Today at 1 pm at the State Capitol, CSKT Tribal Chairman Dr. Vernon Finley will deliver this year’s State of the Tribal Nations Address to members of both chambers of the state legislature, as well as top state officials. This occasion provides us with a great reason to review the meaningful developments in the relationship between tribal nations and the state of Montana.*
1951 – Montana Legislature creates the Coordinator of Indian Affairs position in recognition of the need for American Indians to communicate with state government.
1972 – Montana Constitution is revised in its entirety and includes the addition of Article 10, Section 1(2), which states that “the state recognizes the distinct and unique cultural heritage of the American Indians and is committed in its educational goals to the preservation of their cultural integrity.”
1981 – Montana Legislature enacts the State-Tribal Cooperative Agreements Act, authorizing public agencies to enter into cooperative agreements with tribal governments.
1989 – Montana Legislature establishes the Committee on Indian Affairs, now called the State Tribal Relations Interim Committee to act as a liaison with tribal governments, encourage state-tribal and local-tribal cooperation, propose legislation, conduct interim studies and report its findings and make recommendations to the legislature.
1995 – State Tribal Relations Interim Committee publishes The Tribal Nations of Montana: A Handbook for Legislators to educate legislators about tribal culture, sovereignty, and government policies related to American Indians in Montana.
1995 – Montana Legislature passes House Bill 544, sponsored by Representative Carley Tuss and codified as MCA 20-25-428, to appropriate $1.4 million to go towards reimbursing tribal colleges for educational services provided to resident non-Indian students. This would later become known as the Tribal College Assistance Program.
1997 – Montana Legislature passes Senate Bill 84, sponsored by Senator Greg Jergeson, to make permanent the Tribal College Assistance Program, though the funding distribution remains contingent upon a line item appropriation.
1999 – Montana Legislature passes the Native American Economic Development Act, launching the State Tribal Economic Development (STED) Commission. The commission is comprised of eleven representatives from the eight tribal governments in Montana is responsible for assisting, promoting, developing, and proposing recommendations for accelerating on-reservation economic development.
2003 – Montana Legislature passes House Bill 608, sponsored by Representative Jonathan Windy Boy and codified as MCA 2-15-142, 143. HB 608 creates mechanisms for holding the state accountable to Indian tribes and formulates the principles that should guide the state-tribal governmental relationship.
2005 – Governor Brian Schweitzer creates – via his first executive order – the Governor’s American Indian Nations Council (GAIN) to ensure that all activities conducted between tribal nations and the state are conducted in a government-to-government manner and that state agency activities with tribes include tribal consultation.
2005 – Governor Brian Schweitzer’s administration creates the GAIN database to track the extent of the state’s involvement with tribal governments.
2005 – Governor Brian Schweitzer convenes the first-ever state-sponsored meeting of tribal leaders, regional directors of the Bureau of Indian Affairs and Indian Health Service, and key members of his staff and state agencies to begin creating innovative solutions to some of the issues identified as priorities by tribal nations in Montana.
2005 – Montana Legislature approves Governor Brian Schweitzer’s executive budget request for $3.2 million for fulfilling the state constitutional mandate articulated in Article 10, Section 1(2), today known as Indian Education for All.
2005 – Montana Legislature approves Governor Brian Schweitzer’s executive budget request of $1 million for Indian Country economic development to support tribal nations in taking advantage of existing and potential economic opportunities on their reservations. The program has since been expanded and is now called the Indian Country Economic Development (ICED) program and remains contingent upon a line item appropriation.
2006 – Governor Brian Schweitzer grants official state recognition to the Little Shell Tribe, a declaration that honored the 2003 landmark Montana Supreme Court ruling in Koke v. Little Shell Tribe.
2007 – Montana Legislature makes permanent the State Tribal Economic Development (STED) Commission.
2009 – Montana Legislature passes House Bill 158, sponsored by Representative Shannon Augare, to allow tribal governments the ability to access all economic development grants and loans available under the Big Sky Economic Development Trust Fund, originally created in 2005.
2009 – Montana Legislature passes House Bill 193, sponsored by Representative Shannon Augare and codified as MCA 2-15-102, to change the title of the Coordinator of Indian Affairs to Director of Indian Affairs, making the position commensurate with other positions in the Governor’s cabinet.
2010 – Governor Brian Schweitzer hosts the first Tribal Leaders Summit, now held annually, to encourage state-tribal dialogue and to strengthen the government-to-government relationship between the state and tribes.
2013 – Montana Legislature passes Senate Bill 342, sponsored by Senator Jonathan Windy Boy and codified as MCA 20-9-537, to provide $2 million for the Montana Indian Language Preservation Pilot Program, to preserve and perpetuate tribal languages and creating a historic partnership between the state, tribal educators, organizations and governments.
2014 – Governor Steve Bullock launches his Main Street Montana in Indian Country initiative to work with tribal governments to increase educational and workforce development opportunities, develop reservation infrastructure, increase access to capital, and promote economic growth on reservations.
2015 – Montana Legislature passes House Bill 559, sponsored by Representative George Kipp, III, which appropriates an additional $1.5 million to continue the accomplishments of the Montana Indian Language Program into the 2017 biennium.
2015 – Montana Legislature passes Senate Bill 307, sponsored by Senator Sharon Stewart-Peregoy, to require the state to recognize tribal business entities organized under the laws of a federally recognized tribe in Montana.
2016 – Governor Steve Bullock creates the Office of American Indian Health to work in close collaboration with tribes to address health disparities among the American Indian population in Montana and bring about health equity.
The relationship between the state and the eight tribal governments in Montana continues to progress. Although this relationship can be contentious at times, we are at the forefront in terms of tribes and states working together to advance their common goals of meeting the basic needs of their shared citizens and strengthening their shared economies. Tune in today for Chairman Finley’s address at 1:00pm in the House chambers or listen to it live here.
*Note: There are three criteria for inclusion on this timeline. The relationship development must: (1) impact all the tribes in Montana; (2) be new (versus a continuation of support for a previous development); and (3) concern tribes and not individual tribal members.
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.
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!