Report Preview: Taxes in Indian Country

Few people understand the nuances of how taxes work in Indian Country. As a result, taxation authority in Indian Country has been one of the most litigated issues between tribes, states, and local governments. Furthermore, there is much misinformation and many missed opportunities for innovative and mutually beneficial inter-governmental collaborations that respect tribal sovereignty.

MBPC is pleased to bring you a series of Policy Basics reports that break down this complex issue. This blog provides an overview of Part 1 and the taxes that individual American Indians in Montana pay. You can get all the details by reading our full report, which will be released early next week. Tribal governments and the taxes they pay and assess will be the focus of Part 2, which will be released later this fall.

Taxes and Individual Tribal Members

According to the U.S. Constitution’s supremacy clause, the Constitution, federal laws, and treaties override conflicting state laws. Additionally, a variety of U.S. Supreme Court rulings have recognized the absolute power of Congress to regulate Indian affairs and property. Altogether, this means that in most instances state and local governments cannot tax tribal members, tribal governments, or their property. However, tribal members living or working off their own reservation are subject to state and local tax laws.

In generally, individual tribal members are subject to federal income taxes. American Indians are also subject to state income taxes if they live or work off the reservation. Regardless of residence, American Indians pay into social security and Medicare, referred to as Federal Insurance Contributions Act, or FICA, taxes.

The U.S. Supreme Court has ruled that tribal members must pay state and local property taxes on their privately owned land held in fee simple status, even if their property is located on their reservation. Likewise, tribal members are also subject to all state motor vehicle taxes if they live off the reservation where they are enrolled. Regardless of residence, all tribal members in Montana must pay vehicle registration fees consisting of vehicle registration, vehicle disposal, weed control, county motor vehicle computer, and where applicable, the gross vehicle weight fees.

Tribal and state governments have each asserted their right to collect excise taxes on reservations, leading to years of costly litigation and tension. As a result, the state of Montana and the seven reservation tribal governments have negotiated a variety of revenue sharing agreements for excise taxes on alcohol, tobacco, and fuel (and in once instance oil and natural gas taxes). The goal of these agreements is to “prevent the possibility of dual taxation by governments while promoting state, local, and tribal economic development.”

Therefore, American Indians in Montana pay excise (or sales) taxes on alcohol, tobacco, and fuel that they purchase. The single exception is members of the Confederated Salish and Kootenai Tribes (CSKT), who do not pay the state tax on cigarettes they purchase on the Flathead Reservation. Because of this, the CSKT government does not receive a remittance share of this particular tax from the state; instead, they receive a limited number of tax-free cigarettes according to quotas set by Montana law. However, any sales above the quota are taxed.

Below is a visual snapshot of the taxes that individual American Indians in Montana pay. The yes-no answers paint a clear picture of what in reality is a complex statutory issue that is still being worked out between governments, Congress, and the courts.

AI taxes

 

 

 

 

 

 

 

 

It is important for policymakers and the broader public to understand how taxes work in Indian Country. This can reduce tensions and help maximize the potential for innovative and mutually beneficial inter-governmental collaborations that respect tribal sovereignty. Check out our blog early next week for Part 1 and stay tuned for more information on taxes and tribal governments, coming this fall in Part 2.

ACA Repeal: What it means for Montana

Today, we released a new comprehensive report on the importance of Medicaid for access to health services for Montana children. Roughly half (51%) of Medicaid enrollees in Montana are children, and any effort to cap and cut Medicaid will most certainly impact access to affordable health care for children in the state.

That said recent press indicates that U.S. Senate Majority Leader Mitch McConnell may pivot to again forcing a vote on a full repeal of the Affordable Care Act (ACA) without a replacement in place. So while we are excited about our new report, we suggest dusting off our report from earlier this year, about what it means for Montana to repeal ACA without a replacement. Analysis shows that roughly 142,000 more Montanans would be uninsured.

Assuming Senator McConnell uses a similar version as the bill that passed in 2015, here are the highlights of the ACA repeal’s impact on Americans’ access to health insurance:

Completely end Montana’s bipartisan Medicaid expansion as of January 1, 2020. Montana’s Medicaid expansion has provided health insurance to nearly 80,000 Montanans. There would be no phase out. There would be no statutory option for states to keep their expansions. And, as Senator Daines has called for in the past, there would be no “place to land” for the tens of thousands of working, low-income Montanans who have received affordable coverage though expansion.

