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HomeMy WebLinkAboutMontana Taxpayer February 2001Volume 35 Number 2 February 2001 Maintaining the line on the tax reform from the last session and a look at the overall tax structure in Montana was the theme of a February 16 presentation before members of the Senate and House Tax Committees coordinated by the Montana Taxpayers Association and the Montana Chamber of Commerce. The presentation was in response to some of the proposed legislation on increasing the business equipment tax rates, eliminating the trigger for further reductions and possible income tax reform. The feedback we received from legislators was very positive. Doug Young, Professor of Agriculture and Ag Economics from Montana State University gave an overview of Montana taxes. Dr. Young outlined the elements of a "good" tax system: promotes economic growth, fairly distributes the tax burden, low administrative and compliance costs and provides adequate revenues. Are taxes important for economic growth? Yes, taxes are one of the factors that influence business location decisions, but distance to markets, availability, wages and skills of labor along with the regulatory climate and amenities are usually ranked higher. The difference with taxes is they are something Montana can control. Dr. Young presented data comparing Montana with surrounding states (Tables 1-4)(Re£er to rage 3). Although Montana is comparable, the conclusion was, we could do better. Among his recommendations to help Montana with stimulating our economy was tax reform: reduce top income tax rates, further reduce business equipment taxes, reduce residential and commercial property taxes and consider a sales tax. What else can Montana do to promote economic development? Dr. Young believes that "a regulatory structure and administration that provides clear and rapid resolution of siting and other issues would probably contribute even more. Bonding and other techniques can provide businesses with clear signals and incentives to protect Montana's environmental resources. Transport and communication infrastructure remain crucial to both "new" and "old" economy businesses. More broadly, state and local governments best serve their citizens by providing high quality public services in a cost-effective fashion, and "getting out of the way" of private sector initiative. Vern Hoven, from Vern Hoven's Tax Seminars presented information on fixing the marriage tax penalty at the federal level. He concluded that if the federal government truly wants to eliminate the marriage penalty, they should adopt rules similar to the treatment of married filing separately currently in place in Montana. Shirl Boyce, Vice President of the Boise Metro Economic Development Council shared some of Boise's and the state of Idaho's experiences with their economy. The mid-1980's were terrible for them as all three natural resource industries "went on their lips at the same time. In 1986 you could have shot two 105mm howitzers down Boise's Main Street and not hit a thing." He went on to say, "Adding to the problem was an attitude by some that we were not going anywhere because we thought we couldn't - we were our own worst enemies." Their efforts started getting serious under former Governor Andrus who appointed one of the state's best entrepreneurs to lead the Idaho Department of Commerce. At the same time, Boise established a professional economic development effort with the creation of the Boise Metro Economic Development Council. In regards to taxes, he stated that while Idaho does not have a "huge cornucopia of tax incentives - those we do have are for existing businesses as well as new coming into the state." He believes their investment tax credit was also an important piece of the mix. Linda Reed, represented the Montana Economic Developers (MEDA). "As the group whose members work the front lines of economic development, we are very familiar with the obstacles the Montana personal income and business equipment tax rates pose. We -1- Montana Taxpayer Address all communications to: MONTANA TAXPAYERS ASSOCIATION P.O. BOX 4909, HELENA, MT 59604 Telephone (406) 442-2130 FAX (406) 442-1230 E-mail - inwMtt®montax.org phyatt@montax.org Business Office: 506 North Lamborn VdvvVVVVVrVVVVVVVVVVVVV