State EITC Would Add Fairness to Montana’s Tax System

By Bob Decker

Executive Director, The Policy Institute

February 25, 2009

In 1989, one of the best reasons for celebrating Montana’s hundredth birthday was the state’s progressive tax system. It generally expected residents to support public services based on ability to pay, neither oppressing low-income Montanans nor demanding excessively from the wealthy.

Today, after 20 years of legislative generosity to business interests and corporations, the oil and gas industry, and high-income individuals, Montana has much less tax fairness to boast about. The current Legislature may regress even further, but it also has the opportunity to support the most ignored of state taxpayers - low-income workers.

The unmaking of Montana’s once-progressive tax system includes these watershed events:

In 1989, the Legislature reduced the business equipment tax. Additional reductions since then have cumulatively lowered the equipment tax by about 70 percent. Proposals in the current session would lower it even more.
In 1999, the Legislature lowered the severance tax for oil and gas production and also enacted a “tax holiday” for new oil and gas wells. Those tax breaks, in effect even when oil surged to more than $100 per barrel in 2008, have decreased revenue to the state general fund and to county governments by an average of $100 million annually over the past six years.
In 2003, the Legislature lowered individual state income tax rates. Half of the resulting tax reduction went to households with annual incomes of $500,000 or more. In 2006, low-income taxpayers received an average tax reduction from the legislation of less than $50, while the 1,586 wealthiest households in Montana received an average annual tax reduction of $30,500, which was greater than the annual pay for the average Montana job.

Seldom has a tax change in the past 20 years resulted in direct benefit to the average Montanan. One occurrence was the $400 property tax rebate in 2008, a one-time-only tax reduction for homeowners. (However, this rebate failed to benefit many low-income workers who are also renters.)

And rarely have tax changes provided meaningful benefit to low-income Montanans. Such a thing could happen, however, if the current Legislature establishes an “earned income tax credit” for Montana.

The earned income tax credit is a tax credit for low-income workers. When the credit exceeds the amount of taxes owed, it results in a tax refund.

Established by Congress in 1975, the earned income tax credit has become the single most effective federal tax policy for encouraging work and reducing poverty. Because of its success, 24 states have adopted state-based credits that offer a portion – from 3 to 40 percent - of the federal credit.

In Montana, a state earned income tax credit would benefit 75,000 families. Those who could claim the credit include nursing home workers, emergency dispatchers, school bus drivers, and some school teachers. A family of four with an annual income of $25,000 could receive a $450 credit if a Montana credit were enacted at 15 percent of the federal program.

Currently, two bills to create a state earned income tax credit in Montana are alive in the Legislature. Yes, the passage of either would cost money, $18 million annually for a 15 percent state credit. And yes, a source for that money must be found.

Rep. Dave McAlpin (D-Missoula) has proposed to partially rectify the legislative largesse of 2003 by increasing the tax rate on incomes greater than $250,000 per year by 1 percent. His bill would raise $20 million annually.

Sen. Christine Kaufmann (D-Helena) has proposed to partially rectify the legislative largesse of 1999 by increasing taxes on oil and gas producers.

Both approaches would add fairness to Montana’s tax system. Either approach would pay for a tax change to help those who need it most.

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