A Statewide Sales Tax Would Hurt Montana Families

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Over the past five decades, Montana has rejected sales tax proposals, recognizing that the cost would fall on everyday Montanans. Implementing a statewide sales tax would make Montana’s tax system more regressive, with those at lower and middle-incomes paying a greater share of their income on the tax, on key goods and services that Montanans purchase. Montana can and should consider ways to make its tax system fairer, and that should start with policies that ensure the wealthiest are paying their fair share.

Montana’s Tax System Requires More From Families with Low Incomes

Nearly every state in the nation takes a greater share of income for taxes from families living on lower and middle incomes than from the wealthiest households. A tax system is considered regressive when households living on lower incomes pay a larger portion of their income in taxes compared to those households with higher incomes.

States that rely heavily on sales taxes have a more regressive tax structure. In the top ten states with the most regressive tax system, the lowest 20percent of taxpayers pay up to three times as much in taxes as the wealthiest 1 percent, as a share of their income.^[1] Eight of the ten states with the most regressive tax structures rely on sales and excise taxes for more than half of all tax revenue. For example, the state of Washington, which heavily relies on sales tax, has one of the most regressive tax systems in the country. Those with the lowest 20 percent of income are paying 3.4 times as much tax relative to their income than those at the top.

While Montana ranks as one of the least regressive state and local tax systems, families living on lower incomes still pay a greater share of their income in state and local taxes than higher-income households. While the top 1 percent of households pay 6.7 percent of their income in taxes, the bottom 20 percent pay 9.5 percent, a forty percent higher rate.^[2] However, the main reason that Montana’s tax system is less regressive than surrounding states is that Montana has an income tax and does not rely heavily on sales taxes.

Sales Taxes Rely Most Heavily on Montana Families with Moderate Incomes

Implementing a statewide sales tax would disproportionately hurt families living on lower and middle incomes, particularly when compared with other revenue proposals such as reestablishing a top income tax bracket on high-income earners or changes to the capital gains tax credit. Sales and excise taxes are the most regressive form of taxes. Families living on low incomes pay almost seven times more sales tax as a percentage of their income than wealthy families, and families living on middle incomes pay­ five times more as a percentage of their income.^[3] State rates for sales tax range from 2.9 percent in Colorado to 7.25 percent in California, and even higher for states that allow local governments to tack on local sales taxes.^[4]

With affordability for moderate income families top

of mind, some states have attempted to

mitigate the impact of sales taxes on families living on lower incomes. Despite these mitigations, sales and excise taxes still disproportionately impact these households. Most states provide some sort of exemption or rate reduction for food and/or prescription drugs and eleven states have some sort of exemption for nonprescription drugs.^[5] Even with an exemption or rate reduction for food and prescription drugs, a sales tax still impacts many products that low-income families need like school supplies, winter coats, and shoes. As lower income families spend more of their income on necessities, a sales tax could put purchasing a car necessary for work out of reach. Many Montana families are struggling with increased housing costs, and a sales tax would plop an additional expense on these families, making household budgets even tighter and reducing available funds to pay for housing in an already out-of-control market.

Income Tax Cuts For the Wealthy Prompt Sales Tax Discussion

Policymakers often raise the idea of implementing a statewide sales tax as a replacement for the state individual income tax or state property tax, two of the largest streams of revenue funding essential services in the state. A statewide sales tax coupled with the elimination of income or property tax would result in a significant net loss of revenue.^[6]

Furthermore, putting in place a sales tax to replace income or property tax would make Montana’s tax code less fair. Replacing a less regressive tax with a more regressive one will continue to hurt families already struggling to afford everyday expenses. This tax shift would put an unfair burden on lower and middle income Montanans and risk loss of revenue for local schools and local governments.^[7]

Sales Tax Is Paid By State Residents

Sales taxes are overwhelmingly paid by the residents of the state imposing the tax. Estimates from the Legislative Fiscal Division sales tax model show that if a statewide sales tax were in place in 2025, less than 12 percent of the sales tax would be paid by non-residents, leaving nearly 88 percent of the sales tax paid by Montanans.^[8] A sales tax would be imposed on the goods and services Montanans purchase. This could include: purchasing goods such as clothing, school supplies, and vehicles; the costs for services such as car repairs, hair care services, and lawn services, and entrance fees for entertainment and sporting events. Additionally, Montana residents generate a large share of state tourism dollars. Nearly half of the tourism dollars in Montana are spent by Montanans traveling within the state for activities such as shopping, attending sporting events, going on vacations, and visiting family and friends.^[9]

Montana Has Excise Taxes

Montana has a few already established excise taxes or local sales taxes, targeted at certain goods or services.^[10] The state often uses this revenue to pay for services related to the goods sold. For example, a portion of cigarette tax revenue goes toward smoking cessation programs.