OFFICERS AND STAFF CHASE T. HIBBARD, Helena.... Chairman, Board of Directors BILL SPILKER, Helena, Vice Chairman, Board of Directors MARY WHIT17INGHILL, Helena.... President PAM HYATT, Helena.... Office Manager V V V V V V V V v V V V V V V V V V V V V V V DIRECTORS , Kalispell contractors- John H Mining- Russ Ritter, Helena : Coaperagves-JeanBaron Malta - Ken Crippen, Missoula Motor Carvers Dlreclorat Large-Tom Rohe, Helena Railroads-Alec Vincent, Texas Farm Machinery -Gordon Nelsen, conned Real Estate - Bill Spilker, Helena Financial- Craig Anderson, Billings Retail- Marilyn Hudson, Helena Gas B Electric - Emie Kndt Butte Sheep&Wool - Chase Hibbard, Helena Gram Growing- Daryl Ayers, Denton Telecommunications-Rick Hays, Helena Hardmie Stores- Terry Taylor, Colskip Timber Products- Doug Mood, Seeley to are terms to help overcome these obstacles." In the short term it would be useful to begin - as a State - to talk about effective tax rates. Many possible relocation and expansion opportunities pass Montana by after reading public documents, which refer only to the rates. We believe public documents that talk in terms of effective rates would soon result in the publication of these rates in materials that compare states to states and more accurately reflect Montana's position. Longer term, the entire issue of taxes needs to be analyzed once again. While on average and in aggregate our tax burden falls near the middle of the states' ranking, it is inequitable and we believe, failing to generate sufficient revenues to support critical services necessary to recruit and retain our businesses. Education is one specific example. Ms. Reed ended by saying "MEDA would welcome an opportunity to participate in such an analysis and would engage in marketing a new tax proposal, which brought equity to the existing system (even if not additional revenue)." Concluding the presentation were two business owners: one representing a company requiring large investments in equipment (Summit Manufacturing and Design in Helena) and the other representing the "new" economy in Montana (Right Now Technologies in Bozeman). Summit Design and Manufacturing was created to design and manufacture components for the aerospace industry. Through a relationship with Lockheed Martin Aeronautical Systems and the F-22 program, Summit has expanded to a 25,000 square foot building employing over 100 people. Tom Hoffman, president of Summit explained to the tax committee how important the business equipment tax was to his business. In fact, the reduction for tax year 2000 meant the first time his company was able to turn a profit. Mr. Hoffman believes that it is important for the Montana Legislature to remember those businesses currently in operation when looking at tax reform. He believes further reductions in the business equipment tax should continue to be considered and that Montana needs to look at other options such as a sales tax. Right Now Technology is a provider of web customer service systems and employs over 220 people in Bozeman. Their flagship product, RightNow web, integrates customer self-help, live customer interaction, email management and service contracts administration. Customers include Ben & Jerry's Ice Cream, Xerox, eTour.com, Mindspring, Specialized Bikes, and Air Canada. Gregg Gianforte, president, moved to Montana in 1995 with his wife and family. Greg believes that the Internet eliminates geographic boundaries and that with its advent a world-class high tech company can flourish anywhere, even in a non-traditional location like Montana. The problem in attracting and keeping companies similar to his is Montana's high income and capital gains taxes. MT. Gianforte believes that our tax structure actually repels entrepreneurs from moving to Montana. Greg presented information from the Bureau of Business and Economic Research that high-tech companies represented 25 percent of the increase in economic growth during the 90's and that there is a tremendous amount of additional growth that is unrealized. If Montana wants to benefit from this growth, we need to get serious about tax reform. He recommended even incremental reductions in the marginal income tax rates. Other association executives testified there is a growing concern among their members about the current