Montana Property Tax Reform Options: A Tax Shift Is Not a Tax Reform

Montana lawmakers passed two 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 bills during the 2025 session that aim to shift the 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. burden from primary residences and long-term rentals to commercial properties, short-term rentals, agricultural properties, and centrally assessed real property. SB 542 and HB 231 contain numerous provisions that began as deliberations of the Governor’s Property Tax Taskforce. Both are currently awaiting action by the governor.

While the two proposals differ, they are flawed in many of the same ways. Importantly, both promise to reduce property tax liability for some by shifting the burden to others, making the reforms inefficient, nonneutral, and uncompetitive. And every Montanan would see the state liable to backfill local revenue losses for up to four years, underscoring the need to balance reform with sound policy.

Senate Bill 542

SB 542 is the more aggressive proposal. For tax years 2025 and 2026, property assessments are frozen at 2024 levels, unless the property declines in value over the next biennium. It also introduces progressivity into the property tax code and exacerbates the flaws of the existing split roll tax structure, which applies different rates to different classes of property.

The Senate plan shifts burdens from residential and long-term rental properties to other classes of property, a nonneutral and inefficient policy solution. Moreover, it replaces the flat rate of 1.35 percent of market value with a tiered-rate structure and higher rates. Short-term rental properties will be taxed at 1.9 percent of their market value, an increase of more than half of a percentage point from the prior rate.

Similarly, commercial properties will also be subject to a different tiered-rate structure based on market value. Commercial properties with market values of up to $1.9 million will be subject to a 1.5 percent rate, while all other properties above that threshold will be taxed at 1.9 percent of their market value. Property tax reform is important and necessary, but it should not artificially pick and choose winners by shifting the burden from one segment of the property tax baseThe tax base is the total amount of income, property, assets, consumption, transactions, or other economic activity subject to taxation by a tax authority. A narrow tax base is non-neutral and inefficient. A broad tax base reduces tax administration costs and allows more revenue to be raised at lower rates. to another.

Compared to the House plan, the Senate bill is more extensive and is phased in more slowly. However, each plan arrives at roughly the same place by tax year 2026, with the effects being felt by tax day, April 15, 2027. Each also offers taxpayers a one-time $400 rebate for Class 4 residential property, and qualifying recipients will automatically qualify for a new homestead exemption once the rebate expires. Rebates complicate the tax code and some residents may fail to request them, meaning they may miss out on the rebate and the follow-on homestead exemption.

House Bill 231

The House plan, for its part, also introduces multiple new rates for higher-valued primary residences (ranging between 0.76 percent and 2.2 percent). For tax year 2025, the top rate was 1.35 percent, meaning the proposed reform would result in a nearly 1 percent increase.

There is no question that some lower- and middle-income taxpayers need targeted relief to ensure that they are not taxed out of their homes. However, instead of introducing progressivity into the property tax code, lawmakers could have opted for narrowly tailored circuit breakers, which are a more efficient means of providing relief to a discrete population.

Property Valuations Surge in Recent Years

Nationally, property valuations have surged in recent years, with some areas of the country seeing them rise by over 40 percent. As the property tax is a largely local tax, when valuations grow, local government can earn a windfall, highlighting the need to adequately fund government, but not overly so.

Interestingly, due to the growth in new property, Montana added hundreds of millions of dollars in newly taxable market value each year between 2019 and 2024. Between 2022 and 2024, real property assessments grew by 18 percent in 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. -adjusted terms for new property. By comparison, real property assessments only increased 7.9 percent in inflation-adjusted terms for existing real property.

Assessed, or market values, as Montana refers to them, have increased substantially over the past decade, rising by roughly 15.6 percent between 2022 and 2024 alone. This implies that many will see increased tax bills if reforms are not enacted. However, this problem will not easily be solved by simply shifting the tax burden. There needs to be a fundamental shift in the way policymakers think about how to implement sound, sustainable property tax policy.

Responsible Reform Options

The most efficient and neutral way of providing property tax relief is through a well-designed levy (or collections) limit. This would constrain the growth in property tax revenue with adjustments for inflation and population growth, ensuring local government can deliver the services that residents desire without letting local coffers grow unchecked.

Under a levy limit, liabilities may fluctuate over time, rising and falling with changes to market valuations. However, compared to other relief options, levy limits are the least distortionary and the most effective at providing sustainable relief over time. Pairing a levy limit with narrowly tailored circuit-breakers would help further protect lower-income property owners.

Montana’s property tax code already features a levy limit, which restricts the growth in total property tax revenue (in any given year) to half of the average inflation rate over the past three years. However, this limitation is easily overridden by taxpayers, making it less effective at providing property tax relief. (High inflation in recent years has also meant allowing significant increases in nominal—though not real—terms.) Lawmakers could also consider reforms that make overriding levy limits more difficult but still allow democracy to work.

The property tax is a good tax, and it is worth reforming. Unfortunately, Montana lawmakers have opted for a tax shift, not a tax reform, and it is unlikely to prove a long-term solution. Tightening levy limits to restrict property tax growth would prove more effective in the long run, without leaning on less economically efficient taxes or shifting burdens in ways that distort housing markets and hurt new construction.

With such important changes to Montana’s property tax system at stake, it’s important that lawmakers get the details right. It’s also important that lawmakers acknowledge and address the very real concerns of homeowners who have seen their property valuations soar, making the specter of a dramatically increased tax bill real, despite the flawed protections embedded in the existing code. Unfortunately, these bills provide costly, distortionary patches rather than structurally sound relief.

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