safety – help create thriving communities where we can all live and work.
As the budget moves forward, we will walk through some of the terms and what legislators are considering during the debates.
One budget cutting measure often used is “vacancy savings.” Vacancy savings is the difference between what it would cost to fully fund all of an agency’s approved positions and what is actually spent for personal services because positions were vacant for part of the year.
The Legislature can mandate a certain amount of vacancy savings by appropriating less than the amount needed to fully fund all of an agency’s positions. When vacancy savings are higher than naturally occur because of turnovers, agencies must leave positions open for longer than normal or decide not to rehire.
Since 2003, most agency budgets have included a four percent vacancy savings rate. This rate has fluctuated in past sessions. In this session, the Governor’s proposed budget reflects a four percent vacancy savings for most agencies. However, the joint Appropriations and Finance & Claims Committees are considering even further cuts from the Governor’s proposed budget, including an additional two percent vacancy savings.
While some will argue vacancy savings as a harmless cost cutting measure, the reality is that vacancy savings results in the loss of state jobs and potential of services to be cut or reduced in communities. State agencies that we all rely upon must continue to do more with fewer resources and fewer staff. The effects of these cuts are seen across the state, in both small and large communities.
However, there is something the legislature can do about our current financial position – we can bring in more revenue. There are a variety of ways we can make our tax system fairer and raise much needed revenue for our public schools, higher education, health care, infrastructure, and public safety. We can close loopholes and stop the unfair tax breaks that benefit the super wealthy and out-of-state corporations. We can make sure that we are all pulling our weight and have enough revenue to invest in our communities.
The significant but short-term reduction in revenue levels over the past two years is going to be a challenge for the 2017 Legislative session in Montana. It will require tough choices balancing budget cuts and new revenue.
Unfortunately, the legislature’s plan to start the new budget with almost $50 million in additional cuts beyond those in the Governor’s balanced budget proposal will make matters worse by hurting the economy and families.
If the legislature continues with their plan, they will begin the session by automatically implementing hundreds of cuts hidden in procedural decisions without a transparent discussion of their impacts. We don’t know where these cuts are coming from or whom they will impact. Montana has seen time and time again that cuts this dramatic hurt vulnerable children, students, local communities, and seniors.
What is happening?
The Joint Committees charged with debating the budget (the Senate Finance and Claims Committee and House Appropriations Committee) are discussing moving the starting point for budget decisions to make additional reductions to all state agencies below the Governor’s budget.
This is unnecessary.
The Governor’s budget, which already includes over $73 million in cuts to the state budget is a transparent starting point. It has pages and pages of detail that have been available to the public for weeks, and it was widely publicized. Second, the Governor’s budget is structurally balanced and restores the ending fund balance (effectively Montana’s rainy day fund) to $300 million by the end of the biennium. It is a good starting place for the Legislature to make modifications.
Last, cuts are not the only way to balance the budget. The Governor created his budget that does not rely on only budget cuts, but also addresses the current lack in revenues, by closing tax loopholes used by special interests and ensuring everyone is paying their fair share. The Governor found several new sources for revenue that make sure we are all pulling our weight and can bring in additional revenue available to fund state priorities.
It is not fair to ask college students to pay more for school while the super wealthy get massive tax breaks. It is not fair to cut funding to local schools already struggling to find quality teachers for the classroom when out-of-state corporations take advantage of tax loopholes.
While some cuts are inevitable, this Legislative plan ignores an opportunity to build toward a better economic future. We need a balanced approach to our economic challenges –one that includes new revenue to meet today’s needs and starts planning for our future.
With Governor Bullock proposing to invest $12 million on early childhood education, policymakers and parents are wondering how long the benefits of preschool last. A new study of early education programs in North Carolina helps to answer that question. As it turns out – attending a high quality preschool can benefit children not only in the short run, but for years to come.
Kids who attended one of North Carolina’s state supported preschool programs had higher test scores, and were less likely to repeat a grade or to need special education. The study followed one million children from preschool through fifth grade. From 1995-2010, researchers tracked over 15 years of students who attended the preschool program.
