An Explainer of Income and Wealth in the Time of COVID-19

During the pandemic, there have been many news headlines about the widening wealth gap in the United States. While true, wealth and income gaps existed long before COVID-19, particularly along lines of race. That is no accident. Rather, these gaps are the product of our country’s ongoing history of racist, biased, and discriminatory policies and practices against Black, Indigenous, and people of color (BIPOC). The pandemic has simultaneously made us acutely aware of that fact while also exacerbating the problem.

For starters, let’s distinguish wealth from income and income from wealth. The two terms are commonly used interchangeably but have different meanings. Income is what we get from our employer, our business, rents on properties, and so on. Say, for example, you work at a grocery store that pays you for your work. That is income. On the other hand, wealth represents savings, so it is accumulated over time, and tends to be higher than income. Wealth includes money in the bank, property and land owned, jewelry and art, and the like.

Both wealth and income are essential to long-term financial security. Without income, it is hard to meet basic everyday needs, such as groceries, diapers, school supplies, and clothes. In other words, income helps measure day-to-day economic resources. Wealth gives people a cushion if they lose their job or fall on hard times and allows for big investments in things that can grow wealth, such as higher education and property. Wealth can also generate income through accrued interest on bank deposits and dividends on stocks, for example.

It is possible to have wealth and little or no income. Take owning a home and living on a modest pension as one example. As a different example, take a billionaire, like Jeff Bezos. According to a July 2021 report from the Center on Budget and Policy Priorities, as of 2020, Bezos received an annual salary of $81,840, a modest income for the world’s richest person. Bezos also has wealth in the form of Amazon stock, which grew by more than $100 billion between 2010 and 2018. So, while Bezos has a relatively low income (for the world’s richest person), he has tremendous wealth.

The pandemic is deepening wealth inequality. According to reporting from August 23, 2021, in the first 17 months of the pandemic, billionaires in the United States saw their wealth increase by $1.8 trillion, an amount roughly 144 times the size of Montana’s $12.5 billion 2023 biennial budget. That has happened as the economic downturn of the pandemic has hit ordinary people. Of those billionaires, Elon Musk alone saw his wealth grow by $150 billion, and Jeff Bezos watched his wealth increase by $75 billion. It is not just the wealth of individual billionaires that is increasing, but so is the number of billionaires (from 614 to 708). For perspective, if those 708 billionaires were to sit in the University of Montana’s football stadium (capacity of 25,217), the stadium would be about 97 percent empty. We are talking about a very privileged few here. As a reminder, wealth can generate income, so even if wealthy people (millionaires and billionaires) have relatively little income, they still have resources to finance lavish lifestyles.

This concentration of wealth largely benefits white people. According to an April 2021 report from the Center on Budget and Policy Priorities, the wealthiest 10 percent of white U.S. households hold nearly two-thirds of the country’s wealth. According to September 2020 research of pre-COVID wealth from the Board of Governors of the Federal Reserve System, the average white family had eight times the wealth of the average Black family and five times the wealth of the average Hispanic family before the pandemic. These numbers represent more than a point in time – they represent the historical injustices perpetrated by racist, biased, and discriminatory policies and practices against BIPOC people. Wealth, or a lack thereof, can persist across generations. The accumulation of wealth represents access to homeownership opportunities, the passing down of resources from generation to generation, the ability to save, and a tax code that favors wealth over income, among other things. Remember, wealth can generate income, which also means that it can deepen income inequality.

White people have been more insulated from the financial impacts of COVID. Americans with higher incomes, who are more likely to be white because of ongoing historical racist policies and practices, have had more flexibility to work from home, protecting them from the virus and the economic downturn. In fact, households with annual incomes of $200,000 or more were nearly six times as likely as households with annual incomes of less than $25,000 to have switched to telework in 2020.

BIPOC people are overrepresented in jobs the pandemic hit the hardest. A July 2021 analysis by the Economic Policy Institute shows that while the overall unemployment rate fell, white people fare better. As of the analysis, Hispanic workers were still nearly 70 percent more likely than white workers to face unemployment, and Black workers were twice as likely as white workers to face unemployment.

Wealth inequality helped white people who lost job-related income. For example, according to a July 2021 report from the Center for American Progress, nearly 46 percent of white households that saw job-related income loss used savings to cover expenses, compared to roughly 31 percent of Black households. This means that when households needed to rely on savings, fewer Black families could do so, despite the disproportionate impact of the pandemic on Black people.

While undeniably linked, income and wealth are distinct. Our country’s ongoing history of racist, biased, and discriminatory policies and practices deny BIPOC people equitable access to either, creating an uneven recovery from the pandemic. Lawmakers in Congress and the Montana Legislature can do something about this. Some solutions include providing financial support for BIPOC entrepreneurs to start and grow their businesses, investing in early child care and education, providing financial support for higher education, and strengthening taxation of wealth and high incomes to sustain transformative investments in BIPOC communities.

The Data is in: Families are Spending their Child Tax Credits on Basic Needs

We’ve written before about how the expanded Child Tax Credit (CTC) is a historical step in lifting children out of poverty. But new data released from the U.S. Census Bureau can help us better understand how families use the expanded tax credit to meet their basic needs.

First, a quick recap about what the expanded CTC is: 

The CTC has long been part of our tax code. This past summer, Congress increased and expanded it to help families recover from the pandemic and address the cost of raising children. Congress increased the benefit amount, included 17-year-olds, and allowed families living on the lowest incomes to receive the full benefit for the first time. Families receive $250 a month per child aged 6-17 and $300 a month for children under 6.

Over 209,000 children qualify for the credit in Montana. The expansion is projected to reduce childhood poverty in the state by 45 percent a year if made permanent. For more information on how the expanded CTC works, be sure to read our blog post here.          

New Data Shows Families in Montana are using CTC to meet basic needs.

Since the summer of 2020. the U.S. Census Bureau has been conducting the Pulse Survey to measure the effects of the pandemic on households. Recently, the survey has asked households with children how they have spent their credits.

Data from July through September shows us that families in Montana used their first two CTC payments to meet basic needs, including food, clothing, rent, and utilities.

Here are some important takeaways from the data:

  • Nearly half (44%) of all families are using their credit on food for their household.
  • 3 out of 5 families spent their credits on basic needs and/or educational expenses regardless of their income.

For families living on less than $35,000 a year, the credit is even more essential. Here’s how families living on low incomes used their credit:

  • Food  65% of families spent their credit on food.
  • Utilities – 40% of families used their credit on utility bills.
  • Educational expenses – 34% of families used their credit on educational needs, including after-school care.Clothing – 32% of families used their credit on clothing.
  • Rent or mortgage – 29% of families paid rent or their mortgage with their tax credit. 
  • Basic needs and educational expenses – 4 out of 5 low-income families used their credit on basic needs and/or educational expenses. 

The tax credit also helps families afford to work.

In Montana, ten percent of families, and 17 percent of families with children under the age of 5, used the credit to pay child care expenses. The coronavirus pandemic has forced many parents, especially mothers, out of the workforce, due to health concerns, school closures, and a lack of affordable child care. For families who need child care to work, the credit helps make work accessible.

Congress should make the expanded CTC permanent.

