The report, prepared at the request of the Missoulian State Bureau, says Montana households paid $100 million less in state income taxes in 2005 because of the lower tax rates.
About $48 million of that reduction went to the 1,586 Montana households that reported annual income of $500,000 or more that year, for an average cut of about $30,000, the report said.
Supporters of the tax cut said Friday they're not surprised the change led to larger reductions - and that it's good news for Montana and its economy.
“This evidence shows that not only is (the tax-cut proposal) working, but it's working even better than all of us who supported it had promised,” said Sen. Joe Balyeat, R-Bozeman. “We've got lower, more reasonable tax rates for everybody, faster-growing wages and we've got a (state) treasury surplus. There should be nothing for our opponents to complain about.”
Balyeat said economic studies have shown that reducing upper-income tax rates leads to wage growth in all income-earning sectors.
Nonetheless, Senate Majority Leader Jon Ellingson, a Missoula Democrat who voted against the tax-cut bill, said the 2005 figures show that the cuts “were completely inequitable.”
The wealthy are reaping the largest gains, and there's no evidence the cuts caused the surge in state revenue the past two years or affected the economy, he said.
“The argument that we can jump-start our economy by cutting one tax or another has never been substantiated by the data,” Ellingson said.
Dan Bucks, state revenue director, said the 2003 analysis was based on 2001 income-tax data, and that the economy has grown dramatically since then. However, the income growth went mostly to people who were already rich, he said - thus the much-higher-than-expected tax cut for wealthy Montana households.
Here's a summary of the report, which was released this week:
Tax cuts for the lowest income brackets - those earning less than $25,000 a year - were slightly higher than expected. Their cuts averaged $22 per household. They also had the highest proportional reductions, up to 52 percent.
The 81 percent of Montana households earning less than $65,000 a year had a total tax savings of about $7 million, or 7 percent of the total. The amount also is $1 million less than projected in 2003.
Middle-income earners averaged the lowest proportional tax cuts, in the range of 1 percent to 3 percent. Those earning more than $120,000 a year averaged tax cuts of 10 percent up to 27 percent, for the highest earners.
About 65 percent of taxpaying households had tax changes of less than $50. Twenty-nine percent had a decrease of more than $50 in 2005, while 6 percent had an increase of $50 or more. Most of the latter earned in the $40,000 to $100,000 range.
The bill cut the state's top tax rate from 11 percent to 6.9 percent and made that rate apply to all taxable income over $13,900. It also cut effective tax rates on capital gains (income from property or investment sales) and capped the amount of federal income taxes that can be claimed as a deduction.
Former state Sen. Bob DePratu of Whitefish, who sponsored the tax-cut bill, said Friday he's talked to many people who held off on capital-gains transactions until the cuts took effect. He thinks that helped push up the income amounts for 2005 and therefore increased the amount of tax reductions.
“I think it's kept more money in the state,” he said. “People were holding off for various reasons, because they didn't want to pay that huge (old) rate.”
Balyeat said he expected the higher amount of tax reduction because the analysis done in 2003 did not take into account taxpayer reaction to the lower rates, such as more entrepreneurship and the resulting growth in the state economy.
“You have more people generating more income within the state of the Montana, who would be taking advantage of those lower rates,” he said. “Our income tax rates were way too high, and were driving business and wealthy taxpayers out of the state.”
Bucks said the department has no way of analyzing taxpayer “behavior” in reaction to the tax cuts, and must rely on the data in actual tax returns.
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