A statewide sales tax has been anathema to generations of Montanans, but times change and it’s time to talk again about that long-taboo tax.
Montana’s present revenue shortfall necessitates both short-term and long-term solutions. State revenue hasn’t kept up with the cost of maintaining existing public services for the past couple of years. The bigger challenge appears to be that the revenue gap is projected to grow next year and in future years.
The state of Montana relies heavily on personal income taxes and to a lesser extent on corporate income taxes. Income tax revenue is increasing at a low rate while natural resource revenue (oil, gas, coal) has dropped with the global price of oil and decline in worldwide demand for coal.
As of Jan. 1, 45 states were collecting statewide sales tax, according to a report from the Tax Foundation, an independent policy research organization in Washington, D.C. All of Montana’s neighbor states collect statewide general sales tax and all allow local governments to collect a general sales tax. According to the Tax Foundation, these are the statewide sales taxes and the maximum local sales tax allowed by:
- Wyoming: 4 percent statewide, 2 percent local.
- South Dakota, 4.5 percent statewide, 4.5 percent local.
- North Dakota 5 percent, 3.5 percent.
- Idaho, 6 percent statewide, 3 percent local.
Montana’s neighbors rank among the lower-rate states nationwide. The states with the highest statewide general sales tax are California at 7.25 percent, and Mississippi, Tennessee and Rhode Island all at 7 percent.
Montana is one of five states with no general sales tax, along with Alaska, Delaware, New Hampshire and Oregon.
While many Montanans are pleased and proud to pay no sales tax, there are drawbacks. Our state tax system is less diverse and more easily unbalanced by fluctuations in natural resource and income tax collections. As Montana’s outdoor economy has grown, that growth isn’t reflected substantially in state (or local tax) revenues. Montana has millions of out-of-state visitors every year who spend lots of money on dining and shopping, but don’t pay tax on most of their purchases (gasoline, lodging and rental cars are the exceptions).
“On average, states generate more than one-third of their revenues from personal income taxes and another one-third from general sales taxes,” according to the National Conference of State Legislatures. “The remaining revenues are split between excise taxes (on gasoline, cigarettes and alcohol); corporate income and franchise taxes; and taxes on business licenses, utilities, insurance premiums, severance, property and several other sources.”
A state sales tax should be tailored to exempt essentials, such as groceries and health care items. Most states exempt unprepared food. Some exempt clothing. Some states hold sales-tax holidays, such as a weekend for back-to-school shopping.
Over the years, Montana has seen proposals to enact a sales tax that would offset property taxes. But the reform needed now must increase revenues overall.
The state’s revenue crunch has developed recently. Local governments have been struggling for many years because state law limits their tax options. They depend heavily on property assessments. A statewide general sales tax could be written to allow local government to add a limited tax on the same items.
Montana voters last rejected a sales tax in June 1993 by a margin of 3-1. A lot has changed in the past 24 years. Montana has more people, workers and visitors. Our population is aging faster than most states, increasing demand for health care and home care subsidized by the state. Montana is at full employment with more people earning paychecks. Paying for high-quality education is more important than ever for technical, professional and trade jobs.
We don’t expect that a statewide sales tax will be enacted this year, but let’s get a public discussion started now.