In 2003, the Montana legislature passed a capital gains credit that benefits a very narrow part of our population, at the expense of public programs from education to health care. Montana is one of just nine states offering a significant tax break for capital gains income.

This report explains how the capital gains credit is costing Montana valuable revenue, and why we need funding for our public structures more than ever.

Like most other states, Montana’s revenue has been dropping dramatically over the past year. A little-known contributor to the declining revenue is a federal corporate tax break that is hurting our revenue stream and was never approved by the Montana legislature.

This report explains the impacts of the Domestic Production Credit, and shows how its elimination will help Montana solve its revenue crisis.

House Bill 395 (2009) attempted to restore some of the state revenue lost as a result of SB 407 (2003). SB 407 provided a variety of tax cuts to Montanans, but the highest-income Montanans have received most of the benefits from those cuts,  and the costs to the state were far higher than anticipated. HB 395 would restore some of the revenue lost as a result of SB 407 by creating a new top tax bracket on households earning more than $250,000 per year.  HB 395 would also restore some of the progressivity of the Montana income tax system and affect less than 1% of all Montanans.

During times of economic downturn and revenue uncertainty, any proposals for decreasing revenue (i.e. cutting taxes) must be carefully scrutinized. One of the only new tax cuts being seriously considered during the 2009 Legislative Session is a reduction in the business equipment tax. The effective tax rate on business equipment has already been reduced dramatically over the last decade; further decreases during an economic downturn will mean decreased revenue to the state and reduced funding for other spending priorities or tax cuts that could have a greater impact on both average Montana families and the economy.

Senate Bill 407, passed in 2003, lowered the top tax rate for the personal income tax and created a credit for capital gains, effectively lowering the capital gains rate. At the time, proponents argued that these changes would spur economic growth in Montana. However, there is no evidence that SB 407 created additional growth in Montana’s economy.

Ending preferential treatment for capital gains income will offer fiscal security for Montana while restoring some of the progressivity of the Montana income tax system. Furthermore, extensive research shows that there is little connection between lower taxes on capital gains and higher economic growth, either in the short run or the long run.

The Montana Department of Revenue is completing the most recent reappraisal of property values in the state. Based on the most current estimates provided by the Department, the appraisals are likely to result in a statewide average increase of approximately 56% in residential home values and 51% in commercial property. The Governor and leadership of both parties have expressed a commitment to keeping property tax revenue neutral as a result of the reappraisals and to mitigate the effects of increased property values on taxpayers. Efforts should be taken to ensure that any proposed property tax mitigation is targeted effectively towards those individuals and families least able to pay increased property taxes, namely those who pay an unduly high share of their income in property taxes.

A state Earned Income Tax Credit would help Montana's working families, who are struggling to make ends meet despite their hard work. Economic trends have made it harder for working families to live above the poverty line. Montana currently has over 16,000 families that are working but still live in poverty. The current economic crisis will only increase the struggles for these low-income families. Unfortunately, Montana’s income tax system drives many poor working families deeper into poverty. A state EITC would help ameliorate this effect on low-income taxpayers.