By the time the children were in fifth grade, the benefits from attending preschool either remained constant, or even grew. This research shows that the benefits of preschool are long-lasting.
While in the past some critics of publicly funded preschool have suggested that the initial boosts children gain might fade as they enter elementary school, this study suggests that the “fade out” effect is likely due to the quality of the preschool program itself.
High quality preschools, like the program in North Carolina, must meet certain benchmarks, according to the National Institute for Early Education Research (NIEER). These include a low child-staff ratio, teachers and assistants with education and training in early childhood education, and comprehensive early learning standards.
But a high quality preschool education must go beyond the minimum standards, according to early childhood researchers. The National Association for the Education of Young Children (NAEYC) emphasizes the need for children to feel secure in their environments, have opportunities to explore and play, programs that promote intellectual, social, and physical development. Quality preschool programs, like the ones Governor Bullock is recommending funds for, can benefit children for years to come.
If Montana chooses to invest in early childhood education, as over 40 other states have already done, we too can provide our children with lifelong benefits. Earlier research on preschool has shown that attendance can lead to higher rates of high school graduation, college completion, and employment, as well as reduced rates of teen pregnancy and the need to use public assistance. Investing in early childhood education can also help strengthen our economy, by enabling parents to work while reducing the cost of childcare, providing jobs for early childhood educators, and helping to prepare our children for the day they will enter the workforce.
Although Governor Bullock’s proposed investment in early childhood education is less than half of what he proposed in the previous biennium due to lower revenue levels, this move to provide high quality opportunities for young children is a step in the right direction. We should not miss this opportunity to support our youngest Montanans.
For additional information on the benefits of early childhood education, be sure to read our reports on the topic. To follow future developments in the move for early childhood education, check back here for more updates.
Now that the elections are over, talk around the state will focus on the upcoming legislative session. Things are already heating up with the Governor’s budget release, and the Revenue and Transportation Interim Committee (RTIC) is meeting today to decide on the revenue estimate.
But before we get to what RTIC will decide on the revenue estimate, we thought we’d do a quick “brush up” on the agencies who are providing recommendations to legislators.
These are two agencies that folks should be familiar with as we discuss the budget –the Office of Budget and Program Planning and the Legislative Fiscal Division. The difference between OBPP and LFD can get very confusing, but both are very important when talking about the state budget.
Here is where they are similar.
Both are government agencies housed in the State Capitol. They both provide fiscal analysis on the state budget and provide feedback to Legislators and other interested parties.
Here is where they are different.
The head of the OBPP is the budget director who is appointed by and reports to the governor. The director of the LFD reports to the legislature and does not change when legislative leadership changes. Each is responsible to a different government entity, which can lead to different analysis and conclusions based on the information requested by their respective employers.
Throughout the year, both OBPP and LFD monitor the budget and make note of any changes in revenue or expenses. The LFD reports findings to the appropriate legislative committee and OBPP makes recommendations to the governor on any necessary changes.
Today, both agencies will present their estimates for where revenue will be for the next two years (the 2019 Biennium). Below is a chart that LFD has prepared, which shows where each agency is at in the amount of revenue for the next two years. The differences in their estimates this biennium are not nearly as significant in past sessions. OBPP projects revenue slightly below what LFD is projecting.
Each November in even years (because the legislature always meets in odd numbered years), RTIC prepares a revenue estimate “projected to be available for legislative appropriation.” This initial estimate is considered the official estimate for the legislative session until it is amended or adopted by both legislative chambers. In general, this estimate is introduced as House Joint Resolution 2 (HJR 2). After the session begins, the initial revenue estimate can be debated, amendments can be made, and both the House and Senate can approve the final revenue estimate.
While the process and the details can get pretty complicated, the revenue estimate is a critical component for how Montana will invest in our state. The estimate has real implications on families and communities across Montana. Stay tuned as we see how things play out today.