Below is the list of state and local excise taxes in Montana:

• All rental vehicle vendors in Montana pay a 4 percent sales and use tax. Most of the funds are deposited into the state general fund, with a portion of these funds used for transportation services for seniors and people with disabilities.

• Montana charges a combined 8 percent lodging sales and use tax on hotels, motels, campgrounds, dude ranches, and other short-term lodging. This is split into two taxes, the 4 percent lodging facility use tax and the 4 percent lodging sales tax. Over 60 percent of the lodging facility use tax goes to the Department of Commerce for state tourism promotion and over 22 percent goes to local tourism promotion, with the remainder split between various other special purposes.^[11] Seventy-five percent of the lodging sales tax goes to the general fund.

• Montana charges a 3.75 percent excise tax on all retail telecommunications services. Retail telecommunications services are any two-way transmission of voice, image, data or other information originating or terminating into a Montana service address. Funds are deposited into the general fund. This tax has not been updated to include prepaid cell phone services.

• Montana taxes tobacco products. Each cigarette sold in Montana has $0.085 tax, included in the retail price of the cigarettes. This comes out to $1.70 for a standard pack of 20 cigarettes, adjusted proportionally for different size packages. Montana taxes moist stuff at $0.85 per ounce, based on the listed net weight of the package. Revenue provides funding for Medicaid health services, state veteran and nursing home programs, long-range building program, and the general fund. These taxes have not been increased since 2005 nor updated to include more recent tobacco products.^[12]

• Montana taxes all alcohol that enters the state to be sold to consumers, including beer, distilled spirits, hard cider, and wine. Each is taxed at a different rate and collected by different means. Revenue provides funding for treatment, rehabilitation, and prevention of alcoholism and chemical dependency, Tribal governments with revenue sharing agreements, and the general fund. Many of these taxes have not been updated or increased in decades.^[13]

• Montana charges a 4 percent tax on the gross sales of medical marijuana and marijuana products and a 20 percent tax on adult-use cannabis. Revenue provides funding for various health, wildlife, and recreational purposes, and the general fund. Individual municipalities can require a 3 percent local option cannabis tax in addition to the state taxes. Twenty-eight counties have local option taxes on medical cannabis, adult-use, or both.^[14]

• Montana imposes a state tax on the sale of fuel, set at $0.33 for gasoline.^[15] In the 2026 fiscal year, counties received $15.6 million, and cities and towns received $26 million, for local infrastructure needs.^[16]

• As discussed below, there are ten communities in Montana which heavily rely on tourism that have enacted a local “resort” tax. State law allows a maximum of 3 percent on a narrow list of goods and services.

Expanding Excise Taxes Is Not a Long-Term Solution

In addition to being the most regressive tax, excise taxes are often insufficient revenue-raising tools because they decline in value over time. Excise taxes are often set at a per-unit basis, rather than a percentage of value, so the revenue generated by the tax is eroded over time.^[17] Rates must con­tinually be increased to keep pace with inflation. Using excise taxes to close fiscal gaps means balancing state budgets on the back of taxpayers who are the least able to pay, and these revenues represent a short-term fix rather than a long-term solution.

Local Option Sales Would Worsen Inequity Among Montana Communities

In Montana, there are ten communities that have put in place a local “resort” tax, which by law is limited to small communities that meet certain criteria.^[18] The resort tax applies to a narrow list of goods and services targeted at tourists, including accommodations, restaurants, bars, and ski resorts or other destination recreational facilities.^[19]

Allowing other non-resort communities to extend a local option sales tax would put many rural, struggling communities at an even greater disadvantage and require a large share of taxation from low-income families. With the exception of a handful of Montana’s largest urban communities, the vast majority of Montana communities are unlikely to benefit from local option sales taxes. As we have learned from local mills and bonds, some communities cannot or will not impose local taxes. This would continue to draw a deeper divide between communities of means and communities without. And unlike statewide sales tax options that allow a state to implement targeted assistance to low-income families, a local option sales tax provides no effective mechanism to mitigate the harm on low-income families.^[20]

Montana Can Make Its Tax Code Fairer and Raise Needed Revenue

Instead of requiring our friends and neighbors with the least ability to pay to shoulder the burden of a statewide sales tax, Montana should consider a variety of tax system improvements that would bring in much-needed revenue, and help even out the regressivity of Montana’s tax system.

