HOW DOES MONTANA'S TAX SYSTEM MEASURE UP? An Overview of Montana Taxes.

• Author: Young, Douglas J.

Taxes are an important and often contentious public policy issue. What one pays and what those taxes pay for varies state to state. So, how does Montana's tax system compare to other states? Before discussing the numbers, its worth considering what constitutes a "good" tax system.

First, a good tax system is one that promotes economic opportunity. For many years Montanans have seen large numbers of young people leaving the state for better opportunities elsewhere, and most of us wouldn't mind an increase in our own incomes as well. To the extent that a tax system can improve that situation, or at least not discourage opportunity, is desirable.

A second criterion for evaluating a tax system is fairness --this has to do with who bears the burden of paying taxes. It is very difficult to pin down exactly what constitutes a fair tax system. In fact, most people's definition of a fair tax is one that somebody else pays, which accounts for the popularity of taxes on tourists and to some extent natural resource taxes.

A third factor is low administrative and compliance costs. These are the costs borne by the government in collecting taxes, and also the costs borne by the private sector in complying with the tax code. A complicated tax system has greater administrative and compliance costs than a simpler system.

A fourth factor is stability. You may recall that the Montana Legislature was called back into a special session in the fall of 2017--only six months after it had adjourned not expecting to return for 21 months. The primary reason for the special session was that tax revenues had fallen short of projections. The special session cut planned expenditures for mental health, nursing homes and other programs, shifted funds around, and eventually balanced the budget.

A good system also provides adequate revenues. In fact, revenues to fund government services are just about the only good thing about taxes. If it weren't for the police and fire, roads, schools, health care and other services that are provided by taxes, we could just go home and forget the whole thing.

Are Taxes High in Montana?

Montana's overall tax burden is much lower than the national average and significantly lower than three of the four neighboring states, as shown in Table 1. Total taxes include property taxes on residential, commercial, industrial, agricultural and any other property, personal and corporate income taxes, all kinds of sales and excise taxes, and severance and other taxes levied on natural resources. They include taxes levied by all levels of state and local government, including the state, counties, cities and towns, school districts, right down to mosquito control districts.

Montana's taxes in 2016 totaled $3,827 per person compared to a national average of $4,496, making Montana the 37th highest among the states.

The last two columns show taxes as a percentage of personal income, one measure of one's ability to pay. Montana's per capita income in 2016 was 88 percent of the national average, suggesting that the burden maybe greater than the per capita tax figures suggest. But taxes are also below the U.S. average when expressed as a percentage of income and have a similar ranking (38th highest).

Natural Resource Tax Revenues

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