Montana Tax Overview

by | Nov 20, 2019 | Uncategorized

Montana Tax Overview

Montana taxpayers pay approximately $10.7 billion per year in taxes.  This is split between about $4.7 billion in state and local taxes and $6 billion in federal taxes . We pay fifteen different classes of property taxes which are detailed below. We also pay income taxes, wine, beer, liquor and tobacco taxes.  We pay corporate, car, oil, coal and minerals, gaming, capital gains, investment dividends, interest, gas, diesel, phone, electricity, rental cars, hotel rooms, lottery, telecom, contractors tax, Social Security, Medicare, Medicaid, hospital bed taxes, hospital outpatient taxes, life, health, and disability insurance taxes. We pay fees for weeds, hunting, fishing, public lands, and more.  This is not an exhaustive list. 

Have you ever wondered how much tax you pay that does not show up on your tax returns? Have you ever wondered what the state does with the money it collects from you and other Montana citizens and businesses? As a taxpaying citizen, you should know. 

Before you read on, review this short 40-second lesson on the pain some go through when paying taxes.  

Although it is not the intent of this paper to discuss regulatory costs, they are significant and add to the tax burden of living and doing business in the state of Montana. Montana currently ranks in the bottom 3rd of states in economic freedom according to the Fraser Institute.  We can do better. 

Montana property taxes:

Montana property is taxed based on the property’s market value as determined by the Montana Department of Revenue (DOR). The amount of property tax paid on your home is then determined by a formula set by state law and depending on local mills to get to your tax liability. (1)

Montana has 15 different classes of property taxed at different rates with various exemptions, credits, qualifications, and assistance programs. Most property is re-valued annually except agriculture, residential every 2 years, and forest land every 6 years. 

The following graph summarizes the 15 property tax classes and tax paid for each class of property in the tax year 2018 (FY 2019). For more detailed information visit page 176 of the 2018-Biennial-Report.pdf.

Description Market Value Percent Taxable Taxable Value Taxes Paid Percent of Total
1 Mines (not coal) $4,794,622 100% $4,794,622 $1,903,26 .11%
2 Metal Mines $742,469,971 3% $22,274,100 $13,047,519 .74%
3 Ag Land $6,753,405,034 2.16% $152,576,949 $82,081,810 4.68%
4.1 Residential  $73,899,125,456 1.35% $987,734,976 $626,526,133 35.75%
4.2 Residential Land $27,710,304,492 1.35% $364,026,323 $229,649,792 13.10%
4.8 Commercial  $14,681,978,732 1.35% $273,677,910 $191,365,525 10.92%
4.9 Commercial Land $6,181,878,587 1.35% $116,353,932 $82,016,084 4.68%
5 Pollution control equipment (and others) $1,970,360,360 3% $47,312,292 $26,009,480 1.48%
7* Public Utilities not centrally accessed $15,191,024 8% $1,215,281 $911,447 .05%
8 Business Equip. $6,949,617,276 1.5% to 8% $155,861,423 $92,316,434 5.27%
9 Transmission and Pipelines $4,176,210,477 12% $495,370,951 $259,741,619 14.82%
10 Forest Land $1,323,802,727 .37% $4,898,379 $2,633,117 .15%
12 Railroad/ Airlines $2,823,508,511 Max of 12% $87,932,183 $50,029,906 2.85%
13 Telecom and Electric $2,877,270,073 6% $172,526,493 $84,435,089 4.82%
14 Wind Generation Biogas etc. $761,927,227 3% $16,207,755 $8,993,866 .51%
15 C02 and Liquid Pipeline $151,198,970 3% $2,009,940 $778,679 .04%
Totals 151,023,043,539 $2,904,772,508 $1,752,457,716 100%

*Class 6 and 11 property has been repealed 

Total property tax paid in the state of Montana in the 2019 fiscal year was $1.752 billion. A total of $626 million was paid by residential homeowners from taxes on their homes.   