This new data from the Census Bureau demonstrates how much families need this additional support. When families can afford rent, food, and other necessities, children ultimately do better. Congress should make the expanded CTC permanent and continue this historic victory against childhood poverty.

MBPC Opinion Editorial: It is time to make billionaires pay their fair share

Billings Gazette and Helena Independent Record

A fair economic recovery is possible and affordable. It’s time for billionaires and corporations to chip in.

In Washington, Congress is debating how to help families get back on their feet after a challenging 18 months. However, with so many Montanans still struggling, we cannot afford to return to the way things were. We need to move forward to something better.

While businesses are grappling with the fallout of the global health pandemic and economic downturn, many families know that this crisis has merely laid bare the barriers they have long faced. Rising housing costs and the pressure of balancing caring for family — both young and old — have made it nearly impossible to earn enough to make ends meet. Investments in child care, affordable housing, and home- and community-based services will help people return to work and build a future for their families. They will also foster the workforce that businesses need to get back up and running.

Congress has the opportunity right now to fund these and many other critical investments by ensuring the wealthiest Americans pay their fair share in taxes. Currently, our federal tax system is riddled with loopholes that benefit the wealthiest households and corporations at the expense of investments in the rest of us. Lopsided tax cuts enacted in 2017 made the tax code even more unfair, showering the wealthiest with additional, excessive perks. In 2020, the richest 20 percent of Americans received nearly three-fourths of the tax cuts, costing our country $205 billion. Congress’s plan would make sure the richest 1 percent are paying their fair share.

Making matters worse, the top 1 percent of earners avoid $163 billion in taxes every year. A recent investigation exposed how the country’s wealthiest individuals pay far less than they’re supposed to in federal income taxes. Simply improving tax collections of taxes already due and avoided, mainly by the wealthiest, would add $1.6 trillion in revenue over the next decade.

It is long past time to make a change. Congress should do what’s necessary to ensure billionaires can’t use loopholes and other tactics to avoid paying income taxes on their fortunes.

Congress’s plan would make sure people like Jeff Bezos are paying their fair share. The proposed individual income tax changes would require the richest 1 percent to pay for 97 percent of the tax increase, which will start to address inequities in America’s tax system. And when paired with increases in the child tax credit and the earned income tax credit, these improvements will help families with the lowest incomes – who are often left out of tax reform.

What’s more, a recent study by the Institute on Taxation and Economic Policy found that at least 55 of the nation’s largest companies paid no federal corporate income taxes in 2020. The current plan being discussed by Congress calls for increasing the corporate income tax rate for companies with over $5 million in annual profits and lowering the rate for small corporations with income below $400,000. The proposal also helps level the playing field so small businesses can compete by limiting the amount of taxes avoided by multinational corporations that shift income overseas.

Corporations and the wealthiest have been getting a special deal for too long. Congress should reduce our tax code’s inequities. Most importantly, it should make the investments needed to ensure everyone is included in our economic recovery. Congress has a historic opportunity to close offshore tax haven loopholes, make billionaires pay their fair share, and go after tax cheats. And with new investments in child care, education, and housing, we can make sure all Montanans can thrive.+1 

Rose Bender is Deputy Director of Research and a Senior Fiscal Policy Analyst with the Montana Budget & Policy Center – a nonprofit organization focused on research and advancement of public policies that help families living on low incomes.

Wealthiest Should Finally Pay their Fair Share

A recent investigation found that many of the wealthiest Americans pay little to no income tax each year while tens of millions of middle-class people have it withheld from every paycheck they receive. Those who use their income to buy groceries, school supplies, and pay for housing pay a much higher tax rate than those who have endlessly expansive resources.

Our current federal tax system is unfair, and we are encouraged by recent efforts to make sure those at the top and large corporations are paying their fair share, to invest in critical needs that will help families struggling, like housing, education, and child care.

Much of the income of the wealthy comes from gains in the value of stocks and other assets, and if assets are held onto, taxes are avoided. When the wealthy are required to pay taxes on the income from these assets, such as capital gains and dividends, they pay at tax rates that are far lower than the tax rates they would pay on wages and salaries.

The tax breaks and loopholes that make this tax avoidance possible have been expanded in recent years, including in the 2017 federal tax reform, increasing the already rampant disparities in incomes across race and class.

Montana’s state and local tax codes worsen the economic and racial inequities by asking taxpayers with lower and middle incomes to pay a larger share of their income in taxes than the wealthiest taxpayers.

We as a nation have a serious need to rebuild infrastructure and address glaring economic and racial inequities that have been named and grown during the COVID-19 pandemic. Luckily, fixing the flaws in the tax code that allow the wealthiest to avoid taxes would provide much-needed revenue to address our infrastructural needs and invest in our communities.

Federal lawmakers should make the following reforms to make sure the wealthy contribute to much-needed public investments. These reforms would only affect households with incomes in excess of $400,000.

  • Tax capital gains that have escaped taxation at the end of an individual’s lifetime.
  • Eliminate lower tax rates on capital gains and dividends for those with incomes over $1 million, taxing that income at the same tax rate as salaries and interest, and eliminating the deduction for pass-through income created in 2017. A new tax on the incomes of millionaires should also be strongly considered.
  • Bolster other taxes, such as the corporate income tax and the estate tax, which fall most heavily on the wealthiest households. Increase the corporate tax rate to 28 percent and make changes to the tax code to address the longstanding and rampant use of tax havens.

These proposals, together, represent a modest step in the direction of greater tax fairness.

A State Earned Income Tax Credit: Helping Montana’s Families and Economy

  • The Earned Income Tax Credit (EITC) is one of the most sensible aspects of our tax code. It is a tax credit for working people with low incomes. Giving struggling families this kind of break makes sense not just for them but also for our communities and our economy, since when they spend, it helps businesses. The EITC is a common-sense tax policy that most of us can get behind.
  • In 2017, the Legislature passed a refundable state credit on a bipartisan vote. It is set at 3 percent of the federal EITC, effective for the 2019 tax year.In 2019, the first year that the state EITC could be claimed, 71,473 working Montanans with low incomes benefited.[1]
  • The phased-in EITC boosts wages for working families on low incomes. A state EITC set at 3 percent of the federal credit offers a maximum benefit of $196.71 a year[2]. When combined with the federal credit, this is the equivalent to a wage increase of $3.25/hour for a single parent of three.

  • For most families, the EITC is a temporary tax break that allows people to provide for their families. The majority of recipients receive the credit for one to two years. The few hundred dollars can help them stay current on bills, afford a car repair so they can get to work, or buy school supplies.[3]
  • For families with two children and two parents experiencing poverty, Montana has the third highest tax liability of any state in the nation. For single-parent families with two children, Montana has the fourth highest tax. [4] A state EITC restores tax fairness by reducing the overall taxes the lowest-income workers’ pay.
  • A state EITC reaches families and communities in all 56 counties to help support even the smallest communities, families, and small businesses. In 2017, 65 percent of EITC participants lived outside of the seven biggest Montana cities.[5]
  • The EITC is an economy-boosting policy that raises the floor on wages and benefits to help make sure that average people have enough money and security to keep up the basic spending on which the economy depends. The federal EITC injected $173 million into Montana’s economy in 2014.[6]
  • EITC administrative costs are less than 1 percent of the benefits provided. Errors are primarily due to the complexity of rules surrounding the credit, not fraud.