Completely eliminate the ACA’s tax credits and cost sharing subsidies – with no replacement – as of January 1, 2020. As of January 31, 2017, 44,415 Montanans have accessed tax credits and cost sharing subsidies, making health insurance affordable. These folks would be left with no help starting in two years.

Immediately repeal the ACA’s high-income and corporate taxes, cutting taxes for millionaires by over $50,000 per year.

What does this mean for Americans’ access to coverage? Based on CBO’s analysis of the previously proposed repeal bill:

  • Coverage: 18 million people would lose coverage in 2018, 27 million would lose coverage by the early 2020s, and 32 million would lose coverage by 2026. These losses reflect both elimination of Medicaid expansion and the virtual collapse of the individual market, as outlined below.
  • Individual market premiums: Compared to current law, premiums would be 20-25 percent higher in the first year, 50 percent higher by the early 2020s, and would double by 2026.
  • Individual market stability: By the early 2020s, about half of the U.S. population would live in areas with no individual market insurers, rising to 75 percent by 2026. Essentially, the individual market would collapse throughout most of the country.

Montana Budget Not Ready for Prime-Time

With less than two weeks remaining in the legislative session, the state budget is far from ready for the governor’s signature. Last week, legislative fiscal division released its updated status sheet. Factoring in the current spending bills, tax bills, current revenue estimate, and the budget, the legislature is leaving the state with a mere $162 million in projected ending fund balance. That current level is $138 million below the long-standing precedent for a $300 million ending fund balance. Perhaps even more shocking, it’s $38 million below some Republicans’ counter-proposal for a much lower $200 million ending fund balance.

Thus far, the legislature has:

  • Failed to support nearly all of the governor’s tax fairness measures that would raise needed general fund revenue and provide a pathway for a balanced solution to the recent revenue downturn;
  • Left significant cuts to the budget, particularly in the areas of higher education and social service programs for our seniors and Montanans with disabilities;
  • Passed a myriad of new spending bills that risk leaving an insufficient ending fund balance for dealing with an economic downturn or lower-than-expected revenues; and
  • Increased the revenue estimate simply as a mechanism for balancing the budget.

Any one of these problems should cause concern for the governor and any Montanans who care about the budget and the essential services it funds. The combination of the current problems is simply unacceptable and unsustainable.

The legislature has so far failed to make the difficult choices necessary for a responsible budget. As has been true all session, they have two choices: make further cuts to the budget and other spending priorities or raise revenue. MBPC believes only one responsible choice remains: raising revenue. With significant cuts already proposed by the governor and deeper cuts adopted by the legislature, the legislature must, finally, engage in a meaningful conversation about sensible ways to raise revenue. Options include listening to the dozens of health care professionals and organizations who have asked for an increase in the tobacco tax (which not only raises revenue but also is proven to reduce smoking and decrease health costs) or making sure that millionaires in Montana are paying their fair share for the services and infrastructure that make our families and communities stronger.

It may be that legislators are planning to force the governor to make the additional cuts to popular and essential programs. The governor did his job in proposing a responsible budget, one that included both difficult budgetary cuts but also adequate levels of revenue. Legislators were elected to make the same kinds of hard decisions. If they are going to reject every general fund revenue increase, they need to find other solutions for putting a responsible budget on the governor’s desk.

Equal Pay Day and EITC

Now that spring is in the air, 2016 seems like a long time ago. But it took until today – April 4th – for women to finally earn as much money as a man did in 2016. With such a significant pay disparity between men and women, women have to work three months longer into the next year to make the same amount that men make in a single year.

In Montana, women still are paid only about 67 cents for every dollar a man earns in spite of the fact that more women than ever are the primary breadwinner. In about 40 percent of U.S. households with children under age 18, mothers are the sole or primary breadwinner. For female-headed households, it hurts a lot more when women aren’t paid fairly.

The good news is that a state Earned Income Tax Credit (EITC) could help boost the pay of thousands of low income women. The legislature is considering HB391, which would create a state version of the federal EITC, a tax credit paid to working adults. The Center on Budget and Policy Priorities estimates that 22,000 single mothers in Montana would benefit from receiving the EITC.*

But the EITC does far more than just provide a little extra cash for families. Studies show that the EITC has encouraged large numbers of single mothers to increase the amount of hours they work, and reduce their reliance on social safety net programs. In turn, this increase in hours worked leads to higher wage growth down the road, as well as greater Social Security retirement benefits. The EITC’s impact on employment actually doubles the anti-poverty effect of the EITC for families.

