Montana resorts (mostly) embrace sales taxes to finance infrastructure
Editor’s note: This is the second in a three-day series on the local options sales tax as an alternative means of generating local government revenues while providing property tax relief. Read the Day 1 report.
While many Montanans cringe at the thought of a sales tax, residents of the state’s major resort communities not only support sales taxes but want to increase them.
“I cannot fathom what (West Yellowstone) would be like (without a resort tax). We don’t have any other real resources in Montana,” said West Yellowstone council member Christopher Burke. “When (the tax) came up for renewal in 2002, voters gave it more support than when it was initially put in place.”
In 1985, the Montana Legislature passed a law allowing towns with fewer than 5,500 residents and unincorporated communities with fewer than 2,500 to levy a resort tax if more than 50 percent of the community’s income came from tourism. One year later, West Yellowstone was the first town to pass a resort tax, and it’s never looked back.
Back then, the town at the west entrance of Yellowstone National Park still had dirt streets and somewhat rudimentary services. With its small population, conditions weren’t likely to change much without a special pool of money.
Resort taxes were intended to augment the limited revenue of small towns by adding 3 percent to the price of restaurant, bar and lodging bills and whatever retail goods the community deems “luxury items.”
With the $500,000 raised that first year, West Yellowstone started paving its streets and eventually installed water mains and sewer pipes.
Over the following 30 years, West Yellowstone raised more than $3.6 million to improve its infrastructure. That money can often be doubled when it’s used as a match for various grants that the town wouldn’t have been able to get otherwise.
But the financial burden of infrastructure doesn’t end once pieces are in place – that’s when the long-term expense of maintenance kicks in. And the cost becomes even more challenging as increasing numbers of people depend on those systems.
That’s the case as more tourists flood into Montana each year, feeding money into the economy but also putting stress on places that aren’t prepared for the onslaught.
Both Yellowstone and Glacier national parks report record visitation almost every year. More than 1.6 million visitors pass through Yellowstone’s west entrance and another 8,000 vehicles pass through town while traveling on Highway 191.
“In the 16 years I’ve lived here, we’re seeing a million new visitors coming through. Those records come with impacts, both positive and negative,” Burke said. “In our case, it’s put a heavy burden on water use. And of course, that water has to go somewhere afterward, so it’s also on sewer.”
West Yellowstone town manager Daniel Sobalski said the once-new sewer lines downtown are now more than 30 years old and the town’s spring is producing only two-thirds of the water it used to.
The town has infrastructure needs totaling $48 million, which its 1,300 residents can’t raise with property taxes alone.
Property tax levies are limited to half the rate of inflation. Since 2000, the inflation rate has averaged around 2 percent, so property tax revenue has been limited to 1 percent.
Meanwhile, construction and labor costs have risen dramatically, said Kelly Lynch of Montana League of Cities and Towns. The league has supported local options taxes in every legislative session since 1981.
“As a result, our purchasing power has been reduced by 30 percent during that time,” Lynch said.
For the same reason, the 3 percent resort tax isn’t going far enough, which is why communities are asking the Legislature to allow resort towns to vote on a 1 percent increase.
“If I’d have been elected to the Legislature this year, I would eagerly support a no-tax pledge because I believe in that stuff,” said former West Yellowstone Mayor Glen Loomis. “But (Senate Bill 241) would give towns like West Yellowstone a chance to survive the onslaught of our tourists.”
In addition to West Yellowstone, nine communities in Montana have voted for a resort tax, and all are lobbying for the chance to up the tax to 4 percent. They include Big Sky, Cooke City, Red Lodge, St. Regis, Whitefish, Craig, Gardiner, Virginia City and Wolf Creek. The last four communities apply the sales tax only during the summer-fall tourist season.
Resort representatives speak highly of the tax and what’s been done with the money, which is limited to funding infrastructure projects. For example, St. Regis installed sidewalks and streetlights along Highway 135 to add a community feel; Whitefish repaired 18 streets and replaced the sidewalks on 84 blocks; Virginia City built a new fire hall; and Gardiner is upgrading its water and sewer systems.
That means they’re doing better than much of the state. Montana has long struggled to come up with money to repair infrastructure such as bridges, dams and highways.
In 2017, Montana’s civil engineers gave the state a “C” for the mediocre condition of its infrastructure. Montana’s roads received a “C minus” and almost 10 percent of the bridges are rated poor/structurally deficient.
Gov. Steve Bullock has tried to change that, backing funding bills in 2015 and 2017 that would use bonds to pay for $150 million to $300 million in infrastructure projects, but the legislation didn’t advance. He’s back this year to try one last time.