tax structure in Montana. Jerry Driscoll, former legislator from Billings expressed a desire for further review of the _ tax structure and involvement of any discussions by more of the citizens in Montana. We intend to work with the other grass roots associations throughout the state to find out what the taxpayers in Montana believe a "good" tax system in Montana would look like. (Some of the presentations are available on our web site: www.montax.org). We plan to follow up with the tax committees after transmittal on other businesses benefiting from the business equipment tax reduction from last session. Basically, what the tax reform meant to your business - do you plan to purchase more equipment, did you or do you plan to hire more employees, increase wages, be able to pay for more benefits (i.e. medical insurance for employees)? Please mail, email or fax any information -2- you would like us to present to the committees. We will also be compiling the results of our survey, which is still available on our web site www.montax.org). School Funding Without a doubt, quality education in Montana is a high priority. But, the debate on the appropriate level for school funding will certainly continue until the end of the session. New numbers released by the Legislative Fiscal Division show total funding (state, local and federal) have been growing and, in fact have been greater than inflation. (See Charts 1 and 2).(Refer to Pages 3&4) The problems schools are facing arise due to restrictions on portions of the funding and the funding mechanism currently in place. According to Jim Standaert, Senior Fiscal Analyst, "many schools will be forced to lower their maximum budgets - i.e. it's a budget authority problem, forced on them by the current formula which tries to "gather" all schools within an equalization window of budget authority. Lance Melton with the Montana School Boards Association points out that the numbers "circulating around the capitol include local taxes and federal spending, and a variety of funding sources that could never be spent on teacher salaries because of state and federal restrictions." His figures show the portion of overall state general fund spending dedicated to K-12 education went from a high of 49 percent to 40 percent in FY01. Other figures released by the Legislative Fiscal Division that were requested by Representative Verdell Jackson (HD79), reveal that Montana ranks high in terms of overall effort for school funding as compared to other states with similar levels of disposable income. Chart 3 compares Montana's spending per student compared with 14 other western region states for 1998. Only two states (Alaska and Washington) were higher than Montana in per student spending per year. Alaska has a sparse population spread over an area the size of 1/3 of the continental United States and Washington has the highest average income per capita in the region. Montana ranks fifth behind Alaska, Washington, Oregon and Wyoming. There are a variety of bills that have been introduced to address the school funding issues including SB70 by Senator Bill Glaser, HB121 by Representative Doug Mood and HB31 by Representative Carol Juneau. Another bill that will be introduced this session (LC1465, by Representative Musgrove) is proposing a new look at the entire school funding formula and budgeting process. We think this makes sense - the current system is complicated and does not appear to allow flexibility when enrollments are changing. As the debate continues, one thing is clear. Whether the money comes from property taxes or from the general fund (income taxes, corporation license taxes, etc.) it is -3- still taxes. There still needs to be some assurance to the taxpayers, the funding level is appropriate and the budget formula reflects the operation of schools today. Table 1 - Are Montana's Taxes High? State api027 a Rank %Income Rank Montana $2, 42 11.1% 29 Idaho $2,138 40 11.6% 20 N.Dak. $2,238 35 12.1% 11 S.Dak. $1,965 46 10.1% 46 Wyyoming $2,421 25 11.7% 17 U.S.Avg. $2,597 11.3% Source: USDC, Govemment Finances In FY1996 Table 2 - Tax Rates on a $150,000 Home State Rate rank Montana 1.02% 24 Idaho 0.86% 34 N.Dak. 1.44% 15 S.Dak. 1.30% 19 Wyoming 0.57% 46 U.S.Avg. 1.16% sa,umnemta ravpeya,.A?od?'on. xismm vmpay rev cw,aertson ssldr. Jan,ary, 1999 Table 3 - Top Income Tax Rates Statutory Deduct Effective Federal? Montana 11.0% Yes 5.9% Idaho 8.2% No 5.9% N.Dakota 14% of Fed Tax No 2.7% S.Dakota No Personal Income Tax Wyoming No Personal Income Tax Source. Monfana Department of Revenue, unpubfished data. Table 4 - Income, Sales, Property & Auto Taxes: Income=$15 0,00 State Rate Ran Montana 10.1% 22 Idaho 10.3% 17 N.Dak. 7.5% 41 S.Dak. 6.0% 45 Wyoming 3.8% 50 U.S. Avg. 9.6% s....m.eaac ma,..wmew.i. nm.aexnm,.u. caryvYtq 10.9 Chart 1 School Funding in Montana Comparison of the 2003 Biennium with the 2001 Biennium . 