LOST Ground: Local Option Sales Tax Leaves Many Communities Behind

For decades, Montana has failed to sufficiently fund communities’ needs, resulting in a revenue system where local communities are picking up the tab. However, recent efforts to enact legislation to allow local governments to implement local sales taxes would disproportionately impact families living on lower and middle incomes, while also further disadvantaging Montana residents living in rural communities, particularly those in Indian Country. Insufficient funding for communities is a statewide problem and deserves a statewide solution. Raising revenue at the state level and funding local services is a more equitable solution to the challenges faced by our local governments both big and small.

This report will provide an overview of the local option sales tax proposal, the potential impact on families living on lower and moderate incomes, and the opportunity to exclude rural communities.

Overview of Local Option Sales Tax

Local option sales taxes (LOST) are sales taxes levied by county or city governments on specific goods and services. All of the 37 states[1] that allow LOST also have general statewide sales taxes, with the exception of Alaska.

Local option sales taxes could raise revenue for some large communities and those heavily reliant on tourism. But a LOST would disproportionately affect Montanans living on lower and middle incomes. It would deepen economic inequality in the state even further by requiring rural people to subsidize urban areas when they travel to buy goods and services. Local option sales taxes are a tool that would empower some communities while doing nothing for, or even hurting, others.

Problems with Local Option Sales Taxes

Families Living on Lower and Middle Incomes Pay More

Montana’s tax system is regressive, meaning families living on low and middle incomes pay a larger share of their income in state and local taxes than the wealthy.[2] However, Montana’s tax system is less regressive than most other states, much of which is due to our lack of a statewide sales tax. Montanans living on low and middle incomes spend a larger proportion of their income on goods and services than higher-income Montanans. While Montana imposes selective sales taxes on certain goods (e.g., fuel, alcohol, and accommodations), the impact of these taxes is much smaller on Montana’s overall tax system than a general statewide sales tax.

Local option sales taxes would further exacerbate the regressivity of Montana’s tax system, requiring families with lower incomes to pay an even greater share of income in taxes than the wealthy. Sales taxes are by far the most regressive of all the tax types, and on average are significantly more regressive than property taxes.[3]

A 3 percent LOST on three major urban centers in Montana (Billings, Bozeman, and Missoula) would disproportionately increase taxes on the families living on the lowest incomes, both inside and outside of those three communities. The first chart below shows the increase in the share of state and local taxes paid by income level with a LOST for the residents of those three urban centers. Families earning less than $23,000 annually see a 6.1 percent increase in their taxes paid as a percentage of income.[4] The increase in taxes decreases as incomes rise, with households with annual incomes of over half-a-million dollars seeing only a 1 percent increase.

Montana residents outside of Billings, Bozeman, and Missoula often travel to these urban areas to shop, dine out, attend events, and visit family and friends. They too would see an increase in their state and local taxes paid. Unfortunately, they would not have the added benefits of more revenue for their own communities. All Montana families earning less than $23,000 annually and living outside of these major, urban centers would see an increase in taxes of 1.5 percent of income, on average.[5] The percentage increase in taxes decreases as incomes rise, with households with annual incomes over half-a-million dollars seeing only a 0.3 percent increase.

Local Governments Lack an Effective Mechanism to Reduce the Impact on Lower-Income Families

While the regressivity of the sales tax is a well-known problem among policymakers, some states have implemented tax credits to help offset some of the regressivity of a sales tax, like Maine’s refundable sales tax fairness credit.[6] However, with a LOST, local governments do not have an effective mechanism for administering refundable credits to offset the regressivity of a LOST. While local governments do have the ability to offset sales tax revenue with a reduction in property tax mills, most of the benefit from mill reduction benefits large, centrally assessed taxpayers, not local residents.

Local Option Sales Tax Creates Further Revenue Disparities Across the State

As many rural residents travel to urban areas for their day-to-day needs, a LOST would require them to contribute money toward the better-resourced urban area’s services while their communities went without. Local option sales taxes result in revenue flowing from lower-resourced communities to higher-resourced communities, with the citizens in the losing county paying for the more prosperous county’s roads, schools, and social services.[7]

While proponents of LOST highlight out-of-state tourism, the reality is that many counties are heavily reliant on in-state residents traveling and spending money. One of the arguments for a LOST in Montana is that out-of-state tourists would contribute to the roads, emergency services, and any other public services they access during their visits. However, on a statewide level, nearly half of all tourism spending in Montana is done by in-staters when traveling to other cities in the state for business, recreation, sports tournaments, shopping, and more.[8] The share of tourism spending from in-staters varies by county. The following map shows the portion of tourism spending by in-staters by county.

A majority of counties in the state have a high share of tourism from in-state residents, although the amount greatly varies by county. Counties close to national parks attract a larger share of their tourism spending from out-of-state residents while many other urban centers get almost half or more of their tourism spending from in-staters. Park and Gallatin counties see a much lower proportion of their tourism from in-state residents than Yellowstone County, a regional shopping hub, for example. Other larger communities that do not border national parks, like Yellowstone County, draw in more rural residents for shopping, basketball tournaments, and the like, seeing around half of their tourism spending from in-state residents. Many more rural counties see greater than 70 percent of their tourism spending coming from Montana residents, as they see less tourism spending in general, and correspondingly visitors from out-of-state.

These estimates are the portion of total travel spending from in-staters, and do not consider the share of spending that residents of each county do, and which would be subject to a LOST.

Disproportionate Impact on American Indians

Montanans who are American Indians, living both on and off reservations, would disproportionately feel the negative impact of a LOST. Barriers to higher education and employment and ongoing discrimination have resulted in lower than average incomes for American Indians in Montana. While 13 percent of Montanans live in households earning less than the federal poverty level, 35 percent of American Indians live in households earning less than the federal poverty level.[9] Families living on lower and moderate incomes pay a higher share of local option sales taxes than the wealthy. As American Indian families are more likely to be living on lower incomes, American Indians would pay a disproportionately higher share of local option sales taxes.

To compound matters, a number of factors hamstring reservation economic opportunity, including a limited access to grocery stores and retail stores. This is due, in part, to the historical injustices of colonists that isolate reservation communities from mainstream economic life and make developing reservation economies challenging.[10] The legacy of this past requires families living on reservations to travel to regional shopping centers for their everyday needs for food, clothing, school supplies, and more. According to one estimate, on some reservations, nearly 80 percent of dollars flow out of the tribal economy without cycling even once, meaning those dollars do not circulate in or benefit the tribal economy.[11]

On average, counties with an American Indian population greater than the state average have access to 2.4 food outlets per 1,000 people while counties with a lower percentage of Indigenous people have access to 3.1 food outlets per 1,000 people.[12] Because of discrimination and lack of public or private investment in Indian Country, this trend of less access to food and other necessities in areas with large concentrations of American Indians continues for all types of retail outlets. Being unable to shop for groceries locally results in a disproportionate number of indigenous Montanans traveling from their own communities to urban areas to purchase necessities, potentially being subject to local option sales taxes that do not benefit their communities, and further depressing local economies.