Furthermore, the benefits of the EITC for women aren’t purely financial. Research has also shown that it reduces the rate of low-weight and premature births and improves the health indicators of the mothers. In these studies, women who have received increases in their EITC were more likely to receive prenatal care.

For thousands of workers in Montana, a state EITC could have significant impacts for parents and children alike. In total, 80,000 low- and moderate-income families in Montana stand to benefit from this credit. But for 22,000 single mothers, the EITC can provide additional important benefits that will help improve the stability and health of the entire family.

All hard-working Montana families should get the pay they deserve. While we may have a long way to go in order to minimize the disparity in pay between men and women, a state EITC can be a positive step to reduce the harm this gap causes. Our state legislators should enact a state EITC and improve the lives of thousands of working mothers and their children.

 

* CBPP estimates based on data from IRS, unpublished data from the Brookings Metropolitan Policy Program, and CBPP analysis of the Census Bureau’s March 2010-March 2014 Current Population Survey

A Budget Built on a House of Cards?

Today, the legislative fiscal division (LFD) released its weekly general fund status sheet, providing us a glimpse at where we stand with general fund revenue, projected spending, and the resulting ending fund balance. As the legislature takes actions on bills, including HB 2, LFD updates the status sheet to reflect these changes in spending and revenue bills.

This past week, the Senate Finance & Claims Committee took action on HB 2, adding back some of the cuts made in the House. In total, the Committee restored about $10 million in general funds, $32 million in state special revenue, and $12 million in federal funds.

The status sheet answers a big question: is restoration of these cuts sustainable under the current levels of revenue? The answer: no.

As of today, legislative fiscal division estimates an ending fund balance of $154 million at the end of the next biennium. The status sheets factors in SB 354 to raise the tobacco tax, which passed the Senate this week. This measure raises nearly $69 million in general fund revenue, but still needs to pass the House to become a reality. Even factoring passage of SB 354, we are $145 million below the Governor’s requirement of a $300 million ending fund balance. The ending fund balance is important because it is Montana’s only mechanism for protecting against revenue volatility and unexpected emergencies. This is Montana’s savings account.

Those who have been worried about the budget cuts – including cuts to Medicaid services for seniors and people with disabilities, cuts in higher education, and cuts to programs essential for our emergency responders in local communities – still have work to do. Higher education still faces over $11 million in cuts. Just as importantly, the budget still has several important stages to go and cuts can still be reinstated or increased. As it stands now, the budget is built on a house of cards that could collapse at any moment. We need to continue to be diligent in urging policymakers to pass new revenue and update the revenue estimate, to ensure adequate resources to fund programs essential to our communities.

Want to know more about actions taken this past week on the budget? Check out our quick summary here.

What is the Earned Income Credit?

This session, the Montana legislature is considering legislation to create a state earned income credit – the Working Families Credit – to provide assistance for low- and moderate-income working families, modeled after the successful federal Earned Income Tax Credit (EITC). Doing so could help boost incomes for thousands Montana working families. Today we are going to give a little more background on what the EITC is, and how it works.

History

The EITC was first created in the 1970s, but was expanded significantly in the 1980s by President Ronald Reagan, who called it the “best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.” The measure had broad bipartisan support because it improves the lives of low-income families while encouraging work. In 2013, the federal EITC lifted more than 6.2 million people, including 3.2 million children, out of poverty.

How it works

The credit is based on the amount of money that an individual earns, helping to encourage work. The credit begins with the first dollar earned, increasing before reaching a maximum amount where it plateaus, and then tapers off. This model helps to encourage workers to increase their hours and wages, without punishing them for earning too much. The credit also increases with the number of children in a family, maxing out at three children. Low-income workers without children are eligible for a very small credit, but majority of the benefit goes to adults with children.

Figure 1 _EITC. 3-17 (1)

The federal EITC in Montana

In Montana, 80,000 families receive the federal EITC, with an average amount of $2,168. Rural counties especially benefit from the credit – 21 percent of federal households in rural counties receive the EITC, compared to 17 percent in the rest of the state. In 2014, the federal EITC brought in $173 million into Montana’s economy.

