By Robert Story
At least one general sales tax bill has been requested in every legislative session since 1993.
Groups and individuals in Montana have been contemplating a statewide sales tax for over 50 years.
Proponents of a sales tax base their support on a variety of benefits, including broadening the base of taxpayers, capturing revenue from tourists, matching Montana’s tax system to the new economy, and relieving the tax burden on property or income taxes. Opponents focus on the arguments that a sales tax is regressive and low-income earners will pay a higher portion of their income than high-income earners; Montanans don’t want a third major tax, and if a sales tax is adopted, income taxes or property taxes should be eliminated; or they support a sales tax – just not this particular one.
Another major roadblock to adopting a sales tax in Montana through legislation is the constitutional provision allowing citizens to petition to place any act of the Legislature before the voters for approval or rejection. This provision has caused the Legislature to refer proposed sales tax bills to the voters each time the Legislature passed sales tax legislation.
Montana is among the few states that relies on only two of the three main types of taxes. Many states tax income, sales, and property. Montana taxes property and income but also has a variety of excise taxes on goods like fuel, tobacco, and alcohol as well as sales taxes on accommodations and rental cars.
In Montana, property taxes fund local services such as schools, counties, cities, and a variety of districts that provide specific services. The state generates revenue from individual income taxes, corporate income taxes, and a multitude of other revenue streams including the above-mentioned sales taxes. Montana does allow limited sales taxes to be implemented by resort communities with voter approval.
There have been two major efforts to install a statewide sales tax in Montana in the past half century. Both have been referred to a vote of the people and have been soundly rejected.
The 1971 and 1993 sales tax votes
The first attempt at a statewide sales tax came about because of a special session of the Montana Legislature in 1971. The state was facing a financial shortfall and needed to raise revenue. Voters were given the option of approving a statewide sales tax or continuing an existing surcharge on individual income taxes. The sales tax (R 68) was placed before the voters in June of 1971. The sales tax proposal failed by a margin of two to one, and the income tax surcharge stayed in place.
It was not until 20 years later that the Legislature again placed a proposal for a sales tax before the voters. Interestingly, both candidates for governor in the 1992 election were amenable to considering a sales tax as a source of revenue for Montana.
In 1993, the Legislature was again facing financial challenges. Revenues from current sources were not projected to meet spending needs. Natural resource taxes were lagging. The state had also been sued by school districts claiming that its K-12 funding system did not provide for the equitable funding of schools. The state lost that lawsuit and faced significant increases in support for the public school system. One of the ways the state addressed the requirement that it provide a more equitable funding formula was to increase property taxes. The Legislature increased current countywide property tax levies, transferred that revenue to the state, and created a new 40-mill statewide property tax levy. That revenue was used to pay the state share of an increased K-12 funding formula.
The 1993 Legislature also passed two pieces of legislation dealing with the sales tax. The first, Senate Bill 235, which became LR 111, created the sales tax and a plan to distribute the money. The second, Senate Bill 289, that became CA 27, created a constitutional amendment limiting a statewide general sales tax to no more than 4%.
LR 111 was a comprehensive sales tax proposal, it reduced individual income taxes and corporate income taxes, reduced property taxes, increased state funding for schools, and increased taxes on electrical energy. The complex legislation would have also provided low-income households and renters with a refundable income tax credit. The voter information packet describing the sales tax was over 30 pages long. The sales tax was expected to generate $310 million.
The referendum, LR 111, was voted on in a special election in June of 1993. The measure was soundly rejected by a vote of 228,587 against and 78,349 supporting the measure – a 3 to 1 defeat.
In the regular election in November 1994, CA 27 appeared on the ballot. Since CA 27 was a constitutional amendment, it was required to be voted on in a general election. The voters approved of CA 27 by a narrow margin, 175,618 to 150,469. Montana now has a constitutional limit on a statewide general sales tax of 4%.
There have been no proposals concerning a sales tax placed before the voters since 1993. Discussion of the concept of a statewide sales tax since the 1992 election appears to be the “third rail” for politicians in statewide races. One of the first promises candidates often make is “I will not support a sales tax.”
Sales tax proposals since 1993
At least one general sales tax bill has been requested in every legislative session since 1993. Few have even been introduced and almost none have even survived a legislative tax committee. In this author’s time in the Legislature, which began in 1995 and ended in 2010 (and as a lobbyist), public participation in sales tax hearings has changed dramatically. In the 1990s, if a sales tax bill was scheduled for hearing, the largest meeting room in the Capitol was needed and busloads of opponents crowded the gallery to show their disapproval. By the early 2000s, sales tax bill hearings could be held in the smallest meeting room and generally two proponents and two opponents appeared. The bills then died.
The revenue component of the bills are fairly uniform, taxing goods and services commonly taxed in other states. The difference is in the use of the revenue.
The common proposed use of the sales tax revenue is to reduce property taxes by paying for all or a significant portion of K-12 school funding. Some proposals also target income tax reductions.
The last major consumption tax proposal HB 741 occurred in 2017. This proposal, while labeled a sales tax, resembled a Value Added Tax. It had a low rate of 2% but that tax rate applied to a multitude of transactions.
HB 741 was expected to generate $1.1 billion in revenue. The revenue was directed to replacing all property taxes, reimbursing local governments for forgone revenue, and replacing all property tax funding of K-12 schools with state revenue.
Two new programs using 10% of the revenue would provide state funding for infrastructure for local governments and schools. The Legislature would direct where these funds were spent.
A new statewide property tax levy was included that applied only to centrally assessed properties. It would generate about $450 million per year.
A different approach to a consumption tax passed the 2003 Legislature. Governor Judy Martz’s administration wanted to reduce Montana’s top income tax rate, which was one of the highest in the country at 11.9%. To replace revenue, a working group was tasked with developing a statewide tourism tax. The group’s proposal taxed restaurants, bars, hotels and motels, rental cars, businesses that provided recreational services, and certain goods that tourists tended to purchase. Shortly after the task force proposal, Senate Bill 407, was heard in committee. All businesses were removed from the bill except for rental cars and accommodations. Thus, Montana does have a statewide sales tax, but it is limited to two types of businesses.
“Montanans don’t want a third major tax, and if a sales tax
is adopted, income taxes or property taxes should be
eliminated; or they support
a sales tax—just not this
particular one.“
Looking to the Future
The sales tax discussion will likely not go away. Montanans are perplexed with the ever-increasing property taxes. Montana’s economy is changing, and the legacy taxpayers in the natural resource industries and manufacturing are no longer footing a significant portion of the property tax bill. Mainstreet businesses are disappearing as internet sales capture their customers.
Proponents of a sales tax still believe that the failure to move to a consumption tax will continue to speed the disappearance of main street businesses and shift more property tax burden onto Montana homeowners.
Polling data shows Montanans still oppose a sales tax. Their opposition appears to decrease if the revenue is devoted to property tax relief.
Additionally, Montana’s population is changing. More citizens are moving here from states that have sales taxes. A question that need to be asked is: if these new residents believe their property taxes are burdensome, would they be willing to go back to paying a sales tax if it reduces their property taxes?
Another point to ponder is what additional constitutional guarantees for tax trade-offs might voters need for them to consider supporting a sales tax.
At this point, it appears that Montanans, while being upset with the current tax mix, might rather deal with “the devil they know” than face one they don’t know.
Robert Story is executive director of the Montana Taxpayers Association and former state legislator.
