MTPR

Federal Tax Bill Casts Uncertainty On Montana's Budget

Jan 8, 2018

Montana officials say the tax overhaul passed by Congress could mean a $46 million loss in state revenue, resulting in a possible special legislative session. There's also the chance the state could get sued by taxpayers.

But there is no consensus yet on the federal law’s impact in Montana.

In roughly a week the Montana Department of Revenue is expected to finalize its analysis of the federal bill. An important point of that analysis involves what’s called pass through deductions for Montana’s individual income tax revenue.

Depending on how state officials interpret this provision of the federal law, and whether it applies to the state’s tax code, officials say Montana could lose general fund revenue.

State Revenue Director Mike Kadas.

Montana Revenue Director Mike Kadas.
Credit Montana Department of Revenue

“It’s pretty clear from the way the congressional bill was written that Congress attempted to make sure that that didn’t impact state revenues. And for the vast majority of states, that’s the case. The problem for Montana is the way our state law is written, we’re not completely sure it didn’t impact us.”

Kadas says the revenue department is still analyzing the federal bill. But he says if the department is correct in its understanding that the federal change means a loss for state revenue, then a special legislative session might be necessary in the next few months.

But according to the conservative-leaning Washington, D.C.-based Tax Foundation, Montana has no need to worry. Jared Walczak is a senior researcher at the think tank.

“Many states are still working on their assessments of the impact of federal tax reform on their revenue," Walczak says. "However, with the exception of Montana, those that have analyzed it thus far see it providing a revenue increase. And we would expect that to be true in the vast majority of states, though not all states."

Walczak says Montana’s tax code is coupled with the federal tax code in a more complex way than might be found in other states. But when state officials untangle it all, he expects them to find that the federal tax bill will generate an overall revenue increase to the state, although it’s not clear how much.

Walczak also doesn’t share the concerns of Montana’s revenue director regarding the possibility of lawsuits from taxpayers who believe deductions allowed under the federal law also apply to state taxes.

Director Kadas has projected that the state would likely get sued if it blocked those deductions in state taxes; and if the state lost, it could amount to the state paying millions back to taxpayers in refunds.

Walczak says there’s no need to worry about that.

"Uncertainty on an individual's part as to what may be in the federal tax law, or what that may do for states is not the grounds for litigation. You can’t stop someone from suing, necessarily, but a lawsuit predicated on a false understanding of what would be a state tax law would not go anywhere."

Montana’s Republican Senator Steve Daines says he supported the tax bill because of the tax cuts and exemptions he says they will would drive up wages and boost the economy.

He agrees with analyses saying that the new federal tax bill will increase state revenues partly because it will grow the economy and wages.

However, if that analysis is wrong, Daines suggests the state find ways to cut spending in order to absorb the revenue loss.

"I think the state should focus on efficiencies and tightening its own belt, like Montana families have to do every day. Like Montana small business have to do every day,” Daines says.

If additional cuts to state agencies are needed as a result of the federal tax bill, it would come on the heels of cuts already made to meet a $227 budget shortfall. State lawmakers already cut about 4 percent of Montana’s two year general fund budget in 2017’s regular and special legislative sessions.

The federal tax bill could result in about another one percent loss, under one of the state’s interpretations of the federal law’s impacts.

Meg Wiehe is deputy director  the left-leaning Washington D.C. based Institute on Taxation and Economic Policy. She says that there was an amendment added to the federal tax bill to prevent a revenue loss because of the pass through deduction at the state level. But Wiehe says it was approved by Congress at the last minute, and that could have added to this confusion.

“So the fact that there is any sort of ambiguity in interpretation that is still up in the air in Montana suggests to me that this is largely a technical glitch," Wiehe says. "I can see both sides.”

Wiehe says a shortfall of tax revenue in Montana because of the federal tax bill is possible, even if it wasn’t Congress's intent.

If state officials find that Montana’s tax code is coupled with the federal policy in a way that will result in revenue loss, Wiehe says state lawmakers would likely have to be called in to change that.

“If the interpretation is that the state is coupled, then it makes perfect sense to call a special session to decouple from that change as quickly as possible.”

The Department of Revenue says it will have a more detailed analysis of the federal tax law’s impact on Montana next week.

Communications staff for Governor Steve Bullock are not saying much about it at this point. However, Bullock has generally commented on the tax bill. On the day it passed congress Bullock tweeted that it was, “a bad deal for Montana and for families all across the country.”