Horse-Trading and the Business Equipment Tax

By Bob Decker
March 24, 2009

Bills to lower the property tax on business equipment have been introduced in the current session by Rep. Bob Lake (R-Hamilton), Sen. Ryan Zinke (R-Whitefish), and Sen. Roy Brown (R-Billings). Lake’s bill (HB 240) hangs in limbo in the House Tax Committee, while Zinke’s bill (SB 315) was tabled and Brown’s bill (SB 490) passed, both today, by the Senate Tax Committee.

Also today, a business equipment tax reduction bill (HB 649) sponsored by Rep. Jill Cohenour (D-East Helena) was heard by the House Tax Committee. Rep. Lake’s bill, an unqualified effort to raise the tax exemption limit on business equipment, failed to pass in House Tax, where 10 Republican votes could not overcome the nay votes of the committee's 10 Democrats. Rep. Cohenour’s bill, like Rep. Lake's, seeks to elevate the exemption limit, but also includes a provision that requires the passage of a handful of bills that would allow the Department of Revenue to strengthen its capacity to collect unpaid taxes from various hard-to-corral taxpayers. The House Tax Committee did not act on Rep. Cohenour’s bill today.

Rep. Cohenour’s bill was supported by Gov. Schweitzer, who is willing to reduce the business equipment tax if the lost revenue from such action is replaced by the increased revenue to be gained from more effective collection of taxes owed to the state, largely from corporations and out-of-state residents.

The quid pro quo of Rep. Cohenour’s bill, i.e., the requirement that tax-compliance bills be enacted in parallel with the business equipment tax reduction, is an example of what is known in legislative jargon as “contingency voidness.” It’s a formalized form of horse trading that is sometimes used to advance two ideas at once when passage of either idea on its own is unlikely.

Throughout the session, The Policy Institute has testified on the respective ideas of business equipment tax reduction (we’re opposed) and increased efforts to obtain compliance with Montana tax laws (we’re supportive). We opposed Rep. Cohenour’s bill today because of its tax reduction for businesses and with the argument that tax policy should be constructed through legislative approval of stand-alone proposals, not through negotiated packages that address multiple, unrelated topics. "Contingency voidness" is often the awkward equivalent of taking one step forward and one step backward simultaneously.

Montana's tax rate on business equipment, i.e., the percentage of the appraised market value of the equipment that is paid annually as tax, has been reduced several times in the past 20 years:
- In 1989, the Legislature consolidated the various equipment tax rates at the time, which varied from 11% to 16%, into one rate of 9;
- In 1995, the Legislature reduced the rate from 9% to 6%;
- In 1999, the Legislature reduced the rate from 6% to 3%, and it also established a tax exemption for business equipment valued at $5,000 or less;
- In 2005, the Legislature increased the exemption from $5,000 to $20,000.

Tax reductions can result in reduced revenue to the state, a transfer of tax responsibility to other taxpaying constituencies, or sometimes both. In the case of the business equipment tax, it is likely that the lost revenue was made up by higher taxes paid by others because revenue to the state has climbed steadily over the entire period.

Evidence of tax transfer because of the equipment tax reductions may be seen in the changing responsibilities of taxes paid by various property classes over the years. Montana has about a dozen classes of property, each comprised of a certain type of property and taxed at a specific rate. For example, agricultural land is Class 3 property, forestland is Class 10, residential land and dwellings are Class 4, and business equipment is Class 8.

In 1994, five years after the first reduction in the business equipment tax rate, taxes from business equipment represented 15% of the total property tax revenue in Montana, while taxes from residential property represented 38%. In 2008, after additional reductions in the business equipment tax, the equipment tax portion of total property tax revenue had dropped to 7%, while the residential property portion increased to 49%.

