The 2017 Montana Legislature has been marked with concern over massive budgetary cuts and the major shortfall in revenue. While not all cuts can be avoided, the legislature should take a balanced approach to ensure the state can continue to invest in our families and communities. This includes ensuring we have adequate revenue in the state by putting in place common sense measures to ensuring wealthy corporations are paying their fair share.
Earlier this session, the House Taxation Committee heard House Bill 215, an act revising the rate of tax for certain oil and natural gas production. Reducing or even eliminating this tax break, called the oil and gas tax holiday, is one step toward balancing the budget and making sure corporations are paying their fair share. Unfortunately, the House Taxation Committee tabled HB 215 earlier this week.
The oil and gas tax holiday is a policy that allows newly drilled wells to be taxed at a substantially lower tax rate during the beginning of production. Wells, however, produce significantly higher amounts of oil and gas at the start of usage, which means these oil companies receive this tax break during the most profitable period of extraction. While some argued these tax holidays attract developers and increase revenue, the data clearly shows such tax holidays only suppress potential state revenue and does little to increase developer interest.
Montana, despite its lower tax policies, is not outperforming neighbors with higher tax policies. Wyoming, New Mexico, and North Dakota all have higher taxation rates for oil companies. All three states have consistently out produced Montana in terms of barrelage. Oil and gas companies do not seek to drill based upon the tax policy of that area. They drill where there are natural resources available.
Montana has lost millions of dollars in revenue due to this tax policy. From 2008 to 2014, the tax holiday cost the state and counties $265 million in revenue. This money could have been used to pay for public services, such as schools and roads. In oil-producing counties, especially those near the Bakken region, they have been forced to deal with increased demand on their infrastructure, but no increased revenue to update such necessary services.
HB 215 proposes to increase in Montana’s production tax would to 4.5 percent, which is still lower than the national standard of 9.26 percent. But even this small step is crucial in insuring our legislature can make strategic investments in Montana communities.
The increased revenue could be used to assist in failing infrastructure, public services, and our schools and universities. Oil and industry should not get a free ride in this state. We all need to pay our fair share especially when so many Montanans are struggling with significant budget cuts.
This week, MBPC released a new report providing an overview of early actions so far on the state budget, and the damaging cuts that have already been proposed. In the first couple weeks of the session, Legislators took early steps to make significant cuts to the state budget, representing more than $449 million in total funds. A good portion of these cuts will be in federal matching funds in critical programs for the state.
Montana’s budget and economy rely heavily on federal funding that assists us in our collective efforts to pave our roads, build and maintain our bridges, prepare our national guard, train our workforce, and help keep vulnerable Montanans safe and healthy in their homes and communities. The bulk of the federal dollars that get appropriated through the state budget fund infrastructure, programs, and services in the Department of Transportation (DOT) and the Department of Public Health and Human Services (DPHHS). These funds are usually under the condition that the state meets certain program requirements and matches the federal funding with a state share. Overall, the state budget is supported by over $4 billion of federal funding, roughly 42% of the entire state budget.
As we’ve written previously, this year state legislators and the governor are facing a short-term but significant drop in state general fund revenue. To deal with this decline, the governor’s proposed budget included a combination of difficult cuts to state services and targeted revenue increases that bring more fairness to our tax system and ensure adequate levels of revenue. Unfortunately, some legislative leaders have indicated a dangerous unwillingness to accept this balanced approach and have instead started the budget process by imposing additional deep, unnecessary, and harmful cuts.
Relying entirely on cuts, preliminary actions by the legislative joint subcommittees have slashed over $190 million in state spending ($114 million general fund; $77 million state special revenue) on everything from services for seniors and people with disabilities to our tribal, two-year, and four-year colleges and universities (likely resulting in doubled-digit tuition increases).
What do these state cuts have to do with federal funding flowing into the state and our communities?
Well, in key portions of the budget, like DPHHS and DOT, a lack of state funding means even more dramatic cuts in federal funding – much deeper than many people realize. So in making their unnecessarily severe cuts to state spending of over $190 million, legislators and Montana will lose out on an additional $254 million in matching federal funds. In total, this hit to the state budget is nearly half a billion dollars.
We know that this is more than just dollars to the state. If not restored, these unnecessary cuts will impact people and communities in every corner of Montana.
For example, DPHHS partners with community providers to run a Medicaid program called Community First Choice, for seniors and people with disabilities who need assistance with daily living in order to stay in their homes and avoid institutional settings like nursing homes. Through Community First Choice, Montanans can get help with activities such as eating, bathing, taking medicine, and getting to medical appointments. When Montana provides these services to the seniors and people with disabilities who need them, the state only has to pay 29% of the cost. The federal government pays for the other 71%. It’s a good deal for seniors who get to stay in their homes and a good deal for taxpayers as people avoid costlier institutional care.
The division responsible for running Community First Choice and other programs and services for seniors and people with disabilities is facing over $17 million in state funding cuts that would be accompanied by almost $34 million in lost federal funds for a total loss of $51 million dollars. These cuts are irresponsible to seniors, the state budget, our communities, and our economy.
