One of the top priorities for legislators gathered in Helena is to give Montanans a break on their taxes. It's the least anyone expects at a time when the state projects a surplus of nearly $1 billion.
Amid general agreement that Montanans deserve a break, considerable disagreement has sprung up over how best to do it. At the moment, it's a choice between Gov. Brian Schweitzer's proposed $400-a-household rebate for resident homeowners, supported by Democrats, and the Republicans' proposed cut in property-tax rates. A recent statewide poll conducted by the Missoulian and other newspapers found 50 percent of respondents favored the Republicans' cut in property-tax rates. Thirty-five percent favored the $400 rebate, while 15 percent were undecided.
At this point, it's worth taking a look at a recent state Revenue Department analysis of income-tax cuts effective in 2005. Although it focuses on the income tax, the general pattern is applicable to the current debate. The 2003 Legislature made several important tax changes, including reducing the top income tax rate to 6.9 percent from nearly-highest-in-the-nation 11 percent; reducing tax rates on capital gains; and limiting deductibility of federal income taxes paid. The Revenue Department study shows those changes provided Montanans with some $100 million in tax relief in 2005.
That's far more than anyone - including Republican architects of the tax-cut legislation - expected. The previous administration had forecast savings of $26 million. If nothing else, this is a useful reminder about the precision of predictions.
More to the point, the Revenue Department found that $48 million of the $100 million savings went to just 1,586 households.
That's not a typo. Fewer than 1,600 households saved $48 million on their taxes - $30,000 on average - while the other 367,000 households divvied up the remaining $52 million - about $140 on average. And, actually, most of that remainder was saved by upper-income Montanans. Households with annual income under $65,000 saved about
$7 million combined.
The skewed benefits of the tax cut are no fluke. The lion's share went to relatively few households - those with incomes of $500,000 or more - for the simple reason that those folks pay disproportionately more tax to begin with. Our income-tax system is progressive - that is, the more you have, generally the more you pay. We soak the rich, so when we offer relief, they're the ones who get most relief.
On the other end of the scale, Montanans earning less than $25,000 a year had the largest savings on a percentage basis - as much as 52 percent. But, because lower-income folks are taxed less to begin with, their actual savings amounted to a pittance - an average of $22 a household.
So, back to the current discussion in the Legislature: The Republican plan to cut property tax rates would apply to all property owners, but the benefits would be skewed toward those who currently pay the most. That would be owners of the most expensive homes and buildings and ranches, including many absentee owners and large corporations. A cut in rates inevitably will produce greatest savings for those currently paying the most.
The $400 rebate would skew the benefits the other direction. It would go to all households equally - someone living in a $50,000 house in Malta would get the same amount as the owner of a $5 million mansion on Flathead Lake. It would go only to residents, so out-of-state owners of Montana ranches and vacation homes wouldn't get a dime. The less you now pay in taxes the higher the percentage savings that $400 would represent. The governor's plan skews the benefits to middle-income Montanans. Anyone with enough money to own a home gets $400 - a welcome rebate for middle- and lower-income homeowners, but chump change for anyone with substantial real estate.
This, of course, makes the results of our recent poll more interesting. Either a near-majority of Montanans didn't understand what they were supporting, or Montanans have a more selfless sense of equity than we thought.
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