A trio of bills in Republican Gov. Greg Gianforte's tax package cleared an initial vote in the Senate Tuesday on mostly party-line margins with Republican support and Democratic opposition.
The bills include a proposal to drop the state’s top marginal income tax rate from 6.9% to 6.75%, triggers for additional income tax rate reductions if certain financial benchmarks are met, and an exemption from paying capital gains taxes for some entrepreneurs.
Republicans argue the proposals will draw businesses to the state and spur job growth, while Democrats say the legislation benefits the wealthy who don't need the help and question the role tax policy plays in decisions about where to locate.
"We just have a different philosophy here," said Sen. Greg Hertz, R-Polson, who is carrying both bills related to income tax rates. Hertz told the Senate that Montana's top income tax rate was higher than surrounding states, making it less competitive. Those states, however, have different tax structures that include things like a general sales tax.
Hertz said about half of the state's taxpayers would be included in the reductions under Senate Bill 159, the cut to the top income tax rate. Anyone with a taxable income of $18,500 or more would see their taxes lowered.
But Sen. Edie McClafferty, D-Butte, questioned how much of a tax break middle- and lower-income earners would receive. She pointed to an analysis of the bill that shows people making $34,000 a year would see a reduction in their taxes of about $12.
"What will $12 at the end of the year do for you? Will it help you pay your child care? Will it help you pay your power bill? How about will it help you with your car payment, your rent payment or maybe even your mortgage? it will give you about 3 ½ pounds of hamburger, that's what $12 will do," McClafferty said.
That bill passed second reading on a 34-16 vote, with support from every Republican and three Democrats in the chamber. The bills will see one more vote before going to the House.
Another bill from Hertz, Senate Bill 182, sets up a complex series of triggers that could also lower the state's top income tax rate.
The bill would deposit money into a new fund to offset a tax cut if state's saving account, called the budget stabilization reserve fund, is full.
The savings account gets money when revenues come in higher than projected. Under Hertz's bill, if it fills to the maximum, which is about $115 million, any additional higher-than-expected revenues would be split between a capital development infrastructure fund and the taxpayer reduction fund the legislation creates— as long as other requirements were met.
One of those tests is calculating if the revenue growth outpaces what's called the annual compound growth rate, which provides for a seven-year snapshot of revenue growth. If revenues outpace that measure, the money can flow to the tax reduction fund.
"We want to make sure any increase have, we look back and we make sure these are growing increases that we've seen over the last several years," Hertz said.
The bill would also capture some of the money budgeted for state agencies if it isn't spent. By law, part of that over-appropriated money must go into the fire fund. But if the fire fund is full, which is about $105 million, under Hertz's bill 75% of any other excess goes to the tax reduction fund, with the remaining going to the general fund.
Then to tap the tax reduction fund to offset an income tax cut, another series of measures must be met: the budget stabilization reserve fund has to be full and the fire fund balance must be roughly 75% of the maximum.
At that point, in September of even-numbered years, the governor's office would review any possible tax rate cuts to make sure they wouldn't trigger a segment of state law that calls for budget reductions in the face of lower-than-expected revenues and check to see if the fire fund will be sufficient for that year's fire season.
If those tests are met, the governor can decide, in consultation with legislative interim committees, to implement the triggered tax reductions.
If the triggers aren't met or the governor decides to not make the tax cut, the money in the tax reduction fund goes back to the general fund.
The amount the top tax rate is cut would be based on how much is in the tax relief fund. For example, if the fund has between $10 million and $20 million, the cut would be 0.025%.
The rate goes up the more that's in the fund and if it exceeds $100 million, the cut would be 0.25%, the maximum allowed over a biennium.
The bill has a termination date of Dec. 31, 2025, though any tax cuts made would be permanent.
Sen. Shannon O'Brien, D-Missoula, worried the bill would create scenarios where the state could be left having to make massive budget reductions if revenues came in lower than projected after taxes were cut. O'Brien felt work in past sessions to create savings accounts for the state to deal with shortfalls or big fire seasons would be erased by the bill.
"Not only does it take away all the work that's been done, it also borders on being irresponsible," O'Brien said.
But Sen. Ryan Osmundson, R-Buffalo, told the Senate he was confident in the bill.
"It does meet the qualifications that if we have excess revenue, we can put this where we want it," Osmundson said. " .. We've put many precautions in place to make sure the general fund is very much protected."
Gianforte has made clear he wants to continue to lower the state's top income tax rate more than the 0.15% reduction he is asking lawmakers to pass this year. He's said the challenges from COVID-19's hit to the economy have limited what is possible this session.
Sen. Jill Cohenour, the minority leader in the Senate, said she had concerns about how past revenue estimates the Legislature worked from have led to the need to cut state spending when revenue came in lower than expected.
"This bill is fiscally irresponsible. We could find ourselves as a Legislature without enough money to pay for essential services," Cohenour said.
Senate Bill 182 passed second reading on a 31-19 party-line vote.
The final tax bill the Senate gave initial approval to is Senate Bill 184, carried by Senate President Mark Blasdel, R-Kalispell. It would eliminate capital gains taxes on the sale of stock for a business that has operated for at least five years in Montana, has more than half of its corporate officers living in the state, and had 30% of its employees living in the state for the prior 12 months and at least 25 full-time employees living in the state for three years.
Hertz argued the proposal would attract businesses that would create jobs.
"We want to move this package of bills across to attract more employers to the state ... and provide more opportunities for those individuals in the lower-income levels to provide them with a job that will provide them with a better living," Hertz said.
Cohenour disputed that approach.
"I don’t think the state of Montana needs to incentivize the richest Montanans when we’re in the middle of an economic recovery that needs to be shared across our entire state and its citizens," Cohenour said.
Senate Bill 184 passed on a 32-18 nearly party-line vote.
Earlier in the day, the House Taxation Committee killed a Democratic proposal that would have made a new income tax bracket with a rate of 8.9% for those earning more than $500,000 and increased the state's earned income tax credit from 3% of the federal credit to 10%.
House Bill 424 was carried by Rep. Emma Kerr-Carpenter, D-Billings.
By the 2025 fiscal year the bill would have generated $36 million for the state's general fund. Gianforte's income tax cut reduces general fund revenues by about $30 million annually.
Rep. Kim Abbott, the minority leader in the House, said after the vote that the policy could resurface later in the session.
"The earned income tax credit is something that has had long bipartisan support," Abbott said. " ... Coming out of a pandemic that has caused economic turmoil there is going to be energy from both Democrats and Republicans for getting some relief into the pockets of middle-class and working-class families."
— Reporter Sam Wilson contributed to this story.