Hopes for tax cuts hinge on Legislature's spending

HELENA — As Montanans scrambled to meet this week's tax deadline, their elected officials buckled down with goals of simplifying the state tax code and sending money back to taxpayers.

A number of proposals remain alive, but with less than two weeks left this session, there's no telling which bills will reach the governor's desk.

Community News Service/Amy R. Sisk

Sen. Bruce Tutvedt, R-Kalispell, addresses the House Taxation Committee. He is proposing legislation to change Montana's income, property and business equipment taxes.

During a hearing last week, Rep. Kelly Flynn, R-Townsend, asked a senator the question on everyone's mind: "We're looking at the total amount of funds we have available for tax relief. In your mind, where would you put your income tax relief bill with, let's say, the business equipment tax proposals that are working their way through?"

The answer will come during the final days of the session when lawmakers rank major spending items, including a $9 billion budget and bills to address a pension system shortfall, education funding reform, state employee pay and construction projects at colleges.

The chances for any cuts in income or property taxes will depend on how much money the Legislature decides to spend on services or save as a cushion against unexpected costs until the next session. As of late last week, lawmakers were on track to spend $95 million more than the state is projected to collect over the next two years.

"Both the Democrats and Republicans would like to see some sort of tax relief," said Nancy Schlepp, president of the Montana Taxpayers Association. "But I also know how cognizant they are of the huge funding obligations they have."

When lawmakers first arrived at the Capitol in January, people on both sides of the aisle pledged to return some of the state's $500 million surplus to taxpayers.

Democratic Gov. Steve Bullock wanted to eliminate a tax on equipment owned by small businesses and send a $400 rebate check to every property owner. His proposals never made it out of committee.

Alternatives brought by Republican lawmakers fared better.

Right now, the fight over Republicans' plans for the state income tax boils down to two issues: simplification and tax credits, as seen in the debate over Senate Bill 282.

"It takes Montana's tax code from one of the most complicated to one of the most simple," said the bill's sponsor, Sen. Bruce Tutvedt, R-Kalispell.

His bill would reduce the number of tax brackets and establish a maximum tax rate of 6 percent. Currently, a person who falls in the top of seven tiers pays the state 6.9 percent of their taxable income.

Another measure, House Bill 581, also reduces the number of brackets. Both proposals would eliminate dozens of tax credits.

"The current Montana Form 2 tax booklet includes 42 pages of instructions that are applicable just to Montana, in addition to the plethora of instructions for federal returns," said George Olsen of the Montana Society of CPAs. "The bill under consideration reduces those adjustments to a relative few, which makes it much simpler than existing law."

Not all are happy about losing tax credits, including Ben Brouwer of the Montana Renewable Energy Association and the Alternative Energy Resources Organization.

He said ending three energy credits would hurt homeowners who rely on them to help offset the costs of insulation and window upgrades.

"If you toss these tax credits, the energy policy you are throwing out with them is one that prioritizes conservation and efficiency first," he said.

A third income tax bill provides one-time relief, but it comes with a $47 million price tag.

Dan Villa, the governor's budget director, said Senate Bill 394 would benefit the wealthy primarily and provide almost no relief to the bottom 10 percent of income earners.

The bill's sponsor, Sen. Art Wittich, R-Bozeman, agreed with that assessment, but did not see it as a negative. He said people who pay high taxes deserve tax relief.

The governor's office is also opposing a bill to provide a tax break for property owners. House Bill 230 would cost the state $52 million in fiscal year 2014, and that number would continue to grow in subsequent years.

Ali Bovingdon, deputy chief of staff to the governor, said the state cannot afford that amount. She added that the proposal would send only $44 back to the average homeowner. Large corporations, on the other hand, could see millions.

But the bill's sponsor, Rep. Scott Reichner, R-Bigfork, argued that his proposal would reduce taxes fairly, regardless of whether the recipient falls into the residential, agricultural or commercial tax class.

Lawmakers are also looking at a way to reform the property tax system. Currently, the Department of Revenue appraises property every six years. That would change to two under Tutvedt's Senate Bill 398.

The agricultural community argued against the bill. They asked legislators to maintain the six-year cycle to allow farmers to plan for additional costs.

Meanwhile, the House Taxation Committee has rolled two business equipment tax bills into one. Under Senate Bill 96, companies with less than $250,000 in equipment will pay zero tax. Those with up to $10 million of equipment will receive an exemption on the first $250,000, then pay 1.5 percent on the remainder of their equipment. Above that, businesses will pay a 3 percent rate.

Tutvedt told the House Taxation Committee that lawmakers must come up with a tax-relief package the state can afford. He's not the only one preaching that message; Wittich offered a similar sentiment during a hearing on his income tax bill.

"When we cut the grand bargain here in the next two weeks, we'll hope that the taxpayers of Montana get a little bit back and we just didn't spend it all," he said.

(Reporter Amy Sisk can be reached at [email protected]. Follow @amyrsisk on Twitter for the latest from the Capitol.)