This is just one of many examples of essential state services being cut so severely in an attempt to balance the budget. You can read a summary of total cuts adopted by the Legislative Committee in starting motions here.
We know that some cuts will be inevitable. However, as the legislature continues to evaluate the budget, they must look at ways to responsibly raise revenue and minimize unnecessary losses of federal funding.
An Early Look at the 2019 Biennial Budget: Montana Needs a Balanced Approach to the State’s Revenue Challenges.
Montanans care deeply about the well being of their families and communities. They want a hopeful and prosperous future for their children and neighbors, safe communities, and a strong state economy that supports quality jobs and thriving businesses. As Montanans, we have come together at many pivotal moments in our state’s history to collectively build toward these goals. Together, we have considered not only what we can afford to accomplish today, but also the investments we must make
to protect our future.
During Montana’s 2017 legislative session, elected officials should be focused on wisely increasing and using the state’s resources to help build opportunities and a path to prosperity for all Montanans through the budget creation process. A recent, but short-term, decline in state revenue, caused primarily by declines in corporate income and oil and natural gas taxes and slower than anticipated growth in individual income taxes, has created significant challenges for the state’s elected officials.
The proposed executive budget creates a responsible blueprint for addressing these challenges through a balanced approach that includes a combination of difficult cuts and targeted revenue enhancers that bring more tax fairness to our system and ensure adequate levels of revenue. Unfortunately, key legislative leaders have indicated a dangerous unwillingness to accept this balanced approach and have instead started the budget process by imposing additional deep, unnecessary, and harmful cuts.
To shed light on the depth of these cuts and the programs and people they will impact, MBPC wrote a report – An Early Look at the 2019 Biennial Budget: Montana Needs a Balanced Approach to the State’s Revenue Challenges.
Supporting information can be found in two supporting documents.
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.
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!
A new report released today takes a look at states’ tax expenditures that benefit private K-12 schools, revealing that some wealthy taxpayers can actually turn a profit from these tax credits. You’ll recall that the Montana legislature passed one of these measures last session, which went into law in 2015. The bill (SB 410) allows a taxpayer to take a tax credit for a donation to an organization that provides scholarships to private school students. MBPC released a report raising concerns about this – and several other proposals – that divert state taxpayer dollars from investments in our quality public schools to private schools.
But the report by the Institute on Taxation and Economic Policy (ITEP) does more than just raise concerns about taxpayer dollars benefiting private institutions – it reveals that some high-income taxpayers are actually able to turn a profit as a result of this credit. This means that for some wealthy taxpayers, they can actually get a total tax cut that exceeds the size of the original donation.
How is this possible?
ITEP goes into a lot of detail on how this scheme works. In summary, the Montana tax credit is structured to reimburse a taxpayer for 100 percent of the cost of the donation (in Montana, capped at $150, or $300 for a married couple). In other words, for a household with tax liability, a donation up to the cap essentially costs nothing to the donor and is fully-funded by Montana taxpayers. To add to that, IRS also allows taxpayers to take a federal charitable deduction for their private school donation.
While most taxpayers would have a corresponding reduction in their federal deduction for state income taxes paid (and it would then be a wash), taxpayers who are subject to the federal Alternative Minimum Tax (AMT) are under different rules and can use the charitable deduction to lower tax liability and “double-dip” on the tax benefit of the donation. Depending on their marginal tax rate, these households could receive up to $105 in profit on the donation. In Montana, nearly 10,000 taxpayers are subject to the federal AMT, and about 80 percent of those have incomes more than $200,000 a year.
This tax scheme doesn’t benefit students or our education system, but instead benefits high-income households that can take advantage of a sophisticated tax planning technique.
Montana is not alone. Ten other states have similar “profit-making schemes” structured as private school tax credits. In fact, the levels of profit possible in some states are staggering. As ITEP notes, the cap on Montana’s credit limits the amount that one can profit – but profit, nonetheless.
Montana taxpayers and the state legislature should take note of how this credit can be manipulated by a small percentage of wealthy households and consider repeal (or at the very least, refrain from expanding this terrible policy).
A few weeks ago, the Montana Budget and Policy Center released its new report – The Montana We Could Be. The report details how the income tax cuts passed in 2003, which largely benefited wealthiest households – has resulted in millions in lost revenue. This revenue could have gone to targeted investments into our communities. One area of focus is the ongoing needs in infrastructure – maintaining roads and bridges, water systems, and quality schools. As shown in the chart, the needs far exceed current levels of funding. Last session, the legislature failed to pass a bipartisan infrastructure package, which would have provided $150 million for new infrastructure projects.
As another school year is about to start, several long-time teachers – residing in three Montana communities – highlighted the need for investments in education, including school facilities. Teachers across Montana do an incredible job each day ensuring that our children are given the opportunity to succeed in this state. But too often, educators are faced with teaching our next generations in facilities that fail to provide the 21st Century learning environment that our children need to succeed in today’s world. Even worse – basic maintenance issues continue to stack up – leaking roofs, impaired heating systems, and electrical problems. More than two-thirds of Montana’s schools were constructed before 1970, and a report from 2008 shows overall deferred maintenance needs exceeds $900 million.