Every two years, the Governor of Montana releases their budget proposing investments to support our communities, including education, workforce development, and infrastructure. The budget becomes the marker for what the legislature will consider in the upcoming session. Yesterday, Governor Bullock released his proposed budget for the 2019 biennium (fiscal years 2018 and 2019). Over the course of the next week, we will highlight some of the key components of the budget and walk through some of the logistics on what happens now.
Today, we start with high-level overview of the budget and some of the tax fairness measures that will be up for discussion in the session.
But first, we need to set the stage for what the Governor was facing as he put together this biennium budget. Over the past year, the state has experienced lower revenue levels than previously projected. While the state initially estimated that we would begin the 2017 session with a strong ending fund balance of over $300 million, that amount now stands at around $120 million for the start of the session.
What has happened to cause such a shift? One of the primary reasons is lower oil and gas tax collections as a result of lower production and price. Montana has also seen a slight dip in individual income tax and corporate income tax collections. Both Legislative Fiscal Division and the Governor’s budget office have forecasted that this drop of revenue is short-term – both agencies anticipate revenue growth rate to begin to pick up again in FY2018 and FY2019. (It is worth noting that while revenue in Montana has been strong over the past 5 years, we have lost nearly a billion dollars in the past decade due to tax cuts aimed at wealthy households.)
To address the revenue drop – at least, in part – the Governor’s budget proposes a series targeted tax fairness measures that will also improve our current levels of revenue. Now, to be clear, the Governor’s budget also proposes across-the-board cuts to nearly every state agency. But by addressing the inadequate levels of revenue in the state, he’s been able to lessen the cuts and provide strategic investments in infrastructure, schools, quality child care and early childhood development, economic development in Indian Country, and an increase (albeit modest) in wages for state employees. We will dig into some of these sections on the expenditure side in future blogs. Today, we want to give everyone some background on the tax fairness measures the Governor is proposing.
Earlier this year, we released a report that provided an overview of levels of lost revenue in Montana as a result of tax cuts in 2003 that primarily went to the wealthiest households. Before 2003, Montana had ten income tax brackets with a top marginal rate of 11%. The 2003 legislation eliminated (or collapsed) nearly half of those tax brackets and lowered the top rate to 6.9%. Today, an individual working full-time at minimum wage (about $16,700 a year) now has the same top tax rate as someone making $1 million. The 2003 law also created a tax break for income coming from investments (as opposed to wages). Today, an individual who earns a living through wages is actually taxed at a higher rate than someone making the same amount of money but through investments, like selling stock. Montana is one of only nine states that provide this tax advantage to investors, and it cost the state nearly $30 million in 2013.
Overall, these tax cuts have cost the state hundreds of millions of dollars in lost revenue, with 55% of the benefit going to the wealthiest 1% of households. This effort also made Montana’s overall tax system more regressive. Lower-wage families pay a higher portion of their earnings in state and local taxes (6.1 – 6.3% of income) than highest-income households (4.7% of income).
The Governor’s budget restores a higher top tax bracket, but it will only apply to those with annual incomes over $500,000 (less than 1% of households). This top tax bracket would be set at 7.9%. The Governor has also proposed scaling back the tax advantages to wealthy investors – by capping the beneficial tax treatment on the first $1 million in annual capital gains income. The budget also proposes to bring about parity on the state deduction for federal taxes paid. Montana is one of only six states that allow taxpayers to take a state deduction for federal taxes paid. This expenditure benefits those who itemize their deductions (primarily higher-income households), and costs the state over $65 million in 2013. The deduction is capped ($5,000 for individual; $10,000 for couple), but that cap doesn’t apply to estates and trusts. This disparity in tax fairness costs the state roughly a million dollars a year. The budget would apply the deduction cap equally.
