Meeting produces tax debate

A meeting in Havre of the Montana Chamber of Commerce and the Montana Taxpayers Association turned into a debate about the benefits of reducing taxes in the state.

"Something's got to change in the tax structure," said David Henry, CEO and president of Northern Montana Health Care. "We want everything, but we don't want to pay for it."

The meeting was sponsored by the Havre Area Chamber of Commerce and Henry, who sits on the executive board of the Montana Chamber. Webb Brown, president of the Montana Chamber, and Mary Whittinghill, president of the Montana Taxpayers Association, were among those who attended.

Whittinghill said the state's tax structure is key to attracting and keeping businesses and people in the state.

"How we compare with other areas in taxes, that seems to be very important now not just with neighboring states, but globally," she said.

The state reduced business equipment taxes and further reductions will be triggered as economic indicators change. Both groups also favor reducing the capital gains tax and making other changes to make the state's taxes more attractive to business.

Neither group has taken a stand on proposals to change the income tax structure and implement a "tourist" sales tax.

Montana State University-Northern Chancellor Alex Capdeville said paying for the tax cuts already made is becoming a problem. The cuts were to be paid for with the state's budget surplus, which is now shrinking.

"It's like a shell game," he said.

A combination of factors has reduced Montana's surplus, Whittinghall said. The recession, tax cuts and a federal increase in equipment depreciation rates in a stimulus package passed after the events of Sept. 11 has cut into the surplus. Last year, the surplus was estimated to be $54 million, and now it's about $26 million, she said.

Brown noted that severe budget shortfalls are expected.

The Taxpayers Association believes that the business equipment tax reductions have kept some businesses in the state, and the state's capital gains tax has driven some people out, Whittinghill said.

Hill County Commissioner Doug Kaercher disputed the benefits of the equipment tax deduction. Local governments are mandated to provide certain services, he said, and when one tax is reduced, the county has to raise property taxes. The property tax increase for most small businesses in Hill County offset any savings from the equipment tax reduction, Kaercher said.

State Sen. Greg Jergeson, D-Chinook, said business owners whose operations are dependent on real property rather than on equipment are being treated unfairly.

"If I was a business owner relying on real property, I would be a little irritated," Jergeson said. "If you take somebody to zero percent and leave others taxed, there's an equity problem."

Former Rep. Ray Peck of Havre, treasurer of the state Democratic Party, questioned how much equipment taxes hurt businesses to begin with. Business owners pass expenses on to their customers, he said.

"Who pays the tax the business owner or the consumer?" Peck asked.

State Sen. Jon Tester, D-Big Sandy, said focusing on income taxes and business taxes might not be the right approach. People proposing changes in the tax structure say property tax is not a problem, but "That's not what I hear," he said. "I've never had a complaint about income tax. I've got a ton of complaining on real property tax."

Whittinghill admitted her information about businesses staying because of the equipment tax reduction is anecdotal and that she has no statistics to prove the point.

"It's very difficult to monitor, to gauge that," she said.

When businesses say they will leave because the tax rate is too high, then stay when it is reduced, that seems to prove the point, Brown said. But it's impossible to say whether the businesses actually would have left or not.

The evidence that people are leaving Montana to avoid capital gains taxes is also anecdotal. Whittinghill said she hears examples of it happening at every meeting she goes to.

"We do believe that is a huge problem," she said.

Montana's income tax system is also confusing, she said. Montana's top income tax rate is 11 percent, one of the highest in the nation, but since the state allows taxpayers to deduct their federal income tax, the effective rate is 5.4 percent. But people don't always think of that, Whittinghill said.

"Montana has a perception problem with our income tax," she said.

A legislative interim committee is working on a proposal by Gov. Judy Martz's administration to revamp the income tax system. Tester, who is on the committee, said it would eliminate the federal tax deduction and reduce the rates by 10 percent. That would leave a $66 million deficit that would have to be made up, he added.

Whittinghill said that deficit is part of the reason other tax changes, like the tourist tax, are being proposed.

Rep. John Musgrove, D-Havre, said people have an attitude that they are entitled to services, rather than having to earn or pay for them. Until that attitude is changed, it will be difficult to change taxes and services, he said.

"We have to have almost a cultural shift," he said.

Henry said the hospital, like school districts and local governments, is faced with unfunded mandates. The hospital has a mandate to provide health care whether the patient can pay for it or not. As more patients can't pay, the bill is passed on to the patients who can pay.

Martz's $10 million in cuts to state health programs last year increased that, Henry said.

"What she cut, the rest of you got to pay," he said. "You're paying an awful lot of money that isn't your expense."