HELENA — Here’s a closer look at the elements and effects of three tax-cut bills that reach the broadest number of taxpayers, as enacted by the 2021 Montana Legislature.
Income tax cuts in Senate Bill 159: SB159, which takes effect in 2022, is a straight cut to Montana’s top marginal income-tax rate, from 6.9% to 6.75%. In 2022, that rate will be levied on state taxable income above about $19,000.
Because any income below that amount gets no tax cut, thousands of low-income taxpayers get no direct benefit from this change. According to the state Revenue Department, about 202,000 of the state’s taxpaying households – 42% – will get no reduction.
About 93% of those households earn less than $45,000 a year. The impact on middle-income households also is fairly modest. For the 144,000 households earning between $34,000 and $79,000 a year, the average annual tax reduction is about $23. About 24,000 of these households, or one-sixth of them, will see no change in their taxes.
The wealthiest taxpayers, who pay a larger share of income taxes, get most of the benefit. About 77% of the overall cut -- $21.6 million – goes to the top 20% of taxpayers, or households earning more than $105,000.
Income tax cuts in Senate Bill 399: This income-tax overhaul doesn’t take effect until 2024, but Republicans have said they may accelerate it to 2023, if possible. It reduces the top rate further to 6.5%, on state taxable income over $20,500 ($41,000 for a couple) and collapses the six other lower rates into one, at 4.7%, that applies to income less than $20,500.
But it also ties state taxable income to federal taxable income, giving Montanans a much larger standard deduction. And, it eliminates more than a dozen tax credits and deductions, including the deduction for federal income taxes, which tends to benefit higher-earning households. The credits are eliminated starting in 2022.
The resulting impact is much more diverse, across multiple income brackets.
The Revenue Department estimates that between 55,000 and 93,000 lower-income Montanans will not have to file a tax return, or pay any income taxes because the higher standard deduction will reduce their taxable income to zero.
It also estimates that 279,000 households would see a tax decrease (58%), 134,000 would see a tax increase (28%) and 68,000 would see no change (14%) under SB399.
Those earning less than $36,600 – about 40% of the taxpayers – would see an average tax reduction of about $32 a year. Yet almost a third of this group would see no change and 11% would pay higher taxes.
In the middle-income brackets, earning $36,000 to $84,600 a year, the average reduction is about $100 a year – although 30% of this group will end up paying higher taxes.
For those earning over $84,600 a year, the winners and loser are pretty much even: 50% would get a tax cut, while 49% would pay higher taxes. In fact, this top 30% of the taxpaying households receive less than a 20% share of the overall tax break in SB399.
Property tax cuts in House Bill 663: This bill aims to reduce local property taxes that pay for public schools, by increasing state “equalization” aid for school districts. Although the impacts will differ from school district to school district, the average outcome is a 2.8% reduction in local school property taxes.
Under the bill, equalization aid increases $10 million this year, using a complex formula.
Equalization aid currently goes to 340 of Montana’s 398 school districts. The change in HB663 likely will increase that amount to 345 districts and increase the amount of aid that each district gets. But the idiosyncrasies of the formula and each school district’s budget make it difficult to predict how much property taxes may decline for individual homeowners and businesses.
The aid helps districts reach part of the minimum level of their “base” budget; local taxpayers must make up the difference. If the aid increases, the local share should decrease, and therefore property taxes supporting the base budget will decline – if all other local school taxes stay the same.
In 2021, school districts in Montana levied about $350 million in property taxes to support their general-fund budgets. If property taxes decline by $10 million, thanks to the increased aid from HB663, that would equate to a 2.86% reduction in overall local school property taxes.
Also, HB663 will increase equalization aid even further, in future years – if recreational marijuana-tax revenue comes in higher than expected – and lower local school property taxes accordingly.