Montana is experiencing a cash flow problem and the governor and legislators are looking at ways to balance the budget. To do this, the Republican-controlled Legislature is looking at cutting funding to services that benefit Montanans.
Gov. Steve Bullock, a Democrat, is looking at cutting some of that funding as well, but he is also looking at raising revenue to prevent cuts by increasing taxes on incomes over $500,000, basically recovering a portion of a tax break enacted in 2003, discussed below.
Every two years the Legislature creates a new budget by looking at the budgets and services provided by each state agency and deciding whether to cut, increase, or leave whole their budgets. But there are huge amounts of government spending that never get reviewed; these are what are known as tax expenditures—those tax breaks that are designed to encourage certain economic behaviors by rewarding the people and businesses which engage in them.
For instance, there are income tax deductions for charitable giving to encourage making houses more energy efficient, for recycling, for making movies in Montana, for political contributions—you name it. But there has never been a systematic budgetary review of these tax expenditures to see if they actually do what they were enacted to do.
For instance, does the “Oil and Gas Production Tax Holiday,” with a cost to the state of $56 million in 2014 at the height of the Bakken oil boom (and a post-boom cost of $9 million in 2016) actually encourage oil companies to drill more wells? That was the rationale for the tax break presented by Montana’s oil and gas industry, but who can know?
Well, Wyoming can. That state instituted a similar tax break in 1999 for a two-year trial run. After only one year the state of Wyoming decided that the cost of the program did not justify its meager benefits, and eliminated it. Wyoming is a state that has been controlled by Republicans for decades. They are pro-industry, but they are not fools.
It is one of these tax expenditures that Bullock wants to revisit. In 2003 the Legislature passed Senate Bill 407, a bill to revise Montana’s income tax. Before that bill became law, capital gains from the sale of property or investments were treated as ordinary income and taxed at the going rate.
For those in high-income brackets, that was 11 percent. SB 407 lowered the top rate to 6.9 percent and allowed preferential treatment for capital gains by issuing a credit against taxes on them.
In 2005, the year the law went into effect, the actual cost of the tax cuts was discovered to be four times greater than predicted; $100 million rather than $26 million. Of those tax cuts, 47.6 percent—a total of $47.8 million dollars—went to households with incomes of over half a million dollars a year—all 1,567 of them.
For them the tax savings averaged $30,500 per household. By contrast, those with incomes under $65,000 a year got 7.2 percent of the tax break for an average reduction of $23. Bullock proposes recovering some of that lost revenue by increasing the tax rate from 6.9 percent to 7.9 percent on incomes over half a million dollars. In 2015 the cost of SB 407 was $35 million, with again about half of that going to the $500,000 income taxpayers.
Whether or not one believes these tax breaks actually serve a purpose is often dependent on political affiliation, but that’s not the main concern. This is: when a tax break is given it’s a sure thing it’s going to go on forever (except, it appears, in Wyoming). That needs to be taken into account when the tax break is given and it needs to be reviewed on a regular basis just like other forms of spending are scrutinized.
And just like any other government program, if it’s not doing what it was intended to do, it should be eliminated.
Jim Elliott is a former chairman of the Montana Democratic Party and a former state senator from Trout Creek.