By Jeffrey Michael
Some Montanans have expressed interest in more targeted or limited alternatives to a general statewide sales tax, including a focused tourism tax, or a local option sales tax, where cities or counties would be allowed to implement a sales tax in their community if local voters approve. While these options would generate less revenue than a general sales tax, they might be more popular and politically viable.
Tourism Taxes
While tourism is a large part of Montana’s economy, it is important to understand that Montana’s visitors are not especially big spenders, with the notable exception of real estate – and the state has already adjusted property taxes to capture more from second-home owners. Montana’s visitors are generally motivated by scenery and outdoor recreation, often spending more time on highways and trails and comparatively less time in shopping centers and restaurants.
Montana had roughly 14 million nonresident visitors in 2024 who spent about $5 billion in the state. Comparing this to other scenic states, Hawaii’s 10 million visitors spent $21 billion, Alaska’s 3 million visitors spent $3.9 billion, and Maine’s 15 million visitors spent $9 billion. Table 1 compares the distribution of Montana’s tourism spending as estimated by the University of Montana Institute for Tourism and Recreation Research (ITRR) to average U.S. tourist spending.
Two substantial differences between Montana visitors and other American tourists stand out: 1) Montana visitors spend much more on vehicle fuel, and 2) Montana visitors spend much less on general retail shopping. The implication of this data is that a general retail sales tax will not be as effective at generating revenue from tourists in Montana as in other states. In addition, it appears that Montana visitors purchased at least 300 million gallons of gasoline annually, which would be more than half of total gasoline purchases in the state. While it is difficult to calculate the exact share of gas taxes paid by nonresidents, the available data suggests that an increase to the state’s gas tax, especially in the summer, could generate more revenue from tourists and would have a lesser impact on residents than a general sales tax.
Another observation from this data is that accommodations are the largest spending category, consistent with tourists in other areas, which is the reason accommodation taxes (called transient occupancy taxes in some places) are the most common type of tourist tax. Montana charges a total tax of 8% on lodging, and a small number of resort communities have an additional resort tax of up to 4%. Some cities also assess a Tourism Business Improvement District (TBID) fee of up to $4 per room night. According to global consulting firm HVS’s 2024 lodging tax study, the average lodging tax rate across the 150 largest cities in the U.S. was 14.19%, with the lowest at 8% and the highest at 20.5%. Local lodging taxes make up the majority of the total lodging tax in most parts of the U.S., but in Montana, only resort communities are authorized to have a local lodging tax.
The final key characteristic of Montana tourism spending is strong seasonality, with 48% of total spending occurring during the third quarter (July – September). The second quarter (April – June) is the second busiest at 24% of total spending, and this quarter is strongly skewed toward June, so that the four peak months from June to September account for about 60% of nonresident visitor spending. While uncommon, a few areas have implemented or are considering seasonal tourist taxes. For example, South Dakota’s 1.5% tourist tax and a few of Montana’s resort communities are restricted to the peak summer season. Another state, Maine, is considering legislation that would raise its general sales and food and lodging taxes during the summer peak season. Montana could also consider a seasonal approach to sales or tourist taxes to reduce the burden on residents.
“While the desire of many cities in Montana
to obtain a second major revenue stream
is understandable, there are significant
problems with using locally generated sales
taxes to fund local government.“
Local option sales taxes
Over the years, there have been many legislative proposals to allow cities and local governments in Montana to have the option to implement sales taxes at the local level. About three-fourths of states with sales taxes have local sales taxes in addition to state sales taxes. Alaska, for example, has no state sales tax but has a local sales tax in some communities. Local governments in Montana are dependent on property taxes, and a local option sales tax is seen as a way for them to diversify their revenue streams. The Montana League of Cities and Towns, an influential statewide organization, supports creating a local option sales tax as do elected officials in many of Montana’s larger cities.
While the desire of many cities in Montana to obtain a second major revenue stream is understandable, there are significant problems with using locally generated sales taxes to fund local government. Among the most prominent criticisms, and one that is especially relevant to Montana, is the large variation in retail sales activity across communities. Rural areas of Montana have a very low retail sales tax base, and its residents travel to cities for most of their significant shopping. This creates inequity in revenue generation between rural areas and cities and can confer a significant advantage on the few cities that have attracted major destination retailers like Costco.
Other issues with local option sales taxes occur with different sales tax rates across communities, with some areas not adopting a sales tax at all. This can motivate consumers to travel to avoid paying a sales tax in their community, especially for more expensive purchases like furniture, and can encourage retailers to locate in lower-tax areas.
Even if most areas have the same local sales tax rates, shifting a city’s tax base from property taxes to sales tax as some property tax opponents in Montana have proposed can create a problem known as the “fiscalization of land use,” or “fiscal zoning,” where cities have a financial incentive to favor retail development over housing and industrial development. When housing and industry become financial losers for a community, cities sometimes respond with policies such as zoning, excessive impact fees, and efforts to attract retail spending from neighboring areas. Instead of focusing on efforts to attract industry and high-paying jobs and encourage housing that lifts regional prosperity and affordability, retail sales tax generators – which often create low-paying jobs – can become favored at the local level.
For these reasons, inequity between communities and negative fiscal incentives for local governments, many public finance experts believe sales taxes are best implemented at the state rather than local level. It should be noted that these standard criticisms are far less applicable to communities and activities in which most of the sales are generated by visitors from outside the region. Thus, Montana’s existing resort tax that is restricted to a strict definition of resort communities, as well as a more broadly applied local-option lodging tax, are examples of targeted local taxes that avoid the downsides of a more general local-option sales tax.
Conclusion
Tourist taxes and local option sales taxes are often mentioned as more limited and focused alternatives to a general statewide sales tax. A review of the data and research on these proposals finds some challenges to effectively implementing these policies in Montana but also a few very focused alternatives that should be considered. Specifically, an increase to the gasoline tax and a local-option accommodation tax might be the best opportunity for Montana to increase tax revenue from nonresident visitors. A seasonal implementation of these taxes during the peak summer tourist season could also be considered to reduce their burden on Montana residents.
Jeffrey Michael is director at the Bureau of Business and Economic Research at the University of Montana.