The Governor has also proposed providing some additional support for Montana’s working families. In Montana, our income tax system makes it even harder for many low-income, working families to provide for their basic needs. Montana begins taxing a two-parent family with two children at a lower annual income than nearly all other states in the country. We begin taxing such a family when their income reaches $13,480 per year (about 55 percent of the federal poverty level). And as mentioned above, when factoring in all state and local taxes, this family is likely paying a higher portion of their wages in taxes than the top 1% of households. To address this inequity and give working families a leg up, Congress created the federal earned income tax credit. Nearly half of states have followed suit by creating a similar state credit. The earned income credit is tied to work – a taxpayer must be working in order receive the credit, and the amount phases down as a family earned more. In 2015, this proposal passed with bipartisan votes in House Taxation Committee and second reading on the House. Nearly 80,000 working families in Montana would benefit from a state earned income credit.
The budget also includes proposal to make corporation income tax fairer and increases to some consumption taxes. Stay tuned for more information on those in blog posts later this month!
Incomes across the nation rose in 2015, according to the Census Bureau, with Montana making the biggest leap forward.
In 2014, the average Montana household had an income of $46,000. Last year, the median income was $49,500 – an increase of 6.8%, the largest in the country. The United States on average saw a rise in incomes of 3.8%.
This increase in earnings, coupled with a nationwide decline in poverty, is evidence that on the whole the economic forecast is growing sunnier.
At the same time, we still have a long way to go. One in five children in Montana under the age of 18 were living in poverty last year. For children under age 5, one in four live below the poverty line. There are still too many families working hard for low pay and struggling to afford the basics, like housing, child care, and transportation.
How can Montana keep moving in the right direction?
One of the best ways we can strengthen working families is through the Earned Income Tax Credit (EITC). The federal EITC, a credit which provides additional income support for low-income working families, is one of the most effective anti-poverty measures ever implemented. The federal EITC, coupled with the Child Tax Credit (CTC) has been able to lift 24,000 Montanans (including thousands of children) out of poverty each year from 2011 to 2013.
Enacting a state EITC would give a much-need boost to working families and our local economies. With a state benefit set at 10% of the federal EITC, families could receive a maximum of $627, which would then be spent in local businesses supporting our economy and helping families purchase necessary goods like children’s school supplies.
Now that we are beginning to benefit from a strengthening economy, we should make sure that all Montanans are able to see an improvement in their lives. Enacting a state EITC is an efficient and effective way to keep moving in the right direction.
We are pleased to announce that Dr. Avis Jones-DeWeever will be returning to Montana as the keynote speaker at our 2016 Legislative Summit.
Dr. Jones-DeWeever first came to Montana in 2014 and gave an incredibly powerful and inspirational speech to a room full of advocates from around the state. This year she will address our summit on December 14 at 6:30 pm at the Great Northern Hotel in Helena. We know she will help energize and motivate each of us as we plan for the 2017 Legislative Session.
As accomplished scholar, writer, and public speaker, Dr. Jones-DeWeever is an authority on race, gender, and the economy as well as women’s empowerment and leadership development. She is also a regular contributor to TV One’s NewsOne Now with Roland Martin, PBS’ To the Contrary, Sirius XM Radio’s The Agenda, and the Huffington Post.
Dr. Avis Jones-DeWeever is the Founder of the Exceptional Leadership Institute for Women, a global personal and professional development firm that helps established and aspiring entrepreneurs and executives experience accelerated success while building a holistic life they love. She’s also the President of Incite Unlimited, a Washington, DC-based boutique consulting firm specializing in diversity consulting, communications strategy and the development and implementation of impactful research.
Dr. Avis formerly served as the youngest ever Executive Director of the National Council of Negro Women, a historic membership organization touching the lives of over four million women of African descent worldwide. She’s had the honor of being a Featured Speaker before the World Bank. She currently conducts workshops and trainings on women’s career and entrepreneurial success on behalf of U.S. Embassies across the globe and helps corporations better design and implement strategies to maximize the power of diversity and inclusion at work as well as for the marketplace of today and tomorrow.
Dr. Jones-DeWeever held positions in a variety of highly esteemed organizations and governmental institutions including the Governor’s Office of Virginia, the Maryland State Legislature, the Congressional Black Caucus Foundation, the Joint Center for Political and Economic Studies and the Institute for Women’s Policy Research, and the National Council of Negro Women.
We are still accepting sponsorships of the summit. If you would like to become a sponsor contact Tara Jensen at 406-422-5848.
