Montana passed structural personal and corporate income tax reforms during the recently adjourned legislative session, enacting three bills reducing personal tax rates, simplifying the personal tax system of government, repealing 16 tax credits and changing the allocation factor for corporate income tax. This tax reform package, signed by Governor Greg Gianforte (R) in early May, comes about six years after a similar set of bills were vetoed by a previous governor in 2015.
Senate Bill 159 reduced the top marginal tax rate from 6.9 to 6.75 per cent while leaving the current seven-bracket system unchanged. While the rate reduction is limited to the top marginal rate, it benefits most taxpayers as the top bracket starts at $ 18,700 for individual and joint filers, while the median household income in the state is $ 57,153. The rate reduction goes into effect in 2022, while the bill’s provisions expire after 2024, a sunset provision that hinged on the passage of SB 399.
Senate Bill 399 makes sweeping structural changes to the state’s individual income tax brackets and tax credits offered, and generally makes the state’s tax code more compliant with the Internal Revenue Code.
The biggest change the bill makes to the personal income tax system is the removal of the seven-bracket system and the implementation of a streamlined two-bracket system with rates of 4.7 and 6. , 5 percent, with bracket widths that are doubled for joint filers, avoiding the marriage penalty that currently exists in state income tax. As part of this simplification, the state will adopt federal taxable income as the starting point for determining Montana taxable income, automatically incorporating the federal standard deduction.
Although the lowest rate is 4.7%, down from 1.0%, comply with the federal standard deduction ($ 12,400 last year, compared to the current Montana standard deduction of 4,790 $) also allows low-income taxpayers to achieve tax savings. For example, a taxpayer earning $ 20,500 per year – the point at which the new second tranche would take effect – would have paid $ 783 in taxes last year under the current system, but only $ 381 under SB 399. if it had been in effect that year. The savings would be magnified for dual-income families since the legislation also eliminates the state marriage penalty.
|Current tax code||Under SB 399|
|1.0%||>||$ 0||4.7%||>||$ 0|
|2.0%||>||$ 3,100||6.5%||>||$ 20,500|
Sources: SB 399; Tax foundation.
Senate Bill 399 also repeals 16 income tax credits affecting both individuals and businesses, ranging from the Alternative Fuel Tax Credit to the Adoption Tax Credit, indicating the shift from a more complex system to a simpler system with lower rates. The bill, however, does not eliminate the carry-over of accumulated credits until January 1, 2022, allowing taxpayers to use them to offset income until they have been fully spent. The new law offers more simplicity and neutrality, by swapping targeted incentives for lower rates.
|Tax credits repealed by SB 399|
|College contribution credit||Alternative energy credit|
|Energy saving credit||Low-emission Wood or Biomass credit|
|Alternative fuel credit||Alternative energy production credit|
|Health insurance for uninsured MT credit||Mining / coal exploration credit|
|Elderly care credit||Emergency accommodation credit|
|Credit for dependents||Authorization zone credit|
|Biodiesel Blending and Storage Credit||Adoption credit|
|Credit for geothermal systems||Oilseed credit|
Source: text of Montana Bill SB 399; Montana Budget Director’s Report SB 339.
Not all of the provisions of Senate Bill 399 come into force at the same time. Instead, all 16 credits are repealed as of tax year 2022, while the rest of the changes do not come into effect until tax year 2024, after the extinction of the provisions of SB 399.
To finish, Senate Bill 376 replaces the state’s equal weight three-factor allocation formula for corporate income tax with a double-weighted sales factor allocation formula, following a tendency for states to weight more heavily on sales to distribution purposes. (Many have moved to a single selling factor, although Montana still retains the traditional payroll and ownership factors, albeit with a reduced weight.)
Changing the weight of the sales factor for distribution reduces the tax burden for companies that have most of their assets and payroll in the state while having only a small portion of their domestic sales in the state. ‘State. Conversely, companies with only a modest presence in the state – or, for sellers of services, a purely economic connection – but a large part of sales from the state will see their tax liability increase. .
Together, these three bills represent a transition to a simpler, more growth-friendly tax system. The combined annual revenue loss will be around $ 60 million, or about 1 percent of the state budget and about 2.3 percent of general fund revenue. State General Fund revenues increased slightly in FY20 despite the pandemic and are considerably higher in FY2021 with forecasts indicating further growth in subsequent years which is expected provide fiscal space for these tax cuts to be implemented from income growth.
This is important because the American Rescue Plan Act prohibits fiscal stimulus funds (Montana receives $ 906 million at the state level) from being used to facilitate net tax cuts, directly or indirectly, but the US Treasury Department has made it clear that states are still free to cut taxes on growing their own incomes without fear of stimulus funds being clawed back.
Montana’s tax reform agenda seeks to capitalize on an era of remote work, attracting taxpayers fleeing higher tax jurisdictions. Policymakers in Idaho and Oklahoma have followed suit, with significant tax breaks also being considered in North Carolina, Louisiana and elsewhere.
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