Montana Needs a Statewide Revenue Solution

As communities across the state struggle to provide adequately for their residents, state policymakers should consider more equitable and statewide revenue sources that can help restore needed funding to local governments to provide services. Montana should consider fairer options such as closing corporate tax loopholes, restoring a top income tax breaket, and eliminating the capital gains tax credit which allows investors to pay a lower tax rate than wage-earners.

Revenue raised should be responsibly invested where communities need it most such as funding school infrastructure, investing in community health needs like mental health support, and supporting affordable housing solutions. Together, we can find solutions without disproportionately burdening rural Montanans, families living on lower and middle incomes, and Montanans who are American Indian.

Revenue: The Neglected Foundation for Kids’ Success

In Montana, we share responsibility for each other, and the strength of our children and communities depends on the vibrancy and cohesiveness of our diverse population. Montana kids and families do best when community health services are funded, students and teachers have what they need to provide a modern education for every child, and historical and current day policies that create barriers for American Indian children and families are eliminated. Where our kids start out should not determine where they end up.

Unfortunately, Montana ranks 26th in the nation for overall child well-being. We even rank lower than our neighboring states Idaho, North Dakota, and South Dakota.[1] For too long, Montana policymakers continue to allow tax cuts for special interests that have starved our state budget from the revenue we need to prioritize crucial programs for Montana kids. As a result, many children are walking into schools with failing heating systems, out-of-date technology, and teachers who are stretched too thin leaving students without the full support they need to succeed. Many of these children are in families struggling to cover the basic necessities, like nutritious food, stable housing, and quality early childhood care.

It is not too late for Montana to chart a new course to improve child well-being. This work starts with sound tax policies that ensure a fair tax system that generates sufficient revenue to support programs and services to improve the lives of children. Specifically, Montana policymakers should:

  • Enact tax fairness measures that will provide the revenue to invest in early childhood education, quality public schools, and childhood health and safety;
  • Recognize tribal nations’ sovereign tax authority and their efforts to provide essential services for their communities; and
  • Bolster support for Montana families and children through expanding the state’s earned income tax credit, establishing a property tax circuit breaker for families living on lower incomes, and enacting a state child tax credit.

Revenue Unleashes Kids’ Potential

Montana is falling behind other states, resulting in a lower quality of childhood health. Montana ranks 44th in the nation for childhood health.[2] When our children struggle, it is the sign of a deeper problem.

It means our families, communities, and economy are struggling. Policies like public pre-kindergarten (pre-K), investments in public school infrastructure, and childhood health can improve health and well-being for Montana’s children. These investments pay off enormously over time.

One of the most important investments we can make to ensure our children’s success in kindergarten and beyond is early childhood education. Yet, Montana is one of only six states that have not funded statewide public pre-K, providing four-year-old children with access to quality early childhood education. High-quality preschool helps prepare children to enter school with stronger cognitive and emotional skills and promotes better economic and health outcomes over a lifetime.[3] Investing in quality early childhood education is good for the state too, as it produces a 13 percent return on investment through greater academic achievement, higher graduation rates, reduced crime, and increased lifetime earnings.[4] Quality early education also improves health outcomes for children through nutrition programs, increased health and dental screenings, and improved child and parent mental health.[5] Montana should follow the lead of almost all other states and invest in the education of our earliest learners.

High-quality infrastructure helps kids learn, improves student outcomes, and reduces dropout rates.[6] The average age of Montana school facilities is 53 years, with well over $300 million in needed repairs. [7],[8] In 2017, the Montana Legislature restructured school infrastructure funding into two funding mechanisms: school major maintenance and debt service assistance. The school major maintenance fund provides for large, periodic investments, like new boilers or roof replacements, by subsidizing districts’ investments in these improvements on a prorated basis, depending on the taxable value per student (districts with lower property values who raise less money per mill receive more state assistance). The debt service assistance program helps districts fund new construction and major renovations. Montana should fully fund investments in school infrastructure to ensure that regardless of race, place, and income level, our children are walking into schools with resources to help children learn in the 21st century.

Too many children in Montana are slipping through the cracks without adequate support and services. The suicide rate is a national issue, having increased for 13 years in a row, but it is even more pronounced in Montana.[9] Montana has the second highest rate of suicide in the nation. Montana youth are dying of suicide almost three times as often as the national average.[10] As the long-term, intergenerational impact of colonization, cultural suppression, and oppression of Indigenous people has created a system where Indigenous youth experience higher rates of behavioral and mental health challenges and disproportionately high rates of suicide.[11] In 2017, 10 percent of all high school students in Montana reported suicide attempts within the last year, while nearly one-quarter of American Indian high school students on reservations reported suicide attempts (23 percent).[12] Montana can improve life outcomes for our children with ongoing investment in trauma-informed youth suicide prevention and education, with a focus on American Indian children.

In addition to the lack of critical investments in our children, tax policies that impose higher tax rates on families living on lower and middle incomes than the wealthy exacerbate the racial wealth gap. While in recent decades, people of color have made progress in many areas, state and local fiscal policies too often have not been part of this progress and instead have extended or cemented racial disparities in power and wealth.[13] For example, the structural changes to Montana’s tax system in 2003 that collapsed the number of income tax brackets from 10 to 6, lowered the top tax rate for personal income tax, and created a credit for capital gains increased the racial wealth gap, as white families in the nation are three times more likely to be in the top one percent of taxpayers than families of color.[14]

Luckily, there are many options that can help improve the fairness of Montana’s tax system while raising needed revenue for our children. Montana policymakers have a menu of options that will make Montana’s tax code fairer and raise needed revenue for essential services. These measures include:

  • Restoring a top income tax bracket on the wealthiest (those making more than $500K annually);
  • Closing corporate tax loopholes;
  • Eliminating unfair business tax breaks;
  • Asking wealthy Montanans to pay a higher tax rate than those living in poverty; and
  • Updating our tax code to reflect the current economy.

These common sense solutions can raise almost $250 million, which can be used to improve outcomes for Montana’s children, ensuring a more robust economy for future generations.

Revenue in Indian Country

Kids do best when their communities have adequate revenue for education, public health and safety, and infrastructure. A long history of systemic racism and current day discriminatory practices have erected barriers that hold many American Indian children back from reaching their full potential. These barriers include the lack of jobs for their families, unaffordable or unavailable quality childcare, and a shortage of transportation options. In fact, 39 percent of American Indian children live in high poverty areas, compared to 7 percent of all Montana children.[15] High poverty areas are areas where 30 percent or more of the population are experiencing poverty (income of $21,720 or less annually for a family of three).

While tribal nations operate many of the same public services as other levels of government like maintaining roads, bridges, and other infrastructure; providing housing; and maintaining public order and safety, they often do so with fewer revenue sources and limited taxing authority. A history of legal battles and discriminatory legislation have diminished tribal nations’ exclusive authority to tax within their own reservation boundaries. Tribal self-sufficiency and self-government depend upon a tribe’s ability to raise revenue and regulate its territory.[16]

Exempting tribally owned fee land from property taxes, as it is done for federal, state, and local governments, would give tribal communities the same latitude as other governments in Montana to provide essential services and economic contributions to the state. Montana should also clear up taxation authority of tribal nations by enacting laws that defer to tribal nations for taxation on reservations, such as reservation sales and use taxes or tribal utility or severance taxes. These efforts will allow tribal governments to begin to adequately fund services and programs for their children and communities, like state and local governments throughout the state.