During the same period, Montana's desirability as a place to do business - as judged by business interests - grew steadily. By this year, Montana had climbed to ninth place in an annual evaluation of state tax climate done by the Tax Foundation, which completes a comprehensive survey of states every year from its headquarters in Washington, D.C. According to that study, Montana ranks high not only in the category of sales tax (Montana doesn't have one), but also high (tenth place) in property taxation, of which business equipment tax is a part.

At this point, the question is: How much more does Montana's Legislature have to lower taxes on the business community? The state currently ranks high as a favorable place to do business, and further reductions in that sector's tax responsibility simply mean that other Montana taxpayers - homeowners and individual income tax payers - take on the burden.

Lingering Possibilities

By Bob Decker
March 17, 2009

It’s too soon in the Montana Legislature to define the stakes of the budgetary end game, but enough time and votes have passed to identify what progressive taxing or spending ideas still have life in them.

The Senate Tax Committee tabled Sen. Kaufmann’s bill to establish an earned income tax credit (EITC) for Montana, but the House Tax Committee passed the EITC bill of Rep. Mary Caferro on the strength of concurring votes from three Republicans, who joined the 10 Democrats on the evenly split committee. Though it is likely that a couple of those three Republicans may have voted for the bill simply to provide cover for perhaps one Republican who does support it, the bill stands a fair chance of passing in the House and going to the Senate.

In the realm of property taxation, progressives are striving to improve the lot of low-income property owners through a strengthened system of “circuit breakers,” i.e., limitations on property tax obligation determined by the ratio of income to property tax owed. This concept still has a pulse in the Select Committee on Reappraisal, which is weighing different options for dealing with the results of the Department of Revenue’s recently completed six-year property tax reappraisal process.

Because the EITC involves reduced taxes for low-income workers, it has a price tag - approximately $28 million for Rep. Caferro's bill to create a credit equal to 20% of the federal earned income credit. And because any expanded circuit breaker in the property tax system would increase taxes for more wealthy property owners, it, along with the EITC, will have to be squeezed into a state budget for which estimated revenues are dropping regularly and for which there is no majority support for increased taxation.

The budget situation is threatening not just to progressive tax ideas, but to regressive ones as well. For example, several bills propose to continue a 20-year pattern of reducing business equipment property taxes, and though reducing the equipment tax is a policy devoutly wished for by Republicans and supported in more modest fashion by Gov. Schweitzer, the estimated cost of implementing a reduction nears $50 million annually. That's a hole that would have to be filled either by a new source of revenue or further reductions in state spending.

As the remaining weeks of the sixty-first session unfold, keep your eyes on revenue estimates, the passage of appropriations bills, and leaks of end-game policy-trading packages.

Business Equipment Tax – Striving for Zero

By Bob Decker
March 7, 2009

The highest priority in tax policy for the Republicans this session is repeal of the business equipment tax. The idea is shared, at least in part, by Gov. Brian Schweitzer, a Democrat.

The “business equipment” currently being taxed by the State of Montana is personal property used in business, such as construction equipment, heavy vehicles, tools, tractors, commercial kitchen equipment, and cash registers and computers. Business equipment, known as “Class 8” in Montana’s tax lexicon, is appraised annually and taxed at 3% of market value. The first $20,000 in appraised value of a business’s equipment is exempt from Montana’s tax.

Republicans don’t like the business tax because, they say, it taxes the tools of production and because, they usually don’t say, it is a tax on ownership. They’ve been on a kill-the-business-equipment-tax jihad since 1989, when the Legislature and Republican Governor Stan Stephens successfully consolidated several categories of equipment that were taxed at rates from 11% to 16% and lowered the simplified tax rate to 9%.

Republicans have rarely been alone in their efforts. The 1989 tax reduction was made possible by the support of Butte Democrats in the Legislature, who wanted to the state to offer a targeted discount on equipment tax to a Canadian canola oil processing plant that was pondering the construction of a new facility somewhere in the northern Rockies of the U.S. Gov. Stephens went along with the idea, but only if the Butte Democrats would support a reduction in the tax rate for all business equipment in Montana.

