State legislators are rushing a massive overhaul of our income tax system through the legislature at the last minute. Senate Bill 399 would cost the state millions in revenue and result in one in five Montanans paying more in income taxes.
Senator Hertz (R Polson) introduced this bill on March 26. It was heard in committee less than a week later. The committee voted just minutes after the hearing, sending it to the Senate floor where it passed on a largely party line vote five days later. Normally a bill of this magnitude and consequence would have been introduced at the start of the session or been part of a study between sessions.
Coined as “simplification,” the 98-page bill would shift Montana’s calculation of income tax and eliminate certain tax credits. While simplification is a laudable goal, the 2019 legislature passed a bill that provides a regular schedule for evaluating tax credits putting Montana on the right track. Eliminating tax credits should not happen without a thorough evaluation of their effectiveness and weighing that against the cost. SB 399 eliminates several credits without any consideration for their efficacy.
Even more concerning is that SB 399 would move Montana in an unpredictable fiscal direction. Instead of calculating individual income tax starting with Federal Adjusted Gross Income, the state would start with Federal Taxable Income. This is a massive change, dramatically increasing the chances that the impacts will be miscalculated.
This new base ties the Montana personal income tax more closely to the federal income tax, and any change on a federal level will automatically impact taxpayers at a state level. In 2017, the federal tax code was significantly amended, but the personal income tax changes will sunset in 2025, creating considerable uncertainty with regard to the future stability of this tax base.
In recognition of this, nearly every other state has moved away from federal taxable income as the starting point. Unpredictable state revenues resulted in damaging budget cuts in 2017 when revenues came in lower than expected; SB 399 would increase this uncertainty.
Finally, SB 399 maintains and enhances the beneficial treatment of long-term capital gains income. These capital gains would be taxed at 30 percent less than ordinary income (it is currently taxed at about 29 percent less via a credit). For example, say an investor had purchased 10 shares of Amazon ($1,879/share) on January 3, 2020 for an initial investment of $18,790, and then sold those shares a year and a day later on January 4, 2021 ($3,187/share) for $31,870.
Under SB 399, the investor would have a capital gain of $13,080, of which only 70%, or $9,156 would be taxed. On the other hand, if you worked extra hours at your job over the same year and earned the same $13,080, all of it would be taxed. Almost all of capital gains income is accumulated by the top 10% of taxpayers. Most states do not provide beneficial treatment of capital gains. Under SB 399 not only do the wealthiest taxpayers get an additional break on capital gains, but their top tax rate is also reduced from 6.9% to 6.5%.
SB 399 is being rushed through at the last minute. Legislators need to pause. There are many known problems with this bill. Moving a bill of this consequence this quickly will result in unforeseen problems. A complicated restructuring of Montana’s tax system should be considered on a longer time frame, allowing for policymakers and citizens to understand the consequences and what is at stake.
Mike Kadas is the former director of the the Montana Department of Revenue