Where are property tax revenues allocated? (2)

  1. State $297,158,316: $19 million, (the 6-mill levy) goes to the Universities and the balance to the state general fund (16.9%)
  2. County: $471,402,590 (26.9%)
  3. K-12 Schools: $740,403,060 (42.2%). About 20% of all federal and state revenue also goes to K-12 schools or about $1.3 billion dollars for a total of about $2.04 billion to public education in Montana per year. Montana has about 144,000 students in K-12 education, therefore spending about $14,000 per student or $308,000 for a classroom of 22 students. 
  4. Cities and Towns: $177,769,753 (10.1%)
  5. Fire and Miscellaneous: $65,727,808 (3.7%)
  6. SID’s and Fees: $178,739,425
  7. Total Taxes: $1,752,461,245
  8. Total Fees: $178,739,425
  9. Total Property Taxes and Fees: $1,931,200,772

Montana Income Taxes: 

Montana taxes income with tax rates of 1 to 6.9%. The rates are quite progressive and reach the top marginal rate of 6.9% at $17,900 of taxable income. The tax rate on capital gains (the gains from sales of businesses, stocks or appreciated property) is 4.9%. In 2018 total taxable income in Montana was $27.97 billion, generating about $1.3 billion dollars in 2018. According to the Montana Department of revenue, Montanans pay 8.89% of their personal income in state and local taxes. Go to page 52-65 of the 2018-Biennial-Report.pdf for details. 

Who pays the Income Taxes in Montana?

There were 571,634 tax returns filed in 2017 in Montana. The bottom 50% of income earners in Montana paid 6% of the taxes, with the bottom 30% paying 1%. The top 50% paid 94% of the taxes, with the top 30% paying a total of 80% of all income taxes with 70% of the adjusted gross income. The average tax rate for the bottom 50% was 1.04% while the top twenty percent paid a 4.7% Montana tax rate. For details, see page 66-67 of the 2018-Biennial-Report.pdf.  Most income taxes in Montana are paid by wage earners, pensioners, and those with investment and capital gains income. Farmers paid no income tax on farm income because farm income was a negative -$231 million in 2017.

In FY 2018, Montana collected $1.29 billion in individual income taxes. In total, the state of Montana collected $2.4 billion in general fund tax revenue (including the $297 million in state property taxes shown above.) The general fund is the state’s unallocated (mostly) checking account that the legislature appropriates on a biannual basis. Not all state revenue and fees flow into the general fund.

Other Tax Sources: 

The state of Montana has over 30 sources of tax revenue for its general fund in addition to property and income taxes. The top categories for 2018 were:

  1. Income Taxes: $1.29 billion
  2. Corporation Tax: $167 million
  3. “Sin” Taxes (on gaming, lottery, tobacco, alcohol, cigarettes etc.): $170 million
  4. Vehicle Taxes and Fees: $109.5 million
  5. Oil and Natural Gas Taxes: $54 million (Note: 75% of the $56 million in coal severance taxes do not go to the general fund. Coal generated $77 million in gross proceeds and coal severance taxes for local and state taxing authorities in 2018. This does not include income taxes, corporate taxes, or business equipment taxes, etc.)
  6. Insurance Tax (taxes you pay on life, health and disability insurance policies): $74 million
  7. Sales Taxes (on hotel rooms, car rentals): $27.7 million
  8. Other general fund taxes: $510 million (approximate) 

Some of the other taxes (page 21 2021 Biennium fiscal report)that do not go to the general fund but are designated for special purposes total $500 million in FY 2019. They are:

  1. Gas, diesel and other GVW fees and Taxes: $291 million
  2. 6 mill (universities) $18.4 million
  3. Interest Earnings on Trusts: approximately $72million 
  4. Hospital bed and outpatient taxes: $62 million (some of these are new taxes and not all collected in the 2019 biennium) 
  5. Coal Severance Tax:  $60 million (This tax flows 50% to the coal trust which holds over $1 billion dollars. The income of the trust flows through to infrastructure funding and economic development. The balance splits between about 10 other accounts, which among other things include the arts, library services etc. with about 25% (or $15 million) going to the general fund. (3)

Summarizing the state and local tax categories, we have:

  1. Montana property taxes and fees: $1.931 billion
  2. Montana income and capital gains taxes: $1.45 billion (includes corporate taxes)
  3. Montana natural resources, sales, consumption, etc. tax categories: $950 million
  4. Fuel and GVW taxes: $291 million
  5. Interest earnings, natural resources, hospital and other miscellaneous: $200million. 
  6. Total: approximately $4.7 billion + per year (Not all tax and fee revenue are accounted for above, so it is clearly more, probably approaching $5 billion. Finding all tax and fee revenue is a nearly impossible task. For example, Fish, Wildlife and Park fees are over $60 million and they are not accounted for in the revenue discussed above.

When you total all the taxes and government fees that Montanans pay, it comes to nearly $11 billion dollars ($6 billion federal and approximately $5 billion state.) Six billion dollars go to the federal government, leaving $5 billion in Montana to spend. However, we spend about $8.7 billion with about $3.7 billion of federal tax revenues that come back to Montana. 

