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Montana Tax Simplification Bill Awaiting Governor’s Action

By: Joseph Bishop-Henchman

UPDATE: Governor Bullock vetoed SB 171 on May 4.

Montana legislators are now at home after a session that involved Governor Steve Bullock (D) vetoing two 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. cut proposals from the Republican-led legislature. A third bill, which focuses instead on greatly simplifying the tax system, is on Governor Bullock’s desk awaiting his veto or signature.

Current Montana income tax rates and brackets

1.0%

>$0

2.0%

>$2,800

3.0%

>$5,000

4.0%

>$7,600

5.0%

>$10,300

6.0%

>$13,300

6.9%

>$17,000

The first bill, HB 166, cut each of Montana’s seven tax bracketA tax bracket is the range of incomes taxed at given rates, which typically differ depending on filing status. In a progressive individual or corporate income tax system, rates rise as income increases. There are seven federal individual income tax brackets; the federal corporate income tax system is flat. s across-the-board by 0.2 percentage points and increased the state’s capital gains credit from 1 percent to 1.9 percent but undertook no simplification of the tax system. Montana’s top tax bracket kicks in at a relatively low $17,000 of income, and income above that is taxed at 6.9 percent. Neighboring Idaho has a higher top income tax rate (7.4 percent on income over $10,717) but all other neighboring states are lower: Utah (5.0% flat), North Dakota (3.22% on income over $405,100), Nevada (no tax), Wyoming (no tax), and South Dakota (no tax). Governor Bullock vetoed the bill on March 6, and a veto override attempt failed on March 10 by a vote of 59 yes to 41 no.

HB 166 Montana income tax rates and brackets (vetoed 3/6/15)

0.8%

>$0

1.8%

>$2,800

2.8%

>$5,000

3.8%

>$7,600

4.8%

>$10,300

5.8%

>$13,300

6.7%

>$17,000

The second bill, SB 200, again cut each of Montana’s seven tax brackets and increased the capital gains credit, and modestly increased bracket thresholds. But it again undertook no simplification of the tax system. Governor Bullock vetoed this bill on April 9.

SB 200 Montana income tax rates and brackets (vetoed 4/9/15)

0.9%

>$0

1.9%

>$3,000

2.8%

>$6,000

3.8%

>$9,000

4.8%

>$11,500

5.8%

>$14,500

6.7%

>$18,000

The third bill, SB 171, authored by Sen. Bruce Tutvedt (R-Kalispell), is very different. The seven brackets with high rates on low earners is replaced by a two-bracket system. By adopting different tables for singles and married filers, like the federal government and many other states, the bill eliminates the current tax marriage penaltyA marriage penalty is when a household’s overall tax bill increases due to a couple marrying and filing taxes jointly. A marriage penalty typically occurs when two individuals with similar incomes marry; this is true for both high- and low-income couples. . The bill also raises the tax-free standard deductionThe standard deduction reduces a taxpayer’s taxable income by a set amount determined by the government. It was nearly doubled for all classes of filers by the 2017 Tax Cuts and Jobs Act as an incentive for taxpayers not to itemize deductions when filing their federal income taxes. and personal exemption thresholds up to federal standard deduction and personal exemption, a big tax reduction for low-income individuals. The capital gains credit would be 1.5 percent of income.

SB 171 Montana income tax rates and brackets (approved by Legislature, pending with Governor)

Tax Rate

Single

Head of Household

Married Filing Jointly

4.7%

>$0

>$0

>$0

6.1%

>$20,500

>$30,750

>$41,000

Note: Amounts up to the federal standard deduction and personal exemptions are tax-free.

By adopting different tables for singles and married filers, like the federal government and many other states, the bill eliminates the current tax marriage penalty. The bill also adopts the tax-free thresholds of the federal standard deduction and personal exemption, a big tax reduction for low-income individuals. The capital gains credit would be 1.5 percent of income. A number of special interest credits and carveouts are eliminated, which earned the ire of industries that benefit from them in the bill’s hearings, and making up most of the bill’s revenue loss. A legislator inserted a resuscitation of the film tax creditA tax credit is a provision that reduces a taxpayer’s final tax bill, dollar-for-dollar. A tax credit differs from deductions and exemptions, which reduce taxable income, rather than the taxpayer’s tax bill directly. , though, at $154,000 per year.

Unlike the earlier two bills, this bill delivers broad-based tax relief while simplifying the system and improving the state’s competitiveness. The Revenue Department even estimates that SB 171’s simpler system, simpler form, and shorter instructions would enable them to reduce their headcount by 11 positions and save $750,000 a year in tax administration costs. Stay tuned.

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