Death and taxes, the old adage goes, are the only two sure things in life. Well, at least death doesn’t get worse every time the Legislature meets.
Every session we go in to tweak tax policy here and there, and every session we’re presented with new ideas to “enhance revenue,” the code phrase for tax hike. What’s resulted after years of tweaks and enhancements is a hodgepodge of taxes, fees, credits, deductions, exceptions, and holidays. You can add a third “sure thing” — no one could possibly understand our convoluted tax system.
The next Legislature faces a daunting budget shortfall. This situation is due mostly to years of unsustainable state spending, but our piecemeal approach to tax policy hasn’t helped either. The mess of taxes and fees we’ve imposed has contributed to the unpredictable business climate often lamented by entrepreneurs, and some of those taxes act as an anchor on our economy as it tries to climb out of this recession.
There’s no doubt we need comprehensive reform of our revenue system to make it more stable, more predictable, and less apt to crash during recession. That means we need broad-based taxes that are easy to understand and treat taxpayers fairly. I hope some tax reform is possible next year; it certainly would encourage economic growth.
But sometimes even the most commonsensical proposals find an untimely death during the legislature. Fortunately not every good idea has to face scrutiny from lawmakers first.
Legislators can learn a lesson from one initiative that will be on the ballot this year. Constitutional Initiative 105 is a citizen-initiated measure that would amend our Constitution to prohibit any tax on the sale or transfer of real estate. Montana doesn’t currently have this type of tax, known as a transfer tax, but we’ve considered nine proposals to implement one in just the last 10 years. The transfer tax is the poster child of the bad tax ideas that we see come back every session.
A transfer tax is inherently unfair. It would be applied any time real property changes ownership, which could be a sale, inheritance, family transfer or 1031-exchange. This new tax on property would be on top of the property taxes, we already pay.
The proposed tax rate for this new tax is significant — ranging from 1 percent to 4 percent of property value. The median home price in Montana is about $170,000, so a transfer tax for the average Montana would be from $1,700 to $6,800. That’s a huge chunk of your equity that would have to go to the government, which you could owe even if you sell your property at a loss. Worse, transfer taxes could penalize charitable giving because they can apply to non-profit organizations like churches, hospitals, and land trusts.
Transfer taxes have all the hallmarks of bad tax policy. They’re not broad based — they would only apply to the fraction of homeowners who happen to be transferring property in a given year. They’re a highly unstable funding source for government because they’re tied to a volatile housing market. And they slow down housing sales, which has a negative effect on the overall economy.
CI-105 is an answer to the continued attempts to impose a new transfer tax on Montana homeowners and businesses. If we pass CI-105, the Legislature and local governments will be prohibited from imposing any tax on property transfers.
It’s too bad that we have to go outside the Legislature to pass good tax policy, but that’s the sad reality we have to live with. Perhaps CI-105 can be the start of some other positive tax policy reforms — our economy could surly use it.
(Bob Lake is the chairman of the legislative House Taxation Committee and has sponsored numerous tax reform measures during his tenure in the legislature. He serves House District 88 in Hamilton.)