The initiative that could upend Montana’s tax system
HELENA (MTF) — Meetings of the Montana Legislature’s tax policy committees, particularly the interim group that meets in off-seasons when the Legislature is out of session, are rarely dramatic affairs.
Last month, though, a succession of conservative activists stepped up to a microphone in a state Capitol hearing room to advocate for a taxpayer revolt that could reshape Montana for generations.
As former state Sen. Al Olszewski put it: “We’re tired of renting our homes from the government.”
The activists, fed up with property tax increases they say threaten to price thousands of Montanans out of their homes, had assembled to voice support for Constitutional Initiative 121. Modeled after California’s landmark Proposition 13, the proposal would amend Montana’s Constitution to place strict limits on how much property tax homeowners have to pay and how fast those taxes can grow.
“Your property taxes would be based on the price of your home when you buy your home, not the price of your home 10 years down the road, 20 years down the road, after inflation has driven up the prices, after out-of-state investment has driven up the prices,” said Bozeman Attorney Matt Monforton, who is sponsoring the initiative with Republican State Auditor Troy Downing.
If the initiative’s backers collect enough signatures to get it on the ballot, and then persuade a majority of Montana voters to support it in this fall’s election, CI-121 would fundamentally transform how the taxes that fund Montana schools, law enforcement and local governments are calculated.
As such, the proposal has raised alarms across the state’s political spectrum, drawing opposition not only from left-leaning groups that routinely lobby for more public spending, but also from traditionally tax-skeptical entities like the Montana Bankers Association, Montana Farm Bureau and Montana Chamber of Commerce.
“We believe the unintended consequences outweigh the perceived benefit of CI-121,” Chamber lobbyist Bridger Mahlum told lawmakers at the January meeting.
“Prices are rising for goods and services anyway with inflation,” he said. “Local governments have to be able to afford that in their budgets too.”
The initiative’s opponents generally acknowledge that the state needs to explore property tax relief, but say they’d rather the Legislature enact narrow measures that help low-income residents and seniors who most need help than adopt a sweeping change that limits taxes on modest homes and mansions alike.
Sen. Greg Hertz, the Polson Republican who sponsored some of the key bills implementing Gov. Greg Gianforte’s tax-cut agenda during last year’s legislative session, also said this week that he opposes CI-121.
“You look at the initiative and what it does is shift taxes basically from one taxpayer to another,” he said.
Montforton dismissed the opposition in an interview this week.
“There were a lot of concerns voiced by Helena’s liberal special interest groups. We are unpersuaded by them,” he said.
TAX BILL MATH
As one of five states without a statewide sales tax, Montana’s state and local governments lean heavily on income and property taxes for revenue. By and large, income taxes fuel state investments in universities, social welfare programs and prisons. Most property taxes flow to local services administered by cities, counties and school districts.
The system used to calculate how much each Montana property owner owes to keep their local government running is convoluted, but in broad strokes it works like this: Local government leaders, an elected school board for example, sit down once a year to set their budget, deciding the total amount they need to collect from property owners to pay teachers and put gas in school buses.
That collective burden is then divided among the district’s individual taxpayers, with each landowner assigned a slice of the pie proportional to their share of the district’s overall tax base. For residential properties, the tax values used for those calculations are based on assessed property values determined by the Montana Department of Revenue — essentially the department’s best effort to estimate what the property would sell for.
That means people with more expensive homes and, in theory, more wealth, pay higher property taxes. The owner of a property with twice the value of their next-door neighbor’s is responsible for twice their neighbor’s share of the local school budget.
That means rising property values can lead to higher taxes, depending on how fast a home’s value is changing relative to the other properties in the tax base — and whether that school board is holding its budget constant. If you build an addition onto your home that doubles its value while your neighbor’s valuation stays the same, you’ll pay more, assuming the school budget stays flat. But if every property in the district doubles in tax value and the school budget isn’t increased, each homeowner’s tax burden remains unchanged.
In practice, though, the system is messier than that, which makes assigning blame for rising property taxes tricky. Schools also get some funding from other sources, and commercial and industrial properties are typically assessed differently than homes. And individual property tax bills are the result of budgets set by overlapping jurisdictions like schools, counties and towns along with more arcane taxing entities like soil and water conservation districts. Furthermore, local government budgets rarely stay constant, but often rise as inflation drives up government operating costs or voters approve construction bonds or special-purpose levies at the ballot box.
Further complicating things, the tax bills sent to property owners by county treasurers generally list their charges in terms of mill rates, a statistical construct indicating how much tax a jurisdiction is assessing for each $1,000 of taxable value. Some property taxes, like the 6-mill levy used to help fund the Montana University System, are defined in terms of mills instead of dollars.