We learned this week that the Department of Revenue settled a property tax dispute with NorthWestern Energy, which will lower the overall market value of its centrally-assessed property from what DOR had originally certified as the value for 2016. We thought this would be a great opportunity to do a quick refresher course on property taxes, how they are assessed, and what this will mean for you and your community.
First, let’s go through some basic information on property taxes.
NorthWestern Energy is the state’s single largest property taxpayer, and the company is a centrally assessed taxpayer. Centrally assessed property is property owned by a company operating as a single entity and connected across county or state borders. This includes things like railroads, telecommunication lines, power lines, natural gas or oil transmission lines, and airlines.
How are property taxes calculated?
The Montana Department of Revenue is in charge of appraising – or valuing – property in the state every other year (for centrally assessed, it happens every year). This amount is called the market value. The Department determines the market value for the entire company and then assigns pieces of that value to counties and local jurisdictions based on the percent of property (or mileage) in that jurisdiction. The Legislature has assigned a tax rate to each type (or class) of property, including types of centrally assessed property. The market value is multiplied by the tax rate to determine the taxable value. On a local level, individual local taxing jurisdictions (this would be city and county governments, local school districts, and some smaller special districts, like fire districts) determine the amount of revenue it can levy (with strict limitations) to help fund schools and local government operations, called mill levies. A mill levy is a tax rate per thousands dollars of taxable value of property. Once the taxable value is determined, each local taxing jurisdiction applies the mill levies to the property’s taxable value to determine the property taxes owed.
How each local government and school determines the number of mills it can levy is based on complicated formulas, which are primarily tied to the local government’s or school district’s current budget, the overall tax base in the jurisdiction, and some slight modifications based on inflation and growth. In this case, the Department of Revenue had already certified the total tax base for each local taxing jurisdiction, so counties and local governments had already set their mills.
So what happened with NorthWestern property value?
Toward the end of 2014, Northwestern Energy purchased eleven hydro facilities from PPL Montana for about $870 million. NorthWestern has also reported increased acquisition of natural gas assets and a series of upgrades to its system. All of these changes impact the value of the company. The Department of Revenue took into account this additional value for purposes of 2016 property taxes, and certified taxable values for counties reflecting this increased value.
NorthWestern Energy informally disputed the Department of Revenue’s new market value, and from statements made in the press, it sounded like this could have been headed toward a formal protest, which bottles up a good portion of the tax owed and puts schools and local communities in a very tough spot. The final settlement on this year’s tax bill reduces NorthWestern Energy’s total tax bill by about 8 percent.
What does this mean for local communities?
For those taxing jurisdictions that include NorthWestern Energy property, they will see their overall tax base go down and will generate less property tax revenue (at the current level of mills). Of the 1,300 taxing jurisdictions in Montana, about 900 will be impacted by this settlement. The below chart shows the difference in taxes assessed, for all taxing jurisdictions located in that county. (This is not what the county government gets, but for sake of simplifying the 1,300 taxing jurisdictions, we’ve lumped them together by county to give a sense of where impact is greatest.) For most, the percent change in total taxes assessed is less than one percent. However, for a community or taxing jurisdiction with a large NorthWestern Energy presence, the impact is greater – between two and five percent change.
Because this settlement will have such an impact on some communities, the Department will allow local taxing jurisdictions to request a new certification of the tax base. In that case, it can then go back and change its mills to make up the loss in revenue. This would mean a potential increase in property taxes for all property taxpayers in the jurisdiction.
What are we hearing so far from communities?
Some local jurisdictions have said they will absorb the loss in revenue – through the use of reserves or possibly cutting back services. But for some communities, this loss of tax base will have real implications for budgets and how it provides services in the community, and it may need to request recertification to recoup much-needed revenue.
|Taxing Jurisdictions, by County||Total Taxes Assessed OLD||Total Taxes Assessed NEW||Total Loss in Taxes Assessed|
|Lewis & Clark||$12,317,248.25||$11,289,248.17||$1,028,000.07|