We can and should do better. As our report and yesterday’s op-ed highlights, Montana is faced with a tight budget, in part, due to tax cuts put in place over a decade ago. These tax cuts – billed as a way to grow the economy – resulted in deep tax cuts for the wealthiest households, while the vast majority of Montana families saw little or no benefit. Over the past decade, these tax cuts have cost the state nearly $1 billion in lost revenue – revenue that could have been invested in our children and our communities.
Meanwhile, local cities and towns – and local property taxpayers – are left holding the bag to ensure our neighborhoods and schools can thrive. While state K-12 funding has increased over the past two decades, property tax revenue used to pay for education has increased at a much greater rate.
Over the years, Montana families and our communities have stepped up to ensure our children can succeed. We know our entire state moves forward when we have a quality educational system. However, we also must ensure everyone is paying their fair share and carrying their weight. It is time to reform our tax system to ensure the wealthy are paying their fair share, so that we can invest in a brighter future for Montana.
Reforming Temporary Assistance for Needy Families (TANF) – TANF is a federal program that provides a safety net for families living in severe poverty. For the most part, TANF provides families with cash assistance so they can meet their basic needs, like paying for rent or buying groceries. However, while TANF has many flaws, it is an example of how to look at services from a 2Gen angle. For example, TANF includes both work supports for parents and subsidized child care for children. But policymakers can do more to improve TANF, and we’re pleased to see the President’s budget includes some of those changes.
Based on the proposed budget, the federal TANF program stands to benefit in two major ways. First, because TANF funding is not adjusted yearly to account for inflation, funding has lost up to 30% of its value since the mid 1990s. To make up for some of this lost value, President Obama’s budget proposes to invest an additional $8 billion dollars into the program over the next five years
Second, the budget proposes to shift up to $100 million in TANF funds to better support core programs, including work supports and subsidized child care for parents and families, and mental health and educational activities for children.
Reducing Child Poverty in Rural Areas – To combat poverty in rural communities throughout America, the budget also proposes an investment in 2Gen initiatives that will align early childhood education programs for children and workforce development programs for their parents, in an effort to put families on track to economic security. This includes $16 million to support early childhood education and parental involvement programs in schools funded by the Bureau of Indian Education (BIE) and serving American Indian families.
These are just a few of the investments that President Obama’s 2017 budget proposes and it is the first time a president’s budget has specifically requested funding for 2Gen initiatives. We hope that Congress seriously considers these requests and recognize that these programs strengthen families’ educational, economic, social, and health outcomes from one generation to the next.
This year, the Montana Legislature empowered victims of domestic violence, sexual assault and stalking to make safe decisions without risking economic devastation. House Bill 306, introduced by Representative Jenny Eck, will allow victims (men and women alike) who must leave their jobs to collect unemployment insurance for the same length of time afforded to other workers. Often victims of domestic violence, sexual assault and stalking must leave their jobs in order to protect themselves and their children. Tomorrow, Governor Steve Bullock will visit the Friendship Center, the Helena-based domestic violence shelter, where he will sign the legislation into law.
Unemployment Insurance (UI) was designed to help workers who have lost their job through ‘no fault of their own. Workers who have been laid off or lost their jobs because of natural disaster receive UI for up to 28 weeks. However until now, victims of domestic violence, sexual assault and stalking were only entitled to receive 10 weeks of UI. This inequity was particularly glaring because usually victims do not just have to find a new job, but also relocate their entire lives. Most states provide UI benefits to victims of domestic violence, but Montana was the only state that limited benefits to fewer weeks than the normal limit.
Finding a new, safe community, housing, schools for their children, and a new job can take time. A much longer time than only finding a new job. This bill will provide victims peace of mind to know they will have some income during this difficult transition. Economic insecurity is one of the main reasons that women remain in an abusive relationship.
There is not widespread demand for this benefit, but it is important nonetheless. In 2014 only 22 individual took advantage of the limited weeks available. But for those who receive it, the benefit can be a lifesaver. Nearly 33% of women killed in a U.S. workplace were killed by a current or former intimate partner, according to one peer-reviewed study.
The passage of HB 306 is the first step toward reforming UI so that it meets the needs of today’s workers. This summer we released a report highlighting the large disparities in the utilization of UI by Montana workers. Women, Native Americans and those in low wage jobs are less likely to receive UI when they lose a job through ‘no fault of their own.’ Montana should consider expanding access to UI for those who leave their jobs for compelling family reasons, including:
- To care for a sick family member or for personal illness,
- Because a spouse relocates (currently only available when the spouse is a member of the military).
We commend Rep. Eck, the legislature, our partners at the Montana Coalition Against Domestic and Sexual Violence, and the Governor for taking an important step to supporting workers and victims of domestic violence. Supporting workers when work stops is vital to our workers, families and economy.
Sarah Wilhelm has worked for 10 years providing public policy analysis and lobbying for shared prosperity, fair taxation and adequate revenue generation at Voices for Utah Children, MBPC, and as an independent consultant.