For example, a publicly available tax bill for a home owned by CI-121 co-sponsor and State Auditor Troy Downing south of Bozeman includes line items for county government, the city-county health department, a rural fire district, a jail bond, local schools, the local community college and the 6-mill levy.
The taxable value of Downing’s property, $17,734, is calculated by multiplying the property’s assessed value by the state’s residential tax rate, 1.35%. While the bill adds in some special assessments, the bulk of Downing’s taxes are calculated by taking that tax valuation and applying his district’s total mill rate: $591.68 owed for each thousand dollars of taxable value.
County records indicate that annual taxes on Downing’s $1.3 million property have grown by 24% since 2019, to $10,583.
Contacted this week through a spokesperson at the state auditor’s office, Downing declined to discuss his tax bill. A business disclosure form he filed in 2020 indicates he also owns other Montana real estate.
THE PAIN AND THE PITCH
With the housing market tight — and with local authorities scrambling for money to expand roads and schools in fast-growing communities — rising property taxes are a painful fact of life for many Montana residents.
A pre-pandemic analysis by Montana Free Press found, for example, that the average residential tax paid by Montanans more than doubled from $395 per capita in 2002 to $806 per capita in 2018. And that was before the surging home prices that have come with the state’s wave of pandemic-era buyers.
While state government has programs to provide property tax relief to seniors and low-income homeowners, it’s common to hear retirement-age Montanans in particular worry about being priced out of their homes if rising taxes outstrip their fixed incomes.
Richard Thieltges of Helena, for example, told attendees at last month’s tax committee meeting that he’s retired and living on an income of $1,000 a month in Social Security benefits. His home, which he bought for $100,000 in 1989, is now valued at nearly $350,000, he said. His property taxes rose 48% this year, he added, leaving him worried he might end up homeless after he depletes his savings.
Thieltges noted that his taxes have spiked in part because his property value has appreciated beyond the ceiling built into an existing state tax relief program. That program offers a tax rate break to low-income taxpayers, but only for the first $200,000 of market value on a primary residence.
“There are thousands of people in Montana just like me,” Thieltges said. He’s been collecting signatures for CI-121.
The initiative presents a beguiling solution to taxpayer pain: a one-page amendment to the Montana Constitution that would put a hard cap on how fast homeowners’ property taxes can grow.
If enacted, the initiative would limit the total value-based property taxes on residential properties to 1% of assessed value. Tax on a $250,000 house would be capped at $2,500 a year. Troy Downing’s $1.3 million house would be taxed at no more than $13,000 annually.
The initiative would also limit how fast property values can appreciate for tax purposes, capping the annual assessment change at either 2% a year or the rate of inflation, whichever is lower. That growth limit would be pegged to a pre-pandemic 2019 baseline, but would reset to the current market value whenever a home is sold or “significantly improved” by renovation or new construction.
“It would roll back tax valuations, or tax assessments, back to 2019, prior to COVID, prior to COVID refugees moving to Montana from lockdown states, prior to torrents of out-of-state money coming into our property market,” Monforton said at the January meeting.
THE CALIFORNIA EXPERIENCE
Monforton has said CI-121 is based on California’s Prop 13, passed by voters there in 1978. Triggering decades of public budget turmoil, litigation and subsequent ballot initiatives, Prop 13 has produced a complex legacy that’s still subject to active debate in California and other states that have followed its lead with their own initiative-driven tax revolts.
Critics regard Prop 13 as an unmitigated disaster. Immediately following its passage, California property tax collections dropped by 60%, forcing state leaders to backfill local government funding from the state budget. Schools in some parts of the state cut back on vocational education and arts offerings. Student-teacher ratios rose.
Today, California remains one of the most-taxed states in the nation. Researchers at the Tax Foundation, a right-leaning think tank that often advocates for tax relief, concluded in 2013 that Prop 13-limited property taxes in California have been largely offset by higher sales and income taxes. California’s sales tax, 6% when Prop 13 was passed, is now 7.25%.
The measure has also been criticized for delivering an outsized share of its relief to wealthy homeowners. A 2016 report by the California Legislative Analyst’s Office concluded that two-thirds of Prop 13’s tax relief was going to households with incomes above $80,000, and nearly half to households with incomes above $120,000.
Even so, as Monforton has noted, Prop 13 remains popular with the California public. In a 2018 poll conducted for the proposition’s 40th anniversary, the Public Policy Institute of California found that 57% of Calfornians believe it had turned out to be “mostly a good thing for the state.” Among homeowners, the approval rate was 65%.
