Montana Sales Tax Would Knock State Out of Top Ten in Business Tax Climate

The Montana Governor’s race heated up last week with a sales tax controversy: Democrats claim that Republican nominee Rick Hill supports enacting a sales tax, which Hill denies. (Montana is one of five states with no statewide sales tax.)

From Watchdog.org:

Hill’s campaign manager Brock Lowrance told Watchdog.org on Wednesday that Democrats pitch that line to scare voters. He added that there’s absolutely no legitimacy in the claim.

“Rick is not advocating for a sales tax for Montanans,” Lowrance said. “There’s nothing planned like that.”

But the Montana Democratic Party holds a video they say is concrete evidence Hill does, in fact, want to tax Treasure State purchases.

The grainy, wobbly video was purportedly taken June 2, 2011, and shows Hill talking tax policy with small group. He expresses he’s “often been an advocate for a sales tax as a substitute tax, not as a third rail” to the crowd.

Democrats also point to Hill’s work lobbying for a 4-percent sales tax on Gov. Marc Racicot’s behalf in 1993. The effort failed, but Democrats still finger Hill as leading the effort to bring the tax to the state.

As my colleague Will Freeland noted in the article, a sales tax can pose fewer administrative and compliance difficulties than an income tax. But past proposals have involved Montana adding a sales tax, not using it to repeal its income tax, so they’d end up with both. The last effort, on the June 1993 ballot, failed 26 percent to 74 percent.

Just to see how adding a sales tax would affect Montana’s tax competitiveness in our State Business Tax Climate Index, we ran the numbers as if the state had a 4% sales tax, using the same sales tax base rules as neighboring Wyoming, as of July 1, 2011. The result is that the state falls out of the top ten, dropping from 8th best on the Index to 12th best:

Table: Effect of a Montana Sales Tax on State Business Tax Climate Index Score

Why the sharp drop? Primarily, it’s the value of going without one of the major taxes. That's an entire tax where you don't need people calculating amounts owed, accountants managing paperwork, and tax officials writing rules, auditing, and enforcing. The administrative and compliance costs of going from a 0% sales tax to a 1% sales tax are miles above going from, say, 5% to 6%. That said, a 4% sales tax rate is competitive with neighboring state’s sales tax rates.

Montanans seem to recognize the value of doing without one of the major taxes, and this is why what Rick Hill might have said could be problematic for him.

More on Montana here.