MONTANA'S REVENUE WOES: What's Causing the State's Tax Collection Shortfall?

• Author: Barkey, Patrick M.
• Position: TRENDING

There has always been a lot of confusion in discussions about tax revenues in Helena. More accurately, there is confusion when these discussions circulate outside the political community in our state capital. Most of the confusion centers around language. A spending "cut" in budget speak usually means a lower rate of growth than previously planned. Revenues which grow less than forecasted are referred to as "down." Thus, the news about revenues, which ultimately required a special legislative session last November, requires some interpretation.

The discussion of declines and shortfalls in Montana tax revenues is more than semantics. General fund revenues are extraordinarily weak. On a fiscal year basis, general fund collections--encompassing the entire suite of state taxes and fees not earmarked for specific use--managed to grow by just $20 million in 2017. On a base of $2.1 billion, that's roughly a tenth of a percentage point growth. The first four months of the new fiscal year have been a bit better with revenues up about 2.4 percent. That's mostly because the July-October period of 2016, which was used as a basis of comparison for this calculation, was extraordinarily weak. If we compare recent collections to two years ago, the growth is just 1 percent.

This stark reality has led to a new kind of confusion. Why aren't revenues coming in as they should be? Behind this question is the premise that the economy is strong and thus the underperformance of revenue collections reveals a flaw in our tax system, not weakness in the base. As a matter of logic this is certainly possible, but calling a forecast right and the data wrong is not something that forecasters commonly do.

The Heart of the Matter: The Personal Income Tax

There are 32 taxes, fees and other sources of revenue that account for about 98 percent of all Montana general fund revenue. Of those, the personal income tax accounts for more than half. In some years, big swings in more volatile taxes have made general fund revenues surge and wane. But the story behind this recent sluggish revenue performance has been stagnation in the receipts of Montana's most important tax.

Are personal income collections tracking the economy? A glance at Figure 1, which displays income tax collections and personal income for each fiscal year 2002-17 along a regression line, reveals that tracking is less than perfect. While there is a close fit between income growth and tax collections, there have been...