Annual Spending by Source of Revenue: 

Local spending via property taxes: (counties, cities, and schools): $1.634 billion

Annual state spending via state taxes and federal revenues: $7.1 billion 

Total state and local spending: $8.7 billion 

Total Montana state and local tax revenue $5 billion

When all revenue and spending are combined, Montana overspends its revenue by approximately $3.7 billion dollars. Put another way, approximately 42% of our spending is subsidized by a federal government deficit spending nearly $1 trillion per year.  

Where does this tax revenue go? 

This is not an easy question to answer. It goes a lot of places and depending on the type of revenue, it may go to the general fund or special revenue accounts. Some of the revenue is collected by the department of revenue, some local authorities, and others by different departments of the state, such as the attorney general’s office or the auditor’s office. There is no ONE source that I am aware of that shows all this information in one spot. The closest would be the DOR’s Biennial-Report.pdf. 

In general, however, Montana revenues (federal subsidies, state and local taxes) are spent in the following categories (annual spending): 

  1. Health and Human Services: $3.04 billion (35%)
  2. Education (PreK-College): $2.1 billion (24%)
  3. Natural Resources and Transportation and infrastructure: $1.02 billion (12%)
  4. Cities and Counties: $891 million (10%)
  5. General Government: $767 million (9%)
  6. Judicial Branch, Prisons and Law Enforcement: $440 million (5%)
  7. All other state spending $438 million (5%)

Considerations 

Approximately 60% of all state and federal funds are allocated to education and health and human services while 66% of state general fund revenue is allocated to education (43%) and health and human services (23%). Recent studies have indicated that spending on Montana Medicaid services has increased 437% between 2005 and 2018 while the population grew at about 16% (4).  As spending on Medicaid, human services, and education continue to rise above inflation, what about the rest of the budget?  Is this sustainable?

Spending on areas that often create greater dependency on the government must be evaluated carefully. The federal government is spending about $4.5 trillion with $3.5 trillion of revenue, therefore deficit spending at $1 trillion per year. Montana derives 45% of its revenue from federal sources. What happens when the federal government finally realizes that they can’t borrow at that level? Where does that leave Montana and the dependents we have created? We must consider this in our deliberations. 

Is our tax system the best for our current times? Should Montana have a general sales tax or an income tax? I oppose having both simultaneously. I have always favored a sales tax over income or property tax. Montana limits sales taxes to 4% (5). I would only support a sales tax if either personal property taxes or personal income taxes were eliminated. A state-wide sales tax is estimated to generate about $730 million per year. This is hardly enough to replace the $1.3 billion of state income tax, but it is very close to the amount generated from state property tax on residential property. In my view, property taxes on our personal residence are the most egregious of taxes. We never truly own our homes because if the annual “rent” to the taxman is not paid, we are evicted. Replacing property or income tax, however, is complex and politically difficult. It would take a careful evaluation, study, and a vote of the Montana people to make these types of changes. 

Finally, I believe tax rates should be broad-based, flat and low, competitive with other states, and easy to comply with. As a state legislator, my goal will always be to keep tax rates low and limit the revenue to state government so that the government stays limited, efficient, and non-obtrusive in our lives. In my mind, freedom is a higher priority than services. The more money the government has, the more programs that are created, the more power the government has over our lives. Taxpayer beware. (6)

Tom McGillvray

  1. The taxable value of class 4 residential property (your home) is determined by multiplying its market value by 1.35%. Market value is determined by DOR every two years (a protest of their valuation, which at times may seem arbitrary, can be logged by filing an AB-26 form).  Therefore, the taxable value of a house worth $200,000 is $2,700.00 ($200,000 x .135). The taxable value is then multiplied by the number of mills assessed divided by 1,000. For example, if a home in Billings is being assessed 714 mills the tax for a $200,000 home would be $2,700 x (714/1000) or .714 x 2,700 which equals a tax of $1,927.00. The total number of mills levied is determined by the elected officials, voters, cities, counties, schools, and state law.
  2. Page 179 of 2018 Department of Revenue Biennial report -2018-Biennial-Report.pdf
  3. See page 106-110 of the -2018-Biennial-Report.pdf for details on coal trust distributions and pages 96 and following for natural resource tax revenue.
  4. November-2019/nov2019-section-b-expenditure-powerpoint.pdf
  5. Article 8 section 16 of the Montana constitution
  6. In researching tax and spending of Montana state and local governments, no one source contains all the information in a convenient format summarized in a tight package. The information must be gathered from multiple sources that present information in various ways. I have worked to be accurate. As always, I welcome feedback and corrections. Thanks for reading.