Dick Barrett

As Martin Kidston reports in the January 9 Missoula Current, Gov. Greg Gianforte is calling on some Montana local governments to exercise “greater fiscal responsibility” in order to curb the growth of property taxes.

Relying on a report by The Frontier Institute, The 2023 Real Local Budgets, Gianforte cites as evidence of this alleged lack of fiscal responsibility the fact that, since 2014, the growth of local government expenditures by several cities and counties has exceeded the combined total of local population growth and inflation.

The Frontier Institute itself claims even greater significance for this finding. According to their report, local government expenditure growth in excess of inflation and population growth has “burden[ed] taxpayers with millions in excessive spending;” and limiting expenditure growth to less than the total of inflation plus population growth is necessary to “ensure that the cost of government stays within the bounds of the average taxpayers’ ability to pay for it.”

What these claims imply is that any real (i.e. inflation adjusted) per capita local government expenditure above and beyond the 2014 level is, necessarily, excessive and unaffordable.

This is clearly nonsense. For one thing, there is no justification – and the report offers none - for assuming that the 2014 level of real per capita expenditures was is some way “just right” and is what local governments should therefore lock themselves into in perpetuity. Why 2014? If today we want a new summer recreation program for kids, or better snowplowing, or winter shelter for the homeless or a more modern library, and we can afford them, should we not have them because we didn’t have them in 2014? For the Frontier Institute, and the governor, the answer is apparently that is “no, we should not.”

The real determinant of what we need, want and can afford from local government is our real income. And as long as a reasonable balance is struck between the growth of income and local government expenditure, local government expenditure will not become excessive or unaffordable. And here’s the thing: in all 6 counties included in the Frontier Institute study, between 2014 and 2021 real per capita personal income grew faster than real per capita county spending.

Data for 2022 income are not yet available, and it does not cover the cities in the Frontier Institute study because income data for cities is not reported.
Data for 2022 income are not yet available, and it does not cover the cities in the Frontier Institute study because income data for cities is not reported.

Local incomes were outgrowing local government expenditures, rather than the other way around. (See the table below; it only goes through 2021 because 2022 income data are not yet available, and it does not cover the cities in the Frontier Institute study because income data for cities is not reported.)

If the growth of local government expenditure is being matched, or indeed, exceeded, by the growth in local incomes and ability to pay, why have increasing property taxes become so burdensome? The answer is that the match between property taxes and ability to pay is really pretty bad.

Property taxes are regressive; property tax rates (that is, property taxes as a percent of income) are highest for low-income households. When property values (and ultimately taxes) rise in a neighborhood, they rise for everybody – the young, high-income couple that’s recently moved in, yes, but also the older couple next door living on a fixed retirement income. And because there is such wide disparity in the rate of growth in individual property values, there is comparable disparity in the increases in property taxes paid by individual households; some households will face much bigger tax increases than others, and what’s happening to their incomes will have little to do with it.

The fact is that most communities in Montana have experienced enough income growth to want, need and afford more and improved local government services and schools for their kids. But as long as we are forced to rely on property taxes, the burden of paying for those services and schools will fall on individuals and families haphazardly, and will not be shared fairly.

Obviously, limiting expenditure growth is one way to retard to the growth of property taxes. But what local governments really need is a tax system that allows them to raise revenue efficiently, fairly and in accordance with ability to pay. In that regard, the current property tax system is a miserable failure.