Some CI-121 opponents have cited California’s Prop 13 experience as a warning for Montana.
Senate Majority Leader Jill Cohenour, D-East Helena, for example, cited California’s post-Prop 13 sales tax increases in an interview this week. That’s a tax burden, she said, that falls more heavily on the shoulders of working families and low-income residents.
She’s worried that passage of CI-121 could put Montana in a position where state leaders have no choice but to adopt a sales tax to keep schools and local government services adequately funded.
“Montana is not California. We can do better than this,” Cohenour said.
Hertz, the Republican lawmaker who’s been at the center of many of Montana’s recent tax debates, said he’s especially concerned about situations where city taxpayers, who currently pay higher rates because they’re on the hook for both city and county services, run up against the tax cap before county taxpayers do. That could force more of the burden for county budgets and school bonds onto rural homeowners, he said.
“Taxpayers really need to understand this before they vote for it. It’s not the panacea that it sounds like it is. Particularly if you live in the county,” Hertz said.
A few Republican lawmakers on the party’s right wing have thrown their weight behind the measure, however. Sen. Brad Molnar, R-Laurel, was among the supporters who spoke at the January hearing. And Rep. Matt Regier, R-Kalispell, wrote the committee a letter endorsing the initiative.
“For me stability for homeowners and Montana families takes precedent [sic] over stability for ever growing governments,” Regier wrote.
Even so, Republican Hertz and Democrat Cohenour aren’t alone in their wariness about CI-121’s potential consequences, intended or otherwise. Opponents lined up at the January meeting to air their concerns.
Business groups like the state Chamber of Commerce worried that commercial properties or farmland will end up picking up the tab for lost residential revenues. Public employee unions worried about budget cuts that could cause layoffs of teachers and other government employees. Realtors worried that the tax benefit created by long-term residence would discourage homeowners from upgrading to new homes. A real estate lawyer worried about equal-protection lawsuits in situations where a longtime homeowner ends up paying lower taxes than a young family who just moved into a similar house next door.
Many of the initiative’s opponents say they’d rather see property tax frustration addressed by the state Legislature. They’re most interested, they say, in targeted relief like “circuit breaker” programs, which provide property tax breaks based on income.
“I think, the Legislature, we need to concentrate on low-income individuals and the elderly,” Hertz said this week.
Hertz also said that Thieltges, the property owner who complained about his taxes rising 48%, is a good example of a situation that the Legislature needs to address.
Democrats introduced a series of circuit breaker-style property tax relief bills during last year’s legislative session, but gained no traction as majority Republicans prioritized Gianforte’s slate of tax cuts, which focused on business relief and making the state more attractive for entrepreneurs. Gianforte’s budget did put a comparatively small amount of money, $3 million, toward expanding relief programs for low-income taxpayers. The governor’s highest-profile income tax cut, in comparison, was projected to cost the state $30 million in annual tax revenues.
A fiscal analysis prepared by the governor’s budget office estimates that CI-121 would immediately cost local governments roughly $150 million a year in tax revenues, approximately 9% of the $1.6 billion the state revenue department says those governments collected in 2020. The analysis also notes that the fiscal gap created by CI-121 would widen as the tax cap depresses future revenue growth over time.
Monforton, a former Republican state legislator who now identifies as a Libertarian, argued this week that other states that have adopted Prop 13-style measures have managed to develop workable tax systems.
“The notion that there is going to be sharp cuts or any cuts to revenues to governments is speculative at best, and most likely wrong,” he said. “What local governments will have to do is get used to a reduced growth rate in revenues, just like all of the rest of us.”
“We all know that there is excess spending at every level of government,” he said.
WHAT COMES NEXT
In order to get CI-121 on the ballot, supporters need to collect signatures from 10% of the state’s electorate, 60,359 voters, including at least 10% of voters in 40 of Montana’s 100 House districts.
Some CI-121 opponents, led by the Montana Federation of Public Employees, have turned to the courts in an effort to derail the initiative. They filed a lawsuit last month, arguing in part that Attorney General Austin Knudsen failed to properly review the initiative for the harm its tax code changes could cause Montana businesses.
Legal wrangling in that lawsuit temporarily halted signature gathering, but a Helena judge ruled late last month that initiative backers are free to collect signatures while the litigation proceeds. Backers now face a June 17 deadline to qualify their tax revolt for the ballot.
Monforton said this week that more than 1,000 people have downloaded petitions from the initiative’s website, cappropertytaxes.com.
“The opponents know that if CI-121 makes the ballot, Montana homeowners will vote for it overwhelmingly,” he said. “They have good reason to be fearful.”
This story was initially published by Montana Free Press