2001 2003 Biennium Blennium Difference Average Number Belonging Served 317,130 307,021 (10,109) Total Stale AlaState General Fund $992.1 $981.7 ($0.5) State Personal Property Reimbursement $80.8 $78.1 $17.2 Federal Aid $155.8 $197.9 542.1 General fund budget maximum budgets These flgums are as of Feb. 21, 2001 and reflect app nal of the House Appropriators Education Subcommitlee. It Is assumed that general fund suppler entals of $10.4 million in Fiscal 2001 will be approved by the legislature. The state aid figures are those proposed In the Marti budget (3. percent increase in enlitlemenls and special education in Fiscal 2D03), except for $1.0 million in leacher ban repayments, which is in hb14D (Masolc). Chard 2: Total School District Spending, Montana $Ipso E ? $1 can 8 5 Seat K ° Seao S r us. $900 Dam from DPJ PorTuadellyar.cls, Jan 2001 Current and Long Term Erpendinu es, All Minor Funds Parturf by local, store & fed) escePr Building, EnrerPnse Type. Adult Ed and Tinust Funds Chart 2 shows total increases each year in school spending compared with an average inflation rate of 2.5% from 1994-2000. Spending caught up with inflation in 1997 and exceeded inflation by 20 million in 2000. Chart ;; School Spending and Income ss,apg ---.. -State Comparisons-.1998 •AK Sr,000 ... W,,, oa - I .NV WA_ _...- mm in • It a NIrO no CA ..._• _ _.! __ I.._.-_.-_... • _. _.__ Az?o co v 32,000 !. _.? .....__ .__ _J.. .. __... st,aao I I _ so _ .I ..-...i. ._ $15400, SMOG AaWn $19900 Tlo,ooo SI'me Mae misloo rraa. Militia Disposable Personal Income per Caplta Sauna: NCES,Digest of Education Smtivim Statistical Abstract of US. Chart 3 compares Montana's spending per student compared with 14 other western region states for 1998. Only two stales (Alaska and Washington) were significantly higher than Montana in per student spending per year. Alaska has a sparse population spread over an area the size of 113 of the continental United States and Washington has the highest average income per capita in the region. Legislative Update We expect more tax bills to be introduced after transmittal (revenue bills do not need to be transmitted until March 19). The remaining legislative draft requests (LCs) that have not been introduced contain a variety of titles that pertain to tax reform. But, with the budget forecast remaining about the same, holding the line might be the end result. In any event, we continue to support Governor Judy Martz's no tax increase pledge. A few of the more major tax bills we are watching include: HB 61 - Eliminating the phase out of class eight business equipment property tax. Rep. Erickson HB 124 (the big bill) - Revise local government funding. Rep Story H 247 - Reducing the fee in lieu of tax on heavy vehicles. Rep. Lewis HB 474 - Revising laws relating to electrical energy. Rep. Slifer HB 617 - Simplify and reduce income taxes. Rep. Balyeat SB 119 - Increasing the tax on cigarettes from 18 cents to 56 cents a pack, increasing tax rate on wholesale price of other tobacco products from 12.5% to 45%. Sen. Berry SB 173 - Income tax reform. Sen. Ellis SB 281 - Notification to owners of property when subject to tax sales. Sen. Mahlum SB 346 - Amnesty for penalty and interest for certain delinquent property owners. Sen. Cobb SB 396 - Increase voter participation in constitutional initiative process. Sen. Grosfreld SB 397 - Increase voter participation in statutory initiative process. Sen. Grosfield SB 472 - Revising statutes governing ballot measures Sen. Grosfield Irrl?;?9illllrtt9i?llllltrl9911rt91iltalylrlr9$???r9?rhlritl -l 0100-0t,069: 1W lamed, L3anvi .!(n 1 I ZZ'ON lnwaad lI1'eua17H (Ilya aoclsod "S";1 P.IepuelS Uoseld 1,94 lure 1666 1997 1999 we 2090 Many.,