How Improving Tax Policies Will Help Families 

Montana’s tax system requires those living on the least to pay a higher tax rate than the wealthy.[17] Montana can do better for these families and make it a little easier to support their children. Tax policies targeted to families, like the earned income tax credit (EITC), property tax circuit breakers, and the child tax credit can help Montana families afford necessities like clothing, school supplies, food, rent, and transportation. 

Tax Credits for Working Families

The federal EITC is the most effective anti-poverty program in history, lifting millions of families and children out of poverty. In 2017, the Montana Legislature passed a refundable state EITC on a healthy bipartisan vote. It is set at 3 percent of the federal EITC, effective for the 2019 tax year.[18] Approximately 74,000 working Montana families with low incomes benefit.[19] However, the state benefit is currently maxed out at $192, making it the weakest state EITC in the nation.[20]

Increasing the state EITC to 20 percent of the federal credit would further help Montana families provide for the needs of their kids. Coupled with the federal EITC, a 20 percent state EITC is equivalent to a wage increase of $3.78 an hour for a parent raising three children.[21] Supplementing the wages of working families allows parents to provide for their children and purchase needed goods locally.

Property Tax Help for Montanans on Low Incomes

While state policymakers continue to research and debate the level of property taxes in the state, any property tax reductions should be targeted to those who need it the most. Property taxes are regressive, meaning families living on lower incomes pay a larger share of their income in this tax than wealthy families. Property tax circuit breakers prevent property tax overload just like an electric circuit breaker: when the property tax bill exceeds a certain percentage of the taxpayer’s income, the circuit breaker reduces the property taxes in excess of the circuit breaker.[22]

With residential property taxes making up more and more of the total share of property taxes over time, homeowners and renters are feeling the pinch of high property taxes. Due in part to legislative decisions to exempt business property from the tax base and a lack of state investment leaving communities to pick up the slack, in the last two decades, the share of property taxes falling on the backs of individual homeowners has risen – from 34 percent in 1994 to more than 48 percent today.[23] A property tax circuit breaker would target property tax relief to families who need it most.

Tax Credit to Help Parents Make Ends Meet

The federal child tax credit (CTC) is designed to provide an income boost to parents or guardians of children and other dependents, helping working families offset the cost of raising children. This tax credit is a powerful weapon against poverty, lifting 4.3 million people nationwide out of poverty in 2018, including about 2.3 million children.[24] In fact, one of the best ways to help families afford the heavy cost of child care is to invest in a state child tax credit.

Currently the federal CTC is nonrefundable meaning the lowest income families cannot reap the full benefits of the credit. Montana can help the families struggling the most and lift children out of poverty by adopting a fully refundable state child tax credit. For families currently not receiving the full $2,000 per child federal tax credit, they would receive a state-level refundable credit bringing their combined state and federal credits to the full $2,000 per child.[25] This incredibly progressive tax credit would target the greatest benefit to the families with the lowest incomes (those earning up to $36,400 annually), with the credit tapering off as income increases. With this credit, Montana would see a reduction in child deep poverty of greater than 15 percent.[26]

A Montana Children Can Count On

Montana has a chance to improve the lives and futures for our children. By better balancing our revenue system, we can invest for the long term and ensure opportunity for the next generation. Investing in our families through education, healthy food, and safe communities can help our children live the lives we hope for them.

Montana can learn from other states who have used thoughtful state revenue policies to improve the lives of children. A few years ago, Minnesota was struggling. The state was not raising enough money to fund schools or keep a competitive economy, and the tax system was becoming increasingly unfair.[27] In 2013, Minnesota raised the income tax rate by two percentage points (to 9.85 percent) for those making over $250,000.[28] The revenue allowed the state to invest in schools, health care, affordable college education, job creation, and more.[29] Minnesota moved from a state ranking for childhood well-being of 6th in 2012 to 3rd in 2013, and 1st in 2015.[30]

Montana can do better for our children by following the lead of states like Minnesota who have chosen to progressively raise revenue and put it into programs that are proven to improve the lives of children and families. Allowing tribal nations to raise revenue to provide for local needs like infrastructure, schools, and public health and safety puts children in all communities on more even ground across the state.

This is the time to take bold action to improve child well-being in Montana. Cleaning up Montana’s tax code is how we will pay for the building blocks of opportunity for every child in Montana, building a brighter future for all of us.

Making Montana’s Tax System Work for All Montanans

The cornerstones of our communities rest on modern schools, safe roads, reliable water systems, and responsive public safety services. A healthy state budget ensures we can invest in and build up a solid foundation for our state and communities. Unfortunately, declining state revenues threaten Montana’s ability to adequately invest in the public institutions that educate our children, keep our communities safe, and provide healthcare and other services to families across the state. House Joint Resolution 35, passed by the 2019 Montana Legislature, proposes that the revenue interim committee “study Montana’s state and local tax systems and make recommendations about whether to revise the state’s current tax structure.” [1] The committee is charged with considering changes to the tax code to:

  1. Establish a tax structure that works with the current economy;
  2. Stabilize state revenue and reduce volatility;
  3. Promote the long-term economic prosperity of the state and its citizens;
  4. Reflect principles of sound tax policy, including simplicity, competitiveness, efficiency, predictability, stability, and ease of compliance and administration;
  5. Ensure the tax structure is fair and equitable; and
  6. Allow Montana to compete with other states and nations for jobs and investments.

Lower- and Middle-Income Households in Montana Pay a Higher Tax Rate

In evaluating the tax system of Montana, policymakers should keep in mind how our taxes affect households at different income levels. Montana’s tax system is regressive, meaning families living on low- and middle-incomes pay a higher percentage of their income in taxes than high-income households. In Montana, those with incomes below $18,000 pay 7.9 percent of their income in state and local taxes, while the top 1 percent (those with income above $448,500) pay 6.5 percent.[2]

The following chart outlines the three main state and local taxes – income, property, and sales/excise –  and how the cost of these taxes is distributed among taxpayers. Both property and sales/excise taxes are regressive. Conversely, state income taxes in Montana are progressive. While the income tax is progressive, it does not offset the regressive effects of the property and select excise taxes on a state and local level. Montana’s tax system would be substantially more regressive if it included a general sales tax. However, even without a sales tax, families in Montana living on low- and moderate-incomes face a higher overall tax rate than wealthier households.