State EITCs across the nation

Because the EITC has been so successful at reducing poverty and encouraging work, 26 states and D.C. have enacted state versions set at a percent of the federal credit. The state credit helps to further support for low-income working families.

Montana’s families would likewise benefit from the Montana Working Families Credit. Two bills are making their way through the process – HB 391 and SB 156. Our legislature should act now to help improve the incomes of working families across the state.

Legislative Status Sheet: A Glimpse at Revenue and Spending

This week, the Legislative Fiscal Division (LFD) released the first general fund status sheet for the 2017 legislative session. The status sheet provides a glimpse at where we stand with revenue, projected spending, and the resulting ending fund balance, factoring in actions taken so far by the legislature. Right now, we sit roughly $140 million below the goal of a $300 million ending fund balance. Unless legislators get serious about the need for additional revenue, we could expect even further cuts (on top of the devastating cuts already taken).

Over the past month of session, subcommittees in charge of various parts of the budget have been taking action on the main budget bill – HB 2. These early actions on the budget included deep cuts to nearly all state agencies, including cuts to social service programs for seniors, the disabled, and our most vulnerable families, as well as cuts to higher education that will likely result in double-digit tuition increases for Montana students and families. When factoring both state cuts and corresponding federal dollars we lose, the legislature’s initial actions represent a total $449 million in cuts.

While subcommittees have taken action to add back some funding, most of these additions are “present law adjustments” and are simply a reflection of inflationary needs to continue the current level of services in the next biennium. To be clear: the cuts made in subcommittees will have a serious impact on our communities and families across the state.

The second page of the status sheet provides the general fund balance sheet. It shows that we begin the session with a beginning fund balance of $110 million. As we’ve talked about previously, lower revenue levels than projected have resulted in a much lower beginning fund balance than previously anticipated. The balance sheet then shows the amount of revenue projected to come in during the next biennium. The balance sheet also provides an estimate of expenditures that the legislature has approved thus far. This includes subcommittee action on HB 2, bills on which the legislature has taken positive action, and one-time-only spending approved so far. LFD will update the general fund status sheet on a weekly basis, take into account further changes to HB 2 and bills passing or failing. Right now, when you factor in the projected revenue minus the expenditures passed thus far, we finish the next biennium with an ending fund balance of $159 million.

We are not yet halfway through the session, but Montana families should be concerned about the deep cuts already taken to the state budget and how that will impact our seniors, students, and services vital to our communities. The good news is that there is still time. The Legislature has 49 more days to identify new revenue in the state and restore the deep and potentially devastating cuts they have made to the budget. It is possible in the state of Montana to have a balanced budget, fund the services that help citizens and communities across the state, and leave a healthy ending fund balance. We can do all of this by ensuing that the super wealthy and out-of-state corporations are paying their fair share.

We Need a State Earned Income Tax Credit. Here’s Why.

We need a state Earned Income Tax Credit. Here’s Why.

A state Earned Income Tax Credit (EITC), like the federal credit, could go a long way to helping Montana families meet their basic needs. But it could also do a lot to improve the fairness of our tax code.

Low- and moderate-income families in Montana pay a higher percentage of their income in taxes than do the wealthiest families. The lowest income one-fifth of Montanans pay 6.1 percent of their income in taxes, whereas the top 20 percent pays far less. In fact, the top one percent pays just 4.7 percent of their income in taxes.

While Montana’s income tax is progressive, meaning the more you earn the larger percentage of your income you pay in taxes, other taxes like sales and property taxes are not. People with smaller incomes end up spending a much greater percentage of their income on these taxes than higher income taxpayers. For example, families in the bottom 20 percent of incomes pay 3.3 percent of their income on property tax. The top one percent, however, pays just 1.6 percent. As a result, people with the lowest incomes actually spend much more of their money on state and local taxes than people with the highest.

mbpcslA state EITC could help correct this imbalance in our state taxes.

Twenty six states, plus the District of Columbia, have enacted state EITCs in order to help improve the lives of
working families. After seeing the success of the program, many have expanded their programs. Iowa, for instance, raised their credit to 15 percent of the federal credit. New Jersey recently set their credit to 35 percent of the federal credit. Maine also decided to make their credit refundable, meaning if the total amount of credit exceeds the taxes paid, the taxpayer receives the difference.