Montana had a much fairer tax system prior to 2003 when the legislature collapsed the tax brackets and lowered rates for the wealthiest. This trend has continued in each legislative session from 2021 to 2025 when the legislature passed cuts to the income tax system that disproportionately benefited the wealthiest, at a very significant long-term cost for Montanans ability to invest in our collective needs.

Montana can start to move our tax system in the right direction, toward a place where those with the least are not paying more of their income in taxes than the wealthiest and Montana communities have the revenue they need by:

• Restoring the top tax rate. A top income tax rate on incomes above $500,000 would raise revenue and impact only the wealthiest Montanans.

• Taxing income from investments at the same rate as wage income. This tax break costs our state millions and benefits special interests and the wealthy. Ninety-two percent of this tax break benefits the wealthiest 20 percent.^[21]

• Reforming targeted excise taxes to target revenue to support Montana communities. Directing revenue from excise taxes, like lodging, directly toward local community needs would help to alleviate local pressure from visitors.

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ENDNOTES

1 Institute on Taxation and Economic Policy, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Seventh

Edition,” Jan. 2024.

2 Institute on Taxation and Economic Policy, Montana: Who Pays? 7th Edition, Jan. 2024.

3 Institute on Taxation and Economic Policy, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Seventh

Edition,” Jan. 2024.

4 Tax Policy Center, “State Sales Tax Rates,” Urban Institute & Brookings Institution, Feb. 21, 2023. For example, in the City of

Denver, residents pay 9.15 percent in sales taxes which include state and local sales taxes (City of Denver Business Taxes).

5 Tax Policy Center, “State Sales Tax Rates,” Urban Institute & Brookings Institution, Feb. 21, 2023.

6 MBPC calculations using Legislative Fiscal Division, “Sales Tax Dashboard” and Department of Revenue, “Biennial Report: July

1, 20222 – June 30, 2024.”

7 Jefferson, R., “Policymakers Unwisely Propose Cutting Property Taxes in Favor of Sales Taxes,” Institute on Taxation and

Economic Policy, Jan. 14, 2025.

8 Legislative Fiscal Division, Sales Tax Model, accessed Dec. 8, 2025.

9 Nickerson, N. et al, “The Economic Review of the Travel Industry in Montana,” Institute for Tourism and Recreation Research,

2018.

10 Department of Revenue, “Biennial Report: July 1, 2022 – June 30, 2024,” Dec. 2024.

11 Department of Revenue, “Biennial Report: July 1, 2022 – June 30, 2024,” Dec. 2024.

12 Montana Code Annotated, 16-11-111.

13 According to testimony during the 2017 legislative session, the last major change to the primary beer tax was 1997, the last

time the wine tax was changed was 1985, the last time the liquor excise tax was changed was 1947, and the last time the

liquor license tax was changed was 1977. See Montana 65th Legislature, Hearing materials for SB 328, 2017.

14 Department of Revenue, “Biennial Report: July 1, 2022 – June 30, 2024,” Dec. 2024.

15 Department of Transportation, “Motor Fuel Tax Rates,” accessed Dec. 8, 2025.

16 Department of Transportation, “SFY2026 Allocation of Fuel Tax Revenue.”

17 Institute on Taxation and Economic Policy, “Who Pays? A Distributional Analysis of the Tax Systems in All 50 States, Seventh

Edition,” Jan. 2024.

18 The full list of the communities are: Red Lodge, Virginia City, West Yellowstone, Whitefish, Big Sky, Cooke City, Craig,

Gardiner, St Regis, and Wolf Creek. Department of Revenue, “Local Resort Tax,” accessed Dec. 9, 2025.

19 Department of Revenue, “Local Resort Tax,” accessed Dec. 9, 2025.

20 Bender, R., “LOST Ground: Local Option Sales Tax Leaves Many Communities Behind,” Montana Budget & Policy Center, July

2020.

21 Institute on Taxation and Economic Policy, “Modeling 7.27.2022,” on file with author.