A Senate panel Thursday heard a series of income tax cut proposals brought to the Legislature by Gov. Greg Gianforte and backed by the private sector, part of a larger package of conservative tax reforms from the governor.
Gianforte’s stance is that slicing the income tax, creating a capital gains tax exemption on profits from the sale of shares in Montana companies, cutting business equipment taxes and more, are necessary to attract business growth and high-paying jobs to the state, bringing Montana in line with other states in the mountain West.
“Governor Gianforte is sending a message to entrepreneurs and business leaders across the country,” the governor’s budget director, Kurt Alme, told the Senate Tax Committee on Thursday during testimony on SB159, which would cut the tax rate on taxable income above $17,400 by around 2 percent.
But Democrats, unions, progressive nonprofits and policy analysts see the cuts, marketed by the governor’s staff as broad relief for over half of the state’s taxpayers, as an upward transfer of wealth based on economic assumptions that one opponent compared to flat earth theory.
“This proposal will largely benefit the wealthiest taxpayers in Montana. Lower income households, those who have struggled most this past year … would see virtually no benefit,” said SJ Howell, the executive director of Montana Women Vote. “Most concerningly, this proposal comes with a price tag that is just too high.”
SB159, which proposes to cut the tax rate at the top income bracket from 6.9 percent to 6.75 percent, would reduce state revenues by around $30 million a year beginning in fiscal year 2023, lasting until the bill’s planned expiration at the end of 2025. That means a more than $90 million draw from state coffers.
SB182, another Gianforte tax proposal the committee heard Thursday, and one of several making their way through the Legislature this week, would create a series of cuts to the top income tax rate that would kick in dependent on meeting certain targets for revenue growth.
“If Montana’s economic growth curve shifts up, and if we’re able to find efficiencies in government, and if our reserves stay strong, in the fall of 2022, our income tax will tick down if there’s enough money in the fund,” Alme said.
A fiscal note on the bill is not yet available, but the net effect would be ongoing tax cuts of up to 0.25 percent so long as the state hits those triggers. Opponents worried the bill could leave the state stuck with declining revenues without a clear picture of its economic health in the coming years.
Some who testified Thursday made comparisons between the income tax cuts and the tax reform package ominously dubbed the “Kansas Experiment,” a 2012 bill signed by Kansas Gov. Sam Brownback that cut and consolidated income tax brackets and exempted “pass-through” entities like LLCs and sole proprietorships.
The proposal was branded as a “shot of adrenaline” for the state’s economy. But the ramifications to state services were so severe — to the tune of hundreds of millions of dollars in cuts — that Republican lawmakers in Kansas reversed the policy in 2017, even overriding a veto from Brownback.
Indeed, one of that plan’s architects, the supply-side economist Arthur Laffer, is the business partner of one of the Gianforte plan’s proponents, Donna Arduin, a consultant and roaming state officer who specializes in shrinking budgets.
Gianforte, a Republican, founded RightNow Technologies, a Bozeman technology company that sold to Oracle for $1.8 billion in 2012 before his entrance to politics.
Sen. Greg Hertz, R-Polson, who is carrying two of the tax cut bills for Gianforte, pushed back on the comparison to the Kansas plan.
“This is a 2 percent reduction,” he said, referring to SB159. “Not 30 percent that was in Kansas. The governor’s proposed budget is not making any significant cuts.”
But legislative fiscal analysts warn that the state could be running under a moderate structural imbalance, and opponents fear cuts to state services would be an inevitable consequence of cutting taxes.
These fears were especially acute in testimony on SB182, which would create a special state revenue account called the tax reduction fund. That fund would receive transfers from the budget stabilization — or “rainy day” — fund, the fire suppression fund and the capital development fund, meant to finance infrastructure projects, if state revenues and projections for economic growth hit certain targets.
For example, if real general fund revenue exceeds projections, 25 percent of the surplus goes back in the general fund, while the remainder goes into the rainy day fund. If that fund reaches its statutory cap, 50 percent of the surplus goes to the capital development fund, while the remainder would either go back to the general fund or to the tax reduction fund if the state hit economic growth targets.
If these transfers fill the tax reduction fund to a certain level, automatic tax cuts ranging from 0.025 percent to 0.25 percent kick in.
The intention is to use the tax revenue fund to finance the tax cuts. However, Heather O’Loughlin, co-director of the liberal-leaning Montana Budget and Policy Center, said the structure of the bill is such that one-time transfers from the proposed tax reduction fund might “meet the cost of that income tax reduction over a two-year period,” but likely not beyond that.
Beth Brenneman, with Disability Rights Montana, said trigger bills like this are “tricky” and often have unpredictable results. She referenced 2017’s SB261, spending legislation that created a series of revenue targets that would trigger fund transfers and budget cuts if not met.
The state hit the triggers, causing massive reductions to DPHHS and other areas — accompanied by layoffs and termination of private contractors — that were only exacerbated when lawmakers made further cuts in an ensuing special session.
“We don’t have services and capacity like we had in 2017, and we won’t have it for years,” Brenneman told the committee.
Gianforte’s proposed budget largely retains current spending levels for key programs, though it proposes to spend $100 million less than the budget proposal from prior Gov. Steve Bullock, a Democrat. However, this doesn’t mean the Legislature will oblige that position — Republican lawmakers in the budget subcommittee overseeing the Department of Public Health and Human Services began negotiations on that agency’s budgets with a starting point that would constitute a $1 billion cut over the next biennium.
“Where do we look to fund the essential services in Montana?” asked Eric Burke, the executive director of the Montana Federation of Public Employees. “We look to increases in local property taxes, sales tax, tuition, excise taxes or fees…all of these revenues disproportionately shift tax burdens to low and middle income Montanans in comparison to the income tax.”
Hertz and Alme warn that Montana is losing out to other Western states, which for the most part have lower income tax rates on top earners, though they also generally have different tax structures, or rely on natural resource revenues.
Several representatives from business groups and industries in the state spoke Thursday in favor of the proposal, saying it would keep more money in the hands of their employees and support business relocation to the state.
“We think (the bill) sends the right message to our workforce, and to our entrepreneurs, so please support it,” testified Brad Griffin of the Montana Retail Federation.
However, the proposal would have minimal benefit on low and middle income Montanans, opponents argue. Those making more than $500,000 could get tax relief exceeding $700 a year; for those making less than $60,000, the cut looks more like $50, as reported by KTVH when the plans were unveiled in January.
Another opponent, Missoula-based union official Mark Anderlik, cited a December 2020 working paper from academics at the London School of Economics, which analyzed five decades of data from several countries to determine that top-level income tax rates do more to exacerbate income inequality than they do to stimulate job or wage growth.
Alme, the governor’s budget director, said Gianforte understands that “some with low incomes face particular challenges.”
In response, Alme touted Gianforte’s plan to cut property taxes for low-income homeowners, and he said people who earned less than $17,400 of taxable income are often just there temporarily.
For those who are stuck in low-paying jobs, Alme and Hertz echoed similar theories: the tax cut would bring high-paying jobs to Montana.
“What’s the best thing we can do for those individuals in need?” Hertz asked, rhetorically. “Provide them a better opportunity and a better paying job. That’s the basics.”