Gianforte administration takes second crack at modernizing corporate tax

HELENA — Gov. Greg Gianforte’s administration is renewing a push its officials have described as an effort to modernize Montana’s corporate income tax code to better reflect the state’s 21st-century economy, backing a new, less ambitious bill after a prior measure stalled in the face of industry opposition.

The apparent demise of the prior corporate tax bill, Senate Bill 181, represents a rare legislative defeat for the governor’s tax agenda, which is otherwise plugging along through the Republican-controlled Legislature this year, despite opposition from minority-party Democrats. 

While the new bill, Senate Bill 376, appears likely to move forward after drawing no opposition in its initial committee hearing Tuesday, it compromises on one of the earlier bill’s key selling points: higher corporate income tax collections to help pay for other tax cuts proposed by the governor.

The Montana Department of Revenue had estimated SB 181 would boost state revenues by about $15 million a year, enough to offset about half of Gianforte’s initial proposal for cutting the tax rate on higher earners with a stated aim of stimulating the economy. The department expects the new SB 376 proposal to net state coffers about $3.3 million in additional revenue annually.

At the center of the corporate tax reform push is the part of Montana’s tax code that determines what share of a multistate company’s income is considered in-state revenue, and therefore subject to Montana corporate income tax.

Under current law, Montana averages three factors to make that calculation: the fraction of a company’s sales that occur in Montana, the fraction of its payroll paid in the state, and the fraction of its property located in the state.

With the governor’s backing, however, Montana Department of Revenue Director Brendan Beatty has advocated switching the state to a “single factor” model in which that calculation would be based on the in-state sales fraction alone.

In theory, that would let the state collect more corporate income taxes on digital retailers that sell into Montana without maintaining a workforce or buildings in the state. It would also reduce the tax burden on Montana-based manufacturing businesses that sell primarily to out-of-state customers, since they would no longer have their Montana production facilities or payroll factored into their corporate income tax bill.

Beatty and other Gianforte officials have said the shift to a single-factor model, which has been adopted by most other states, is a way to modernize Montana’s tax code for an increasingly digital economy. They also say it will help Montana-based manufacturing businesses that pull money into the state and typically offer well-paid jobs.

However, SB 181, the Gianforte administration’s first crack at shepherding corporate income tax reform through the Legislature, drew opposition from several major industry groups at its initial hearing before the Senate Taxation Committee in early February. It has since languished in the committee without a vote.

A lobbyist for BNSF Railway, Matt Jones, testified at that hearing that SB 181 would add $9 million a year to the company’s tax bill. Industry associations representing grain growers and coal producers also lined up in opposition, saying they would expect heavier taxes on the railroad to translate into higher freight rates for their members, who rely on rail shipping to get their products to market.

“Our business activity hasn’t changed, but the rules under our feet will,” Jones said.

The bill was also opposed by major telecommunications companies such as AT&T, Charter Communications and Verizon Wireless, as well as the Montana Taxpayers Association. 

Under current law, special administrative rules are in place for railroads, telecommunications companies and some other industries that tweak some aspects of how their taxes are calculated under the three-factor system. SB 181 opponents noted that it isn’t clear how those provisions would be affected by a switch to the single-factor approach.

Sen. Greg Hertz, R-Polson, the sponsor for both bills, acknowledged the first effort had stalled as he introduced the new reform bill before the Senate Taxation Committee Tuesday.

“The previous single sales factor bill, when we worked through that, there were a number of taxpayers who were inadvertently affected, Montana taxpayers, so that didn’t seem to work for us,” Hertz said.

At the February hearing for SB 181, Beatty acknowledged the bill would inevitably create winners and losers, but maintained it was forward-thinking policy — and stressed that its additional revenue was a key piece of the governor’s overall budget package. 

“We really do need this to pass to cover other tax cuts and continue to contribute to our economic growth,” Beatty said.

Gianforte’s press secretary, Brooke Stroyke, didn’t answer questions Wednesday about whether the scaled-back bill means the governor will need to reduce other tax cut proposals. She said in a message that his office is “evaluating options.” 

Hertz’s new bill, which is also backed by the Gianforte administration, is a compromise that takes what Hertz described as “baby steps” toward a single-factor system. Instead of switching Montana’s corporate income formula to a sales-only approach, the bill would instead tailor the statute so sales volume is double-weighted relative to property ownership and payroll.

The revenue department considers it a step in the right direction, Beatty said.

“We’ve been pounding the square peg of a 20th century tax code into the round hole of the 21st century,” he said. “This bill is moving us forward into the 21st century economy.”

The new bill was also endorsed by the Montana Taxpayers Association and the Montana Chamber of Commerce. No one spoke in opposition to the new bill at Tuesday’s hearing.

Hertz also said he expects the full-fledged tax reform idea to come up again.

“I believe this is something that we will again be reviewing in the next legislative session,” he said.