Overarching Principles for Successful State Tax Studies

As Montana policymakers consider studying the state’s overall tax system, Montana can learn from 22 states and the District of Columbia that have successfully embarked on similar efforts in the last decade.[3] The Legislative Revenue Interim Committee should take into consideration the following lessons learned:

  • Tax commissions should avoid deep tax cuts without offsetting tax increases, as most state budgets are already stretched thin;
  • Tax commission reports should include a range of proposals and show advantages and disadvantages of each specific proposal with revenue estimates;
  • Tax commissions should have diverse memberships and hear from multiple perspectives;
  • Tax commissions advocating dramatic overhauls of state tax structure did not produce results;
  • Tax commissions stacked with members from only one side of the ideological spectrum saw proposals struggle;
  • Tax commissions should evaluate the tax system from multiple lenses, including race, income groups, and other socioeconomic indicators; and
  • Tax commissions should recognize the limitations of tax policy in influencing economic development, as scholars have yet to come to consensus on which tax policy proposals, if any, are effective in shaping business decisions.[4],[5]

Principles of a High-Quality State Revenue System

The National Conference of State Legislatures recommends nine principles of high-quality state revenue systems, which are good guidelines for policy proposals from state tax commissions.[6] A high quality state revenue system:

  • Is comprised of elements that are complementary, including finances of both state and local governments;
  • Produces revenue in a reliable manner involving stability, certainty, and sufficiency;
  • Relies on a balanced variety of revenue sources;
  • Treats individuals equitably by implementing similar tax responsibility on people in similar circumstances and minimizing taxes on those living on low-incomes;
  • Facilitates taxpayer compliance by creating a system that is easy to understand and minimizes compliance costs;
  • Promotes fair, efficient, and effective administration;
  • Is responsive to interstate and international economic competition;
  • Minimizes its involvement in spending decisions and makes any involvement explicit; and
  • Is accountable to taxpayers.

As Montana sets forth on a study of the state tax system, policymakers should ensure: a diverse make-up of study members; specific, carefully analyzed recommendations; and close consideration of the nine principles of a high-quality revenue system, in order to move good tax policy forward. A high-quality tax system will help Montana to balance a healthy state budget with positive impacts on our state and communities.

Capital Gains Tax Credit: Valuing Wealth Over Work in Montana

In 2003, the Montana Legislature passed a capital gains tax credit that benefits a very narrow portion of our population at the great expense of our collective ability to adequately invest in public programs, from education to health care. Currently, Montana is one of just nine states offering a significant tax break for capital gains income.[1] Since 2003, this tax break has proven to be unaffordable, unfair to working-class Montanans, and has not helped the economy. In fact, the tax credit costs the state tens of millions of dollars in state revenue each year. This reduction in revenue jeopardizes our collective ability to invest in schools, families, and communities across this state. It is time to take a hard look at the usefulness of this costly tax break that predominantly benefits the wealthiest Montanans.

Key Findings

  • The capital gains credit lowers the effective tax rate for households who make money from investments compared to those who earn income from wages.
  • Montana is one of only nine states that offer a broad tax break for capital gains income.
  • In 2016, half of the capital gains tax cut went to the wealthiest one percent (just 4,600 households in Montana, making more than $371,000).
  • In 2015, 85 percent of taxpayers (more than 476,000 Montanans) did not benefit from the capital gains tax credit.
  • In 2017, the capital gains tax break cost the state almost $50 million in revenue.
  • Rolling back the capital gains tax break would free up new revenue to support growth-oriented public investments, like education, work support, and infrastructure improvements.
  • Numerous economic studies have shown that there is little connection between favorable treatment for capital gains and economic growth in either the short or long run.

What Are Capital Gains?

Capital gains are profits from the sale of stocks, bonds, real estate, art, antiques, or other assets. These profits are usually not taxed until they are “realized,” that is, until the asset is sold. This means that a stock or vacation home can become more and more valuable, but the investor will not pay taxes on the appreciation of that asset until it is sold. The capital gains are calculated by taking the difference between the original purchase price and the price at the time of sale. The assets owned by everyday Montanans – houses and retirement income – are generally exempt from taxation when sold.

How Does Montana Treat Capital Gains?

In 2003, the legislature passed Senate Bill 407, which created the capital gains credit, and also instituted other tax cutting provisions.[2] The credit lowered the effective tax rate on capital gains by giving a nonrefundable credit starting in 2005.

Montana is one of only nine states that provide a broad tax break for income from capital gains.[3] While the federal tax codes provides a lower rate on capital gains income, nearly all states require equal treatment of income from capital gains as income from wages.

Capital Gains Tax Breaks Value Wealth Over Work

The creation of a tax break for capital gains income has created a tax system that favors wealth over work. Capital gains tax breaks mean individuals with incomes from wages pay higher tax rates than people whose income comes from growth in assets.

Chart 1 illustrates the different taxes paid by two individuals with the same amount of income. In 2017, a firefighter in Montana earned an annual wage of $48,790.[4] Compare this taxpayer to an investor who earned the same amount, but through the sale of stock. The firefighter paid $2,224 in state income taxes, and the investor paid $1,247. The investor paid $976, or 44 percent, less in taxes than the firefighter.[5]

Only a small number of Montanans take advantage of the capital gains credit. In 2016, 49 percent of the capital gains tax cut went to the wealthiest 4,600 taxpayers (those earning more than $371,000).[6] In 2015, over 85 percent of Montana taxpayers – more than 476,000 taxpayers – did not receive any benefit from the capital gains credit.[7] Middle- and lower-income Montanans do not benefit from the capital gain credit because they are much more likely to earn their income on the job rather than through large sales of assets.  Furthermore, the most common assets owned by most Montanans—houses and retirement funds—are generally not treated as taxable capital gains when they are sold.[8] Recent analysis by the Montana Department of Revenue shows the vast majority of very wealthy taxpayers benefiting from the capital gains tax credit are taking the credit year after year (as opposed to a one-time profit).[9] The Department looked at the taxpayers with capital gains income of more than $1 million in 2010. In 2015, 82 percent of those same taxpayers were still benefiting from the capital gains tax credit.

Additionally, profits from capital gains have increased significantly since 2001. From 2001 to 2005, capital gains income by Montana taxpayers almost doubled, to over $1.5 billion.[10] The vast majority of that growth (nearly 77 percent) accrued to the wealthiest 10,000 households, with average household income of $362,000 annually in 2005.[11] While capital gains income has increased over the past decade, the state loses out on its full opportunity for needed additional revenue as a result of the capital gains tax break.

Montana Cannot Afford the Capital Gains Tax Credit

The capital gains credit has proven to be unaffordable and hurts our ability to fund services like education, health care, infrastructure, and clean air and water. When SB 407 passed, the legislature expected the bill to cost $26 million in 2005, the year its provisions went into effect. [12] In fact, the combined tax cuts passed in 2003 cost the state $100 million in 2005.[13] In a little more than a decade, Montana has lost approximately $976 million in revenue, from the tax cuts from 2003.[14]

A major portion of the continued revenue loss is attributed to the capital gains tax credit, primarily benefiting the wealthy. While earnings through capital gains dipped during the recession, these earnings have grown significantly since 2009, representing a significant loss in revenue year after year.[15] In 2017, the state lost almost $50 million in revenue as a result of the capital gains tax loophole.[16] This level of revenue could have covered the general fund contribution for FY19 for the Child and Family Services division of the Department of Health and Human Services which includes child protective services, child abuse and neglect services, prevention services, domestic violence, and other programs designed to keep children safe and families strong.[17]

Tax credits are an expense to the state; giving people who sell assets a tax break means the state collects less money. However, unlike the cost of spending on public services which is more stable and benefits everyone, the cost of the capital gains credit to the state is difficult to predict, impossible to control, and benefits only a few. For example, when Montana decides to invest in higher education, the legislature decides the amount the state contributes to universities, community colleges, and technical training centers. In contrast, the full cost of the capital gains credit to the state depends solely on individuals’ decisions to buy or sell assets and is therefore effectively unlimited.

