The key to our work is to balance tax rates on corporate income, individual income and real property. In addition to setting fair rates, we need to be able to collect taxes owed. Ninety-seven percent of Montanans pay their taxes, but this is not true for corporations and individuals who live outside of Montana. Experts estimate that with the right tools, the Department of Revenue could collect an additional $50 million to $60 million in the next two years. These tools include:
Withholding appropriate taxes at the point of transaction before the dollars leave the state.
Giving the Department of Revenue enough staff to work with courts in other states to collect from tax cheats who ignore collection letters and phone calls from the Montana DOR. Closing loopholes that allow abusive tax shelters and tax avoidance by international corporations.Ordinary hard-working citizens should expect their legislators to help the DOR collect taxes owed, because when that money goes uncollected either the rest of us pay or the needed services are not provided. Seems simple, right? Wrong. Some legislators were unwilling to support even the most basic and fair efforts to collect from tax cheats.
Corporate interests have had a good ride in Montana these past 20 years, writing their own legislation (electrical deregulation), lowering their taxes (and raising ours), and enjoying virtual immunity from scrutiny of their tax returns thanks to an understaffed Department of Revenue. Fortunately, the department is directed by Dan Bucks, the most competent and knowledgeable person ever to hold the position.
What has been conspicuously absent is a victory for the Montana homeowner or Montana small businesses. Yes, there has been token tax reduction, only to be eaten up by higher property taxes. And thanks to the defeat of the tax cheat legislation, the permanent property tax reduction for homeowners died because it was part of the bill.
Let's look at some of the details of just three of the bills broadly defined as tax cheat bills. You can decide whether the Republican refusal to pass any of the bills was justified.
Capital gains on nonresident real estate sales: If you sell property that has gained in value in Montana, you pay capital gains tax to both federal and state governments. Some out-of-state individuals have sold Montana property and paid their federal taxes but not their Montana taxes. The federal government does not report those sales to the state.We had two different solutions to this problem. Either the seller could pay withholding at closure or there could be the same form demanded by the feds (a 1099 form) sent to the state. The Republican majority in the House refused both options even though these taxes, clearly due to the state, amount to $20 million over the biennium.
Fraudulent tax shelters: The IRS has been vigorously prosecuting individuals in major accounting firms for several years over tax avoidance schemes. Just last week, employees of the accounting firms Ernst and Young joined those from KPMG on the indictment list. We have evidence that out-of-state people are using Montana as a base for such abusive tax shelters.The practical effect of the proposed law would have been to curb such tax evasion in Montana. Firms that have assisted taxpayers in setting up abusive tax shelters and the taxpayers who used those services would report to the Department of Revenue. New penalties for avoiding this requirement, based on a federal law that has been shown to work, were part of the bill. A voluntary compliance program for people who have used such abusive shelters would have guaranteed that no criminal penalties would be incurred. This has worked well in other states.
Subsidiary companies: In an arcane section of law, a subsidiary of a major corporation that does less than 20 percent of its business in the United States, but operates in Montana, does not have to pay taxes on the earnings of that subsidiary. As far as we can tell, no other state in the country has this loophole. Closing the loophole would bring $5.2 million to Montana in this biennium.Revenue to the state would have been $3.2 million a year beginning in 2009 and $5.1 million from the compliance program in 2008. Altogether there were 10 such bills, generating $59 million for the biennium that did not make it through the process. If these bills had passed, we would have been able to offer permanent tax relief to small businesses and renters.
Whenever there is a proposal to close business tax loopholes we hear cries of, “It will have a chilling effect on business in Montana,” or “It sends an anti-business message to anyone thinking of moving a business to Montana.” Like who? Tax cheats? Nobody claims enforcing laws against drunken driving will have a “chilling effect on Montana tourism.” Why then should collecting taxes from out-of-state tax cheats have any effect at all on honest businesses?
If you were wondering why there wasn't permanent property tax reduction for homeowners this session, it is because it was part and parcel of the efforts to achieve tax fairness stalled or defeated by every Republican on the House Taxation Committee. Take the time to look at the bills and votes and hold your legislator accountable in the next election.
State representatives Ron Erickson, Dave McAlpin and Robin Hamilton of Missoula are members of the House Taxation Committee, and have a combined 14 years of experience.
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