How to

How to spend a $2.5 billion surplus? The legislature is not short of ideas.

As lawmakers negotiate Montana’s next state budget this winter, the Republican-controlled Capitol has a one-time windfall to spend — the state’s $2.5 billion surplus.

Of course, opinions differ as to what to do with the pile of cash.

Republican Gov. Greg Gianforte has proposed a budget that would fill the state’s reserve accounts, bolster health and welfare programs and allocate $525 million for short-term property tax breaks. However, various factions within the legislative GOP have their own ideas, with some Republicans wanting deeper rebates that also focus on income tax refunds.

For their part, the super-minority Party Democrats have proposed tax break legislation that they say will better target rebates to low-income Montanans.

Three and a half weeks into the 2023 legislative session, these disagreements have already translated into disputes over some of the bills introduced to pass the governor’s budget. For example, House Bill 222, which would have implemented the Gianforte property tax refund, was introduced in a bipartisan vote by the House Taxation Committee on Jan. 18 — an action that normally sounds the death knell for bills.

However, HB 222 was revived, amended and further developed by the committee in a party-line vote the following day, shortly after Gianforte told reporters at a press conference that he was “disappointed at the procrastination and the delay”. The change halved the amount of property tax relief the law would provide, from rebates of up to $1,000 per homeowner for the 2022 and 2023 taxes to rebates of up to $500. After the amendment, the total cost of the bill is approximately $270 million.

Gianforte said his administration is in dialogue with Legislative Republicans about how his budget proposals could be improved, but said he sees putting money back in taxpayers’ pockets as an urgent task.

“We need to give Montanans significant tax breaks, and I look forward to seeing those bills on my desk,” Gianforte said

House Speaker Matt Regier, R-Kalispell, said in a Tuesday news briefing that he expects Republicans to present a package of six early-session budget bills that would use some of the surplus for rebates.

This package would include both property tax returns in amended HB 222 and income tax returns in an amended version of House Bill 192, which was supported by Republican leaders in the House and Senate as a more generous alternative to the governor’s rebate proposal. Governor said lawmakers plan to reduce HB 192 on its income tax provisions and spend about $450 million to provide rebates of up to $1,250 per taxpayer.

Also on the list is the Gianforte-backed House Bill 212, which would increase the state’s office equipment tax exemption limit from $300,000 to $1 million. That shift would cost the state about $7 million a year, the governor’s budget office estimates, and exempt about 5,000 businesses from paying taxes on equipment like tractors and beer brew kegs. The bill would also top up the portion of business equipment tax revenue that goes to local governments.

Governor also said the early session funding package includes a $185 million measure to pay down the federal debt, House Bill 251; an adjustment to the state capital gains tax, House Bill 221; and a measure that would create a $100 million fund for highway construction to allow the state access to more federal transportation funds, House Bill 267.

With those measures, Regier said, the Legislature could consider more tax breaks later in the session.

“This is just the first bite of the apple,” he said.

The state enters this year’s legislature with solid accounts after years of better-than-expected revenues, particularly from individual income taxes. The official revenue estimate adopted by lawmakers in 2021 assumed the State General Fund would see approximately $5.2 billion in revenue in 2021 and 2022. In fact, the General Fund raised $6.7 billion — about $1,400 more than expected for each Montana resident.

State budget analysts attribute the growth in personal income tax receipts to extra money circulating in the economy as a result of massive government stimulus spending during the COVID-19 pandemic, inflation and migration into the state by “high-income individuals”. But with pandemic stimulus dwindling and some forecasters predicting a recession, it’s unclear whether income tax receipts, which fuel government budgets, will continue to rise in the years to come. (By comparison, most property tax revenues go to local government programs like schools, parks, and law enforcement.)

Regardless of how much rain comes in the next biennium, the state’s reservoir is full right now. As originally proposed, the Gianforte budget would historically keep large amounts in reserve and stash hundreds of millions in the state’s rainy day account as well as its firefighting fund.

The governor is also proposing significant income tax cuts that, by lowering the state’s top tax rate from 6.5% to 5.9%, would divert revenue before it goes into the treasury. As proposed in Senate Bill 121, this tax cut and an accompanying increase in Montana’s earned income tax credit would cost the state approximately $160 million per year.

Gianforte also wants to pour hundreds of millions of dollars to irrigate the state’s ailing behavioral health system. His proposals include funding Montana State Hospital in Warm Springs, which lost its state license last year, and increasing the Medicaid reimbursement rates the state pays to providers who provide mental health and substance abuse services.

Many other ideas for excess spending are also circulating in the Capitol — both by returning money to taxpayers and by investing in public services.

Democrats say they want to focus on long-term wealth tax breaks rather than lowering income tax rates, arguing that it’s wealth taxes, rather than income tax rates, that are the biggest pain point for most Montanans.

They point to proposals from minority parties, such as House Bill 280, that would allow Montana taxpayers to apply for an income tax credit to reimburse a portion of their property tax bill. As proposed, this loan would be available to both homeowners and renters.

“A one-time solution like the one proposed by the governor just doesn’t address the scale of the problem facing homeowners,” Senate Minority Leader Pat Flowers, D-Belgrade, said in a news conference on Tuesday.

Hardline Republicans in the newly formed Montana Freedom Caucus, by comparison, want much bigger rebates than the governor’s proposed $500 million one-time wealth tax break.

Her House Bill 307 would spend a whopping $1.275 billion in income and property tax returns. It would provide retroactive refunds of up to $1,000 each year for property taxes paid in 2022 and 2021, and would also provide income tax refunds to Montanans of up to $3,500 per taxpayer.

On the spending side, major proposals range from infrastructure investments to increasing public pension funds. For example, the budget proposed by the governor allocates $200 million to establish a fund to subsidize the construction of water and sewer lines necessary for the construction of high-density housing. In addition, public education advocates have said they plan to use $60 million to set up a trust that will make it easier for school districts to offer health insurance to teachers.

Rep. Llew Jones, R-Conrad, Speaker of the House, said last week he personally would like to see a first round of excess spending, including rebate bills and debt repayments, for no more than a third of the $2.5 billion excess amount or about $800 million.

But Jones, the de facto leader of the comparatively moderate Republican Conservative Solutions Caucus, said what ultimately matters in the Capitol is what combination of ideas is capable of winning the votes needed to complete the legislative process — the 26-vote majority to pass bills in the 50-seat Senate, the 51-vote majority needed in the 100-seat House of Representatives, and then a final signature at the governor’s desk.

“It’s the magic: 26-51-1,” Jones said. “The governor is ready to support it and the House and Senate are ready to allow it. We’re trying to bring the magic together.”

Arren Kimbel-Sannit, Mara Silvers and Alex Sakariassen contributed coverage.

This story originally appeared in the Montana Free Press, which can be found online at montanafreepress.org.

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