Montana Should Treat Capital Gains Like Other Types of Income

Economic theory and experience indicate that treating capital gains more favorably than earned income will not help the economy grow and may actually prevent growth in the short-term by forcing state budget cuts.[18] In contrast, rolling back this tax break would restore revenue to help support growth-oriented public investments, like education, work support, and infrastructure improvements.

“Capital gains tax preferences are costly, inequitable, and ineffective. They deprive states of millions of dollars in needed funds, benefit almost exclusively the very wealthiest members of society, and fail to promote economic growth in the manner their proponents claim.”

– Institute on Taxation and Economic Policy

Furthermore, Montana should create a level playing field for those earning income through wages, thus creating a greater incentive for businesses to invest in the creation of good-paying jobs. The capital gains credit favors investment in capital over investment in labor, creating potential distortions in investment decisions. As Montana faces continued workforce shortages, we cannot afford policies that might further reduce investment in human capital.

In addition, Montana’s capital gains credit does not distinguish between in-state or out-of-state capital investments and therefore does not create incentives to invest in Montana. In fact, taxpayers can claim the credit when they sell the stock of a company that has never done business in our state.

Tax Cuts to the Wealthy Do Not Grow the Economy

While Montana’s economy has grown over the past decade, research makes it clear that this growth is not a result of tax cuts. The claim of some legislators that supported the 2003 tax cuts for the wealthy that these measures would grow the economy and result in higher revenue is simply not the case. The Montana Department of Revenue concluded, in 2013: “it is unlikely that [the 2003 tax cut] had a significant short-run stimulus effect,” stating instead that the law primarily redistributed tax obligations rather than reducing them.[19] The then-director of the Bureau of Business and Economic Research at the University of Montana stated the data on whether the tax cuts had a statistically significant impact on economic growth was “simply inconclusive.”[20]

In an analysis of the impact of the 2003 legislation, comparing economic growth in Montana to surrounding states, Montana Budget and Policy Center found, at most, negligible evidence that the economic growth Montana experienced over the past decade could be attributed to tax cuts.[21] MBPC measured whether the 2003 tax cuts had a statistically significant change in the actual growth in Montana’s economy by comparing the state’s economy with regional data in such areas as the unemployment rate, income per capita, jobs, wages, or gross state product, several years out.[22] Instead, Montana continues to lose nearly a hundred million dollars in revenue each year that could instead be invested in our local communities.

Because tax breaks on capital gains benefits a small percentage of the wealthiest households, who are more apt to save this money than spend it in local economies, studies show very little economic impact of these tax cuts. Mark Zandi, chief economist of Moody’s Analytics has noted that efforts to provide tax cuts for capital gains income provides one of the lowest impacts on economic growth, as compared with improving policies that help low- and moderate-income families.[23] Dozens of highly credible economic studies around the country show that there is little connection between cuts in individual income taxes for the wealthy and economic growth in either the short or long run. A comprehensive review conducted by the Center on Budget and Policy Priorities noted that of the 15 major academic studies on income tax cuts conducted since 2000, over 75 percent found no significant economic effect of these tax cuts.[24] Since enacting the cuts, most states have actually had slower job growth than the nation as a whole and have seen their share of national employment decline.[25]

Rather than continuing the failed policy of tax cuts, our best opportunity to realize economic growth in Montana is to invest in our communities, through strengthening support for K-12 education, expanding access to post-secondary education and training, supporting families struggling to make ends meet, and increasing good-paying jobs and business growth through investments in public infrastructure. One of the best ways we can ensure adequate state revenue and begin to properly invest in our communities is by ensuring that Montana’s wealthiest households pay their fair share.

Montana Should Restore Equitable Tax Treatment for Capital Gains Income

Now, more than ever, Montana needs to invest in ways that build our workforce and our economy. Our best opportunity to realize economic growth for all Montanans is through investments in our communities. There are fair and effective ways to raise the revenue needed to pay for these public investments. They include ending tax cuts and loopholes that benefit the wealthiest.

Since its passage in 2003, the capital gains credit has cost Montana hundreds of millions of dollars that could have been invested in schools, families, and communities all across this state. Only a small percentage of Montanans benefited; half of the benefit went to the wealthiest 4,600 households. Meanwhile, the vast majority (over 85 percent) of Montana residents do not receive any benefit from this tax break and instead pay a higher effective tax rate on income from wages. Continuing preferential treatment for capital gains income is unfair to hardworking Montanans who earn their income through wages and salaries. We can no longer afford such a costly credit that benefits so few households.

Taxing investment income like we tax income from wages will help us to create jobs and protect our land, people, and the services that make them stronger.

Policy Basics: Individual Income Taxes in Montana

Policy Basics is a series of background reports on issues related to the Montana budget and Montana taxes. The purpose of the Policy Basics series is to provide the public, advocates, and policymakers the tools they need to effectively engage in important fiscal policy debates that help shape the health and safety of our communities.

Introduction to Montana’s Individual Income Tax

For generations, our tax dollars have served as shared investments in the programs and services that make our state a great place to live, work, and play. Tax dollars enable Montanans to work together for those things which we could not achieve alone – educate our children, build and maintain infrastructure, provide public safety through police and fire protection, keep our air and water clean, and pave the way to a strong economy where every Montanan can thrive.

In Montana, these shared investments are managed through the state’s General Fund. Taxes make up the vast majority (94 percent) of the revenue for the General Fund, and the individual income tax is the single largest source of revenue for the General Fund, comprising just over half of the state’s General Fund revenue (Chart 1). [1]

Wages, salaries, and tips make up almost two-thirds (63 percent) of income subject to individual income tax (Chart 2).[2] In general, taxes paid by corporations are paid through the corporate income tax. However, depending on how the entity is structured, business income may be reported through the individual income tax. Specifically, if the business is structured as a C-corporation in order to receive the legal benefits associated with such a status (including limited liability for debts and business actions and access to capital markets), its taxes would be classified as corporate income taxes. All other businesses, including sole proprietorships, partnerships, limited liability corporations, and S-corporations, report income on individual returns, and this amount is reflected in both pass-through income and business income, which comprises less than 14 percent of total individual income.[3]

Key Terms

Progressive refers to a tax or a tax system in which higher-income households pay a larger portion of their income in taxes compared to those households with lower incomes.

Regressive refers to a tax or tax system in which lower-income households pay a larger portion of their income in taxes compared to those households with higher incomes.

2003 Changes to the Montana Income Tax Significantly Cut Taxes for Wealthiest Households

In 2003, the Montana Legislature made significant and harmful changes to our income tax system. That year, legislators passed a bill that greatly altered Montana’s tax system by providing a significant tax cut for wealthiest households.[4] The changes made in 2003 included collapsing the income tax brackets and creating a tax cut for capital gains income. Both of these provisions make our tax system more regressive, giving a greater tax cut to high-income households and costing the state nearly a billion dollars in revenue that could have been used to invest in our future.

Due to tax changes made in 2003, an individual earning just above the minimum wage now the same top marginal tax rate as someone making $1 million.