So, a handful of Democrats supported the negotiated deal in 1989, the business equipment tax went down statewide, and, once more, tax shift happened, i.e., other taxpayers in Montana picked up the decreased responsibility of business owners. And the canola plant in Butte? It never happened.

In 1995, the Legislature reduced the business equipment tax further, from 9% to 6% over three years. Gov. Marc Racicot, a Republican, signed the bill.

In 1999, the Legislature reduced the business equipment tax further, from 6% to 3%, and it exempted the first $5,000 in equipment value from taxation. Gov. Marc Racicot, a Republican, signed the bill.

In 2005, the Legislature increased the exemption on business equipment tax from $5,000 to $20,000. Gov. Brian Schweitzer, a Democrat, signed the bill.

The 1999 legislation also provided a mechanism for the phase-out of the business tax based on measured growth in wages and salaries in the state, but this phase-out was modified, then repealed, in subsequent years.

Here’s the summary:
- Since 1989, Montana’s tax rate on business equipment has dropped by 70%.
- The total market value of business equipment tax increased by 66% from 1994 to 2007, but state and local revenue derived from business equipment taxes decreased by 20% during that period.
- In 1994, the business equipment tax contributed 15% of all taxes received from property taxation in Montana; by 2008, that contribution had decreased to 7%.
- In 2008, revenue to state and local governments from the business equipment tax was $81 million.

When dramatic decreases in tax rates are legislated for distinct taxpaying constituencies, two things can happen: 1) tax responsibility for other taxpayers goes up to make up for lost revenue; and/or 2) public services are reduced or eliminated if lost tax revenue is not replaced. In other words, someone else either pays the bills, or public programs are diminished.

Early in the current session, bills to further decrease business equipment taxes were introduced by Rep. Bob Lake (R-Hamilton) [bill here] and Sen. Ryan Zinke (R-Whitefish) [bill here]. And Gov. Schweitzer has indicated that he is amicable to elevating the equipment tax exemption level to lower taxes for small businesses and agricultural operators.

Last week, the Senate Tax Committee heard yet another proposal, SB 490 by Sen. Roy Brown (R-Billings). Brown’s bill proposed to increase the tax exemption on business equipment from $20,000 to $5 million, a change that would take thousands of Montana businesses off the equipment tax rolls (leaving only 100 to continue paying, albeit with the $5 million exemption in pocket), reduce the business equipment slice of the property tax pie from 7% to 4%, and cost the state $50 million annually in lost tax revenue.

At the hearing, Sen. Brown justified his bill with the familiar assertion that lower taxes on businesses result in more jobs, higher wages, better benefits, and/or economic growth. That assertion was contested with vigor, principally by Sen. Ron Erickson (D-Missoula) and me, speaking as an opponent to the bill. Still, the most immediately relevant point of the discussion may have been made by Sen. Brown himself, who said that the economic growth and associated general tax benefits to result from lower equipment taxes “will take time.”

That takes us back four paragraphs: A decrease in taxes for businesses will either increase taxes for someone else or force legislators to cut public service funding to account for the loss. In this year’s Legislature, where “No new taxes” is revered by most lawmakers as commandment and free-falling operating revenue estimates have already forced significant cuts in public program budgets, Sen. Brown’s $50 million idea has the look of a circling jumbo jet straining for a safe place to land.

Why Was the Highwood Coal-Fired Electric Generating Station Abandoned?

By Tom Power, Economics Department, The University of Montana
March 3, 2009

The Republican leadership in the Montana Legislature is up in arms over the decision by the Southern Montana Electric Cooperative to abandon plans to build a coal-fired electric generator outside of Great Falls. The complaint is a familiar one: Montana’s environmental laws protecting air and water quality and our regulations assuring public participation in government decisions are too strict and burdensome. Radical environmentalists take advantage of those laws and block the development and use of the plentiful coal supplies Montana has.

