Corporate Tax

Montana Adopts Earnings Tax Reform For People And Companies

Montana passed structural reforms to both individual income tax and corporate income tax during the recently adjourned legislature by introducing three bills to lower individual tax rates, simplify the state’s individual tax system, remove 16 tax credits, and change the apportionment factor for the Corporation tax were passed. This tax reform package, signed by Governor Greg Gianforte (R) in early May, comes roughly six years after a previous governor vetoed a similar bill in 2015.

Senate Bill 159 lowers the top tax rate from 6.9 to 6.75 percent, while the existing system with seven brackets remains otherwise unchanged. Although the tax cut is limited to the highest marginal tax rate, it benefits most taxpayers as the top tier starts at $ 18,700 for both individual and joint applicants, while the median household income in the state is $ 57,153. The tariff cut will come into effect in 2022, while the provisions of the bill expire after 2024, an expiry clause that was contingent on the adoption of SB 399.

Senate Law 399 makes far-reaching structural changes to individual income tax brackets and tax breaks offered by the state, and brings the state’s tax law in general more into line with the Internal Revenue Code.

The biggest change the bill will bring to the individual income tax system is the abolition of the seven tax bracket system and the introduction of a lean system with two tax brackets with rates of 4.7 and 6.5 percent, with the tax bracket width for joint applicants doubling, thus avoiding the marriage penalty currently exists in the state income tax. As part of this simplification, the state will use federal taxable income as the starting point for determining Montana taxable income, automatically taking into account the federal standard withholding.

Although the lowest tax rate increases from 1.0 percent to 4.7 percent, in line with the federal standard withholding ($ 12,400 last year, compared to Montana’s current standard withholding of $ 4,790), it also brings tax savings for low-income taxpayers. For example, under the current system, a taxpayer earning $ 20,500 a year – the point at which the new second tax bracket would kick in – would have paid $ 783 in taxes last year, but only $ 381 according to SB 399 if it had been in force this year. For double earners, the savings would be increased as the legislation also abolished the state marriage penalty.

Current tax code Under SB 399
1.0% > $ 0 4.7% > $ 0
2.0% > $ 3,100 6.5% > $ 20,500
3.0% > $ 5,000
4.0% > $ 8,400
5.0% > $ 11,300
6.0% > $ 14,500
6.9% > $ 18,700

Sources: SB 399; Tax foundation.

Senate Bill 399 also repeals 16 income tax rebates affecting both natural and corporate taxpayers, from the alternative fuel tax credit to the adoption tax credit, indicating a move from a more complex system to a simpler one with lower rates. However, the bill does not remove the carryforward of the credits accumulated by January 1, 2022, so that taxpayers can use them to offset income until they are completely exhausted. The new law offers more simplicity and neutrality and trades targeted incentives against lower interest rates.

Tax credits canceled by SB 399
· University contribution credit · Alternative energy credit
· Credit for energy saving · Credit for low-emission wood or biomass
· Alternative fuel credit · Credit for alternative energy generation
· Health insurance for uninsured MT credit · Mineral / coal exploration credit
· Credit for elderly care · Emergency shelter credit
· Long-term care loan · Authorization Zone Credits
· Biodiesel blending and storage credit · Adoption credits
· Credit for geothermal systems · Oilseed Credit

Source: Montana SB 399 Bill; Montana SB 339 Budget Manager’s Report.

The provisions of Senate Act 399 do not all come into force at the same time. Rather, the 16 credits will be canceled with effect from tax year 2022, while the remaining changes will only take effect in tax year 2024 after the provisions of SB 399 have expired.

Finally, Senate Bill 376 replaces the state’s three-factor, equally-weighted corporate income tax apportionment formula with a double-weighted sales factor apportionment formula that follows the trend for states to weight sales more heavily for apportionment purposes. (Many have moved to a single revenue driver, although Montana still maintains traditional wage and property factors, albeit with less weight.)

Changing the weighting of the revenue factor for apportionment will reduce the tax burden on companies that have most of their property and wages in the state while making only a small portion of their national sales in the state. Conversely, companies with a modest presence in the state – or a purely economic connection for service providers – but who generate a large proportion of their sales to the state, will increase their tax liability.

Taken together, these three bills represent a transition to a simpler, more growth-oriented tax system. The combined annual loss of revenue will be about $ 60 million, about 1 percent of the state budget and about 2.3 percent of general fund income. Revenues from the general government fund rose modestly in FY 2020 despite the pandemic and are significantly higher in FY 2021, with forecasts showing additional growth in subsequent years, which should provide fiscal leeway for implementing these tax cuts from revenue growth.

This is important because the American Rescue Plan Act prohibits the use of Fiscal Recovery Funds – Montana receives $ 906 million at the state level – to directly or indirectly enable net tax cuts, but the U.S. Treasury Department has made it clear that states can still tax cut from their own income growth without worrying that all recovery funds will be recouped.

Montana’s tax reform package aims to capitalize on an era of remote work and attract taxpayers fleeing higher tax territories. Policymakers in Idaho and Oklahoma have done the same, with significant tax breaks being considered in North Carolina, Louisiana and elsewhere.

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