Bracket Collapse Disproportionately Benefits Wealthiest

Prior to the tax cuts implemented in 2003, Montana had ten different income brackets, with each higher income bracket paying a slightly larger share of their income in taxes (Appendix A).[5] In this old structure, the lowest income bracket paid two percent of their income in taxes, while the highest bracket (applying to incomes over $107,000, adjusted for 2018) paid 11 percent of that income in taxes.[6]

The changes in 2003 reduced the total number of income brackets to seven. In 2018, the top bracket now includes all households making over $17,900.[7] That means someone earning just above the minimum wage now faces the same top marginal tax rate as someone making $1 million. As a result of the 2003 tax cuts, the wealthiest households experienced the greatest tax reductions. More than half the reduction in income taxes went to households with incomes of over $500,000, the top 0.4 percent of taxpayers, whose average tax reduction was $30,499. For the bottom 81 percent of Montana taxpayers, the average tax cut was just $23 (Chart 3).[8]

As a whole, these tax cuts have created a more regressive income tax structure. In fact, while our individual income tax remains slightly progressive, it is not progressive enough to offset the regressivity of our property taxes and selective sales and excise taxes.[9] In other words, when looking at the entire tax system in Montana, lower-income taxpayers pay a larger portion of their income in taxes compared to those with higher incomes.

The changes made have also had a negative impact on Montana’s revenue streams. In the past decade, it is estimated that the state has lost one billion dollars in revenue due to the 2003 tax cuts.[10] This lost revenue could have been used to educate our children, keep our communities safe, and protect our land and water instead of cutting taxes for those who need it the least.

For further information about the income tax bracket collapse, see Montana Budget and Policy Center’s (MBPC) report, The Montana We Could Be: Tax cuts, aimed at the rich, take a toll.

Capital Gains Credit Favors Wealth Over Work

Key Term

Capital Gains are income from the sale of an asset, such as stocks, bonds, vacation homes, art, or a business. Capital gains income is only “realized” when the asset is sold for a profit.  As long as the investor continues to own the asset, any increase in value is not considered income. The first $500,000 in capital gains from primary residences is not taxed. Likewise, profits from the sale of an individual retirement account are not treated as capital gains.

Currently, Montana is one of only six states that offer significant tax breaks for capital gains.[11] The capital gains credit has proven to be unaffordable, is unfair to Montanans who earn income through wages, and has not benefited the Montana economy.[12]

The capital gains credit lowers the effective tax rate for people who earn income through investments compared to those who earn income from wages. This creates a tax system that favors wealth over work. In 2016, half of the benefits from the credit went to the wealthiest one percent of taxpayers (just 4,600 households in Montana).[13],[14]

Nearly all middle- and lower-income Montanans do not benefit from the credit because they are much more likely to earn their income on the job rather than through the sale of large assets. In 2015, over 85 percent of Montana taxpayers – more than 476,000 taxpayers – did not receive any benefit from the capital gains credit.[15] In fact, the assets owned by most Montanans – primary residences and retirement funds – are not treated as capital gains income when they are sold.

Economic theory and experience teach us that treating capital gains more favorably than wages will not help the economy. In fact, the lost tax revenue could actually prevent growth by forcing state budget cuts. The capital gains credit cost Montana an estimated $35 million in 2015.[16] These vital dollars could have been used to fund growth-oriented services like education, healthcare, and environmental protections.

For more information see MBPC’s report, Capital Gains Tax Credit: Valuing Wealth Over Work in Montana.

Earned Income Tax Credit Makes Work Pay   

In 2017, the Montana Legislature passed a state earned income tax credit (EITC) making Montana the 29th state to create a state EITC to support working families make ends meet.[17] Beginning in 2019, Montana will provide a refundable tax credit set at three percent of the federal EITC to low- and moderate-income households, offering a maximum benefit of $192. Approximately 80,000 Montana families that earn income through work are eligible to receive the state EITC.[18]

Prior to the 2017 session, Montana’s income tax structure placed one the highest burdens in the nation on families living in poverty.[19] A state EITC keeps families working and out of poverty, but Montana can do more to improve the economic security of low-income families by increasing the credit amount. Among the 29 states and District of Columbia that offer a state EITC, Montana’s three percent credit is the lowest.[20] Raising the value of the credit to 10 percent of the federal credit, similar to Colorado and Nebraska, would result in a maximum benefit of $643, and will go further in helping families meet their basic needs.

For more information see MBPC’s report, A State Earned Income Tax Credit: Helping Montana’s Working Families and Economy.

Deduction for Federal Taxes Paid

Montana is one of just six states that still has a deduction for federal income taxes paid, a deduction that disproportionately benefits the highest income earners in the state and costs the state much-needed revenue.[21] In 2015, this deduction cost nearly $66.7 million.[22]

The deduction for federal taxes paid is an unusual tax break that allows taxpayers to deduct the federal taxes they pay from their Montana taxable income. The deduction is only available to those who utilize itemized deductions and is capped at $5,000 for a single taxpayer and $10,000 for married taxpayers filing a joint return.[23]

Eliminating this deduction would impact a little more than one-third of taxpayers overall, with over two-thirds of the tax increase going to the top 20 percent of taxpayers. Halving the deduction from $5,000 to $2,500 per spouse would generate $27 million in revenue for the state.[24]

Income Taxes in Indian Country

Generally, all individual tribal members are subject to federal income taxes. The exception to this is income derived directly from allotted trust lands or treaty fishing rights.[25] In Montana, tribal members are also subject to state income taxes if they live or work off the reservation where they are enrolled.[26] In 2010, 39 percent of American Indians resided off-reservation in Montana, and many more American Indians living on their reservation were working in nearby communities.[27]

Federally recognized tribal governments do not pay state income taxes because states cannot tax Indian tribes in Indian Country.[28] Thus, federally recognized tribes receive the same income tax exemption as federal and state governments. However, income generated by state-recognized tribes or through tribal corporations chartered under state law is subject to federal and state income taxation.[29]

Tribal governments, like federal and state governments, have the right to tax the income of their own members, but few, if any, actually do. Each tribe has its own reasons stemming from its unique history and cultural views on the matter. However, widespread poverty and high rates of unemployment common on many reservations plays into the unfeasibility of taxing tribal member income. In Montana, the combined average of reservation-residing American Indians living in poverty between 2011 and 2015 was 34 percent.[30] Likewise, the Bureau of Indian Affairs estimates that tribal member unemployment was as high as 70 percent on some reservations in the state in 2005.[31]

For more information see MBPC’s report series Policy Basics: Taxes in Indian Country Part 1: Individual Tribal Members and Policy Basics: Taxes in Indian Country Part 2: Tribal Governments.

Conclusion: Reforms for a Stronger Montana

Our income tax system is one of the primary ways that we pool our resources to make investments in public services and infrastructure that help make our communities stronger, safer, healthier, and more prosperous. The following reforms would greatly strengthen Montana’s income tax system:

  • Repealing and reducing the capital gains tax credit;
  • Restoring a top marginal bracket limited to highest-income households;
  • Eliminating the deduction for federal taxes paid; and
  • Increasing the value of the state EITC.

Montana needs a modern income tax system that makes continued investment in our communities and economy, paving the way for a more prosperous future for our children and grandchildren.