A state EITC would be easy for Montana to administer because it is calculated based off of the federal EITC. Administrative costs would be equal to less than one percent of the benefits provided.

It could also boost our local economy. House Bill 391 would establish a state EITC at 10 percent of the federal credit. If passed, this credit would funnel $16.5 million back into the hands of working Montanans and into our economy.

When families spend their tax credit on basic needs like school supplies and groceries, local businesses reap the benefits. A state EITC that could help the economy, as well as reduce the inequalities in our tax code, is a good deal for Montana.

A State EITC Can Help Montana Kids

Kids don’t usually get too excited about things like tax credits. But they do appreciate things like being healthy, doing well in school, and having working parents. A state Earned Income Tax Credit (EITC) could help families provide their children with each of these things, and support our local communities as well.

Today we are going to talk about how children benefit from the EITC. If you’re not sure what that is, check out yesterday’s blog post first to get caught up.

Slide1While some very low-income families without children receive the EITC, most of the credits go to families with children. In Montana, 80,000 low- and moderate-income households benefit from the federal EITC. House Bill 391 would establish a state EITC, and help improve the lives of families and children all over the state.

The EITC essentially raises the income of working families by providing them with a tax credit. This bump in income has significant benefits for children. Nationwide, the federal ETIC has been the single most effective way to reduce poverty. In 2013, it lifted 6.2 million people, including 3.1 million children, out of poverty.

Although most families only receive the credit for a year or two, the benefits for children last much longer. Here are few examples of the long-lasting benefits the EITC can have on children:

  • Better health at birth. Studies have shown that receiving the EITC can mean fewer babies born premature, or with low birthweight. Mothers were also more likely to receive prenatal care, and had better health indicators themselves.
  • Better school performance. Children whose families receive larger EITCs are also more likely to do well on school tests, particularly in math.
  • Brighter futures. Kids whose families receive larger ETICs are more likely to graduate from high school. They are also more likely to attend college.
  • Higher earnings. A small boost in a family’s income when kids are little can mean big payoffs when they are older. For every $3,000 in extra income a year that a child in a low-income family received before age six, their working hours increase by 135 hours per year by the time they reach 25. Income increases by 17%.

Families spend their tax credits on basic needs, most of which directly benefit their children. About half of the credit tends to go to things like groceries or school supplies. Families spend the other half of things like paying off debt, or on home repairs, education, or savings. The EITC can help parents better provide for their children.

If Montana creates a state EITC, we can help build even healthier and stronger families across the state. House Bill 391 is an important opportunity to help our children succeed.

To learn more about how a state EITC would benefit Montana, read our report here.

What is the EITC and How Does it Work?

This Wednesday, the Montana legislature will have a hearing on a bill that could help brighten the prospects of working Montana families. The bill is HB 391, a proposal to create a state Earned Income Tax Credit (EITC). So let’s first figure out what exactly the EITC is, and how it helps working Montanans.

The federal Earned Income Tax Credit was first created in 1975, as a bipartisan means of reducing poverty and creating jobs. President Ronald Reagan once said,

“The Earned Income Tax Credit is the best anti-poverty, the best pro-family, the best job creation measure to come out of Congress.”

The federal EITC gives families with incomes between about $39,500 and $53,000 (depending on marital status and number of kids) credit for the taxes they have paid. In 2015, the average EITC was $3,186 for a family with children, raising the family’s wages by about $265 a month. Only families that work qualify, and most families only use the credit for a year or two.

figure-1-_eitc

In HB 391, Montana’s proposed state EITC would be set to 10% of the federal credit.

A state EITC would:

  • Benefit 80,000 families across Montana. Montana’s low-income families actually pay a higher portion of their income in taxes. A state EITC could help even out this disparity.
  • Improve children’s lives. Children see plenty of benefits from the EITC – better health, better school performance, higher rates of college attendance, and even higher earnings for adults.
  • Promote work. With an EITC, the more you work, the higher your refund. This format encourages families to work more hours, meaning better opportunities and higher pay as their careers continue.
  • Strengthen communities. Families use their EITC to buy pay bills, buy groceries, and buy school supplies – pouring money back into their local businesses.

Twenty-six states plus the District of Columbia have already created state EITCs. This year, Montana legislators should make the same move to help support working families and their children.

To learn more about how a state EITC would benefit Montana, read our report here. Be sure to check back tomorrow, when we will talk more about how a state EITC would benefit our children.