The legislature is considering ways to balance the state budget. Despite some rhetoric to the contrary, there are plenty of mechanisms available for maintaining our investments in education, health care, and other public services. One option is to scrutinize tax expenditures to determine if any are obsolete or ineffective. Tax expenditures quietly drain the state of million of dollars in revenue every year. In fiscal year 2009 alone, we lost $375 million, which amounted to 20% of the state’s general fund budget that year.

Montana’s tax code is based on the federal tax code, so deductions passed at the federal level are automatically implemented at the state level, unless specifically disallowed by the state. The federal “domestic production deduction” tax break doesn't make sense as state policy, and is estimated to cost Montana $6 million in revenue in fiscal year 2011, at a time when we need all available revenue to maintain education, health care, and other vital public services.

In Montana, thousands of families across the state are working but still struggling to make ends meet. Recent economic trends have made it even harder for working families to live above the poverty line. Montana has over 17,000 families that are working but poor.

A state EITC would provide a much-needed economic boost to these hardworking families and their communities. Indeed, the most efficient way to stimulate the Montana economy is to support low-income families who are likely to immediately spend that support in businesses and communities across the state.

Most Montana families and businesses lawfully pay the taxes they owe, and in the process they help fund public education, infrastructure, public health, and job training programs that move our economy and our communities forward. Unfortunately, not all taxpayers are paying the money they owe, and the result is less funding for the public structures and services that drive growth and recovery. 

The Department of Revenue has estimated that the state has a tax gap of $312 million.1 The tax gap is the difference between the amount of tax legally due in a given year and the amount that taxpayers voluntarily pay in a timely manner.  Recently, the Department of Revenue has substantially improved audit collections.  However, in order to further close the tax gap and raise needed revenue for public services, additional tools are needed.  By implementing these tools, Montana can improve tax compliance, maintain a system where everyone plays by the same rules, and raise revenue for essential public services, simply by enforcing our current tax laws. 

Years ago, the legislature created a tax break for oil and gas companies that now costs the state tens of millions of dollars per year, and does not deliver on its promise of economic development. The dollars given to oil and gas companies as a tax holiday would be better spent maintaining public structures like education; public sewers and water systems; good roads and healthy communities that help Montana retain and grow jobs.

In short, the oil and gas tax holiday is costing Montana valuable revenue for public services. It’s time to take a hard look at the usefulness of this corporate tax break.

In 2003, the Montana legislature made significant changes to Montana’s income tax system through Senate Bill 407 (SB 407). The changes enacted in SB407 have had a significant negative impact on Montana’s revenue streams, yet are often ignored in discussions about the state’s current revenue challenges. In 2005, SB 407 decreased total income tax revenue by $100 million (13%), with almost half of the benefit going to families earning incomes over $500,000 per year.

In order to protect our future, we need a tax system that maintains the schools, roads, and natural resources that create opportunities for all Montana families. With Montana facing potentially severe and damaging cuts to these public structures, it’s time to take a hard look at the usefulness of SB 407’s costly tax changes.

This policy brief will analyze the impact of one portion of SB407--changes made to Montana’s income tax brackets. MBPC finds that the bracket collapse has been unaffordable, disproportionately targeted to upper income Montanans, and ineffective as a tool for economic growth.

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.