Resort towns have the advantage of not relying on bonds. They’re able to reap some of the $3.4 billion that tourists spent in Montana in 2017.
Even so, they say more money is needed, and they’ve been saying that for a while. This is their second attempt to pass a tax increase; the first failed in 2017 on a tie vote in the Senate.
Big Sky Chamber of Commerce member Kevin Germain helped develop this year’s bill.
“This is for investment in infrastructure, and that promotes private investment. These are great public-private partnerships. If we have great infrastructure, that attracts outside businesses and that grows our state coffers, not just through property taxes but also through the income taxes that those jobs create,” Germain said. “This is really about local control. It gives us one more tool in the toolbox.”
It seems that once Montanans experience what a sales tax can do, their traditional resistance softens. Resort areas must vote to renew their tax every decade, and they’ve always passed in the 10 communities.
But a few communities have never gotten far enough in the process to learn how much they’d gain.
Polson, Columbia Falls, Bigfork and Seeley Lake have all flirted with adopting a resort tax, but local voters rejected the idea.
The situation in Seeley Lake illustrates how those opposed to a resort tax can create misunderstandings and potentially end up paying more money in the end.
Seeley Lake is unincorporated, which makes it harder to raise money for infrastructure projects that are badly needed. Water mains had to be enlarged and installed after wildfires focused concerns on water availability.
Water pollution in the lake highlighted the need to improve the sewer system. But that takes money.
So after the Department of Commerce carved out the portion of the community that qualifies for a resort tax, Seeley tried to encourage people in that area to vote for a tax. They failed in 2008, 2009 and 2012. The last vote defeated the tax by a margin of 2:1.
Walt Hill, who has co-chaired the Seeley Lake Community Council’s economic development committee, has been dogged in the search for grants to improve the sewer system without dipping into tax revenue.
But as with many towns, the cost of system maintenance eventually dwarfs the cost of upgrades.
Hill said one of the big hurdles in the 2012 attempt was trying to decide what counts as a “luxury” item for tax purposes.
Red Lodge had the same challenge and its tax proposal failed a few years before finally passing in 1998.
“That becomes ticklish,” Hill said. “Is a snowmobile a luxury? For some, yes. But for others, it’s a necessity because that’s the only way they can get in and out of their place in the winter.”
Another problem was locals’ misunderstanding of how the tax is assessed. Before the vote, resort tax opponents circulated a flier saying, “When the tourists go away, guess who gets to pay the resort tax?” The flier implied that locals would have to make up the difference, which isn’t true. If people don’t stay in the hotels or eat in the restaurants, nothing is taxed.
In spite of experience to the contrary in other resort towns, business owners believed it would hurt business. Others didn’t like that only people in the resort district could vote on the tax, even though the revenue can be spent on projects anywhere in the community.
But without the tax, the people of the community are going to have to pay higher sewer bills to maintain the new sewer system once it goes in. Operations and maintenance costs are estimated at $150,000 to $200,000 a year, so residents each will have to pay $75 to $80 a year.
“It’s Seeley Lake, this is an old timber community, and the people here aren’t very well off financially. And they say ‘I don’t want to pay any more taxes,’” Hill said. “But the resort tax would have reduced that to somewhere near $50. They’re shooting themselves in the foot by not supporting the tax.”
Hill is still toying with the idea of proposing the tax again, but maybe this time, it’ll apply only to restaurant, bar and lodging bills.
“Just say there are no luxuries in Seeley Lake, everything is a necessity. I don’t know if that would go over, but I think it might,” Hill said. “Even adding 3 percent to those things, we believe could pay for the sewer or water or both.”
Polson hit similar snags. More than 80 percent of Polson voters rejected a resort tax in 2009. The City Council considered it again in 2016 as a way to pay for road repairs but didn’t put it on the ballot after hearing public opposition. As with Seeley Lake, business owners believed the common misconception that it would hurt business.
Without the resort tax, the Polson City Council would have to create a mill levy that would add $75 to the property tax of an average homeowner.
Christopher Burke is pleased that West Yellowstone residents recognized that a resort tax is worth having.
“There’s a lot of talk of (a sales tax) being a regressive tax; there’s maybe an argument for that on a statewide basis where it’s more challenging,” Burke said. “In our case, it would be more regressive to not have the public amenities and services function as they should. We have some businesses that want to grow, and we can’t allow them to turn the water on at this point.”
Contact reporter Laura Lundquist at email@example.com.