Montana’s 2025 legislative session has seen a flurry of property taxA property tax is primarily levied on immovable property like land and buildings, as well as on tangible personal property that is movable, like vehicles and equipment. Property taxes are the single largest source of state and local revenue in the U.S. and help fund schools, roads, police, and other services. reform proposals, a response to the surge in property valuations in the state. Unfortunately, hasty decision-making can result in suboptimal policy outcomes. Lawmakers would do well to focus on reforms that offer economic stability over those that could leave the state less competitive in the long run.
Four bills currently under consideration offer a view into the urgency that lawmakers feel to deliver property taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. relief. Importantly, the bills are not uniformly sound. Two of the bills offer neutral and transparent reforms which would improve the property tax system, while two others could harm the state’s competitiveness, both regionally and nationally.
Reforming Voted Levies and Studying Special Districts Would Provide Greater Transparency and Neutrality
Frequently, voters throughout the country are asked to support increases in mill levies to fund local projects (e.g., parks, municipal buildings, etc.). If approved, these voted levy increases often remain in effect for an indeterminate time, meaning that a property tax increase to fund a local priority at a moment in time effectively becomes a permanent tax increase.
SB204 seeks to limit the duration of these voted mill levies to 10 years, subject to certain exceptions. If a municipality would like to extend the voted mill levy, it must be resubmitted to voters for approval. Ensuring that voted levies, often tied to time-limited needs, do not become permanent tax increases would improve transparency and align outcomes with voter intent. Requiring an additional vote to renew the increase allows new residents to become part of local financing decisions rather than being subjected to an increased tax bill incurred by previous owners or generations.
Special taxing districts fund local needs such as infrastructure projects and public safety. In 2024, Governor Greg Gianforte’s Property Tax Taskforce identified special districts as being outside traditional property tax limitations, and available reporting is limited to totals across counties, rather than more granular and transparent information. The Taskforce raised the possibility that local governments may shift revenues and expenditures to special districts if lawmakers restrict local government property taxing authority.
Therefore, SJ8 creates an interim study of special districts which, among other things, would evaluate whether there should be limits on special districts and review current reporting requirements. Such a study could prove to be a valuable step in ensuring that all stakeholders have the necessary information to determine whether special district financing is effective and should continue. Applying this to tax increment financing (TIF) districts, which are notoriously ineffective at delivering promised returns, would further provide transparency to property owners and help to create greater neutrality in the property tax code.
Implementing a Statewide Sales TaxA sales tax is levied on retail sales of goods and services and, ideally, should apply to all final consumption with few exemptions. Many governments exempt goods like groceries; base broadening, such as including groceries, could keep rates lower. A sales tax should exempt business-to-business transactions which, when taxed, cause tax pyramiding. and Shifting the Property Tax Burden to Second Homeowners and Short-Term Rentals Is Uncompetitive and Distortionary
Compared to the reforms discussed above, lawmakers are also considering bills that could hurt the state’s competitiveness. HB507 would create a constitutional amendment to allow a 4 percent statewide sales and use tax to fund K-12 education, a significant recipient of property tax revenue. Such a tax is allowed under the Montana Constitution but enacting one would remove a significant competitive advantage that Montana enjoys over neighboring states.
Compared to the sales tax, the property tax is, generally, better for economic growth. An Indiana study showed that replacing the property tax with a sales tax would result in a 2.7 percent decline in gross state product. An international study spanning 21 Organisation for Economic Cooperation and Development countries also found that property taxes are less harmful to economic growth than income and sales taxes. Lawmakers would do well to take these findings into account and pursue sound reforms to the property tax code, rather than replacing it (wholly or partly) with less economically efficient means of generating revenue.
Some states have considered reducing property taxes for permanent residents, to the detriment of second homeowners who spend less time or own multiple residences in the state. HB231 would do something similar by reducing property tax rates on residential homeowners and long-term rental properties, excluding second homeowners and short-term rental properties from this tax preference.
While in theory a rate cut sounds good, in practice such reform does nothing to adequately control for surging property valuations. Consequently, properties that have experienced significant valuation increases could see increased property tax bills even if rates are reduced. Moreover, shifting the property tax burden to those living in apartments (who bear much of the incidence of the property tax through higher rent), second homeowners, and short-term renters makes the state less attractive to investment and, crucially, to those who rent anything other than a single-family home. Renters and those with second homes do not consume more local services (e.g., police, fire, schools) than permanent residents and should not be punitively taxed as if they did.
Competitive Reforms to the Property Tax
The property tax generates most local government funding nationwide and is highly transparent. Taxpayers know their property tax bill; they have very little idea, conversely, what they pay under a sales tax. Additionally, the property tax influences decision-making less than other taxes. Notably, people continue to flock to states like Texas, despite high property taxes, as the state’s tax code is highly competitive, given the lack of an individual income taxAn individual income tax (or personal income tax) is levied on the wages, salaries, investments, or other forms of income an individual or household earns. The U.S. imposes a progressive income tax where rates increase with income. The Federal Income Tax was established in 1913 with the ratification of the 16th Amendment. Though barely 100 years old, individual income taxes are the largest source of tax revenue in the U.S. (which is more economically distortionary than a property tax). Moreover, a well-structured property tax aligns with the benefits received by residents and property values tend to increase as local services improve.
For these reasons, and others, the property tax is a good tax and worth reforming. Fortunately, there are ways to do so without distorting the economy. Montana currently employs rate and assessment limitations, and we have written about the shortcomings of each approach previously. Additionally, the state code features a levy limitation (also known as a revenue or collections limitation) which seeks to constrain the growth in government, with adjustments for inflationInflation is when the general price of goods and services increases across the economy, reducing the purchasing power of a currency and the value of certain assets. The same paycheck covers less goods, services, and bills. It is sometimes referred to as a “hidden tax,” as it leaves taxpayers less well-off due to higher costs and “bracket creep,” while increasing the government’s spending power. and population growth. This is a much more neutral relief mechanism as it does not advantage some residents over others (as assessment limits do) and prevents local governments from reaping a windfall when property valuations surge (as rate limits fail to do). Montana should work to strengthen existing levy limits and consider pairing this with strong Truth in Taxation laws to promote increased transparency.
The four reforms discussed above are not a package, meaning that each will be evaluated on its own merit. Through this lens, lawmakers should prioritize and enhance the state’s competitive edge. Montana boasts a robust tourist economy which, of late, has converted many visitors into residents. Lawmakers should pursue sound tax reforms by avoiding tax shifts or the creation of new taxes which could negatively impact the state’s economy. This will be essential to maintaining Montana’s ability to attract and retain residents and businesses alike.
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