Just as familiar are the Republican’s proposed solutions: Gut still further Montana’s environmental laws and block the public from appealing government environmental decisions. A whole raft of new bills has been introduced into the legislature to do this. Once we shackle these pesky citizens and make Montana’s land, air, water, and climate more freely available to coal developers, the Republicans believe a Montana coal boom will blossom and we will be able to produce, use, and sell as much coal as Wyoming currently does.

For those who have followed the saga of the Highwood Generating Station, this version of what happened is simply incomprehensible because it completely ignores the economic forces that have been working against the Highwood Station from the start.

First, dozens of coal-fired electric plants have been abandoned by their developers across the United States over the last two years. The explanation has been straight-forward economics. Utilities know that greenhouse gas emissions are about to be regulated in the United States as we join the rest of the world in recognizing the reality of global warming. Given that coal is our most greenhouse gas intensive fuel, that impending regulation is going to boost the cost of coal-fired electricity. No one knows at this point how this will affect the viability of coal as a source of electricity, so developers are pulling back from coal, waiting for some of the uncertainty about carbon regulation to be clarified.

Second, more and more states are imposing limits on the carbon footprint associated with sources of electricity. California took the lead on this, effectively banning the importation of coal-fired electricity unless the carbon dioxide emissions were captured and sequestered. Other west coast states have followed suit, effectively eliminating the largest markets for electricity in the West. Other states around the nation are engaged in similar reviews of coal-fired generation. Michigan, for instance, has put a moratorium on new coal-fired plants and Georgia is considering doing the same. Clearly this is not a Montana phenomenon driven by weird Montana citizens and laws.

Third, given this uncertainty about the economic viability of coal-fired electric generation, financial markets, already under stress from the developing financial meltdown, pulled back from lending money to build coal-fired plants. The developers of the Highwood Plant were refused funding by the federal government and were still going hat in hand from one financial institution to another when they finally threw in the towel.

Fourth, because of worldwide shortages of basic construction materials, the cost of new coal-fired generators was rising steeply. The projected cost of the Highwood plant had doubled and no one knew what its ultimate cost would be. Some of the participating rural electric cooperatives already faced rebellion by their customer-members as electric rates had to be increased dramatically to cover the initial costs of the Highwood plant.

Republicans are supposed to be the more business-oriented of our two political parties, but business common sense seems to drain away from them once they get caught up in their hypnotic chant about extracting Montana’s resources. They seem to believe that if there is a lot of stuff in the ground, it should be pulled out of the ground and used for something no matter what the cost or, even, whether there is a market for that stuff.

So they wanted the federal government through the Air Force to build and operate a coal to liquid fuel plant at Maelstrom Air Force Base, all at tax payers’ expense. Fortunately the Air Force concluded that the technology was not economically viable.
Wyoming’s much larger-scale development of coal, ten times that of Montana, is regularly used by Republicans to prove that Montana environmental laws and radical environmental activists have effectively strangled coal development here. They conveniently ignore the basic economic fact that coal transportation costs are the primary determinant of the cost of coal to distant utilities. Those transportation costs give Montana a cost advantage only in reaching the northern tier of Rust-belt states: Minnesota, Wisconsin, and Michigan. Wyoming has the transportation cost advantage in reaching most of the faster-growing Sunbelt states. Montana coal also has other cost disadvantages including thinner seams, deeper overburden, as well as higher sulfur and sodium content.

Those in the legislature who want to reduce the public oversight of the potential impacts of burning coal on our air, water, land and climate are clearly on the wrong track. At this point in time, “clean coal” is simply a fantasy. Coal is dirty in its production whether using mountain top removal or strip mining. Coal is dirty when it is burned, not only threatening climate stability but also pumping out mercury, sulfur oxides, and fine particulates that threaten our health. Other waste products from the combustion of coal are also toxic as show by the pollution of ground water and household wells in Colstrip, Montana, and the release of a billion gallons of toxic fly ash slurry at a TVA plant in Tennessee.

Rather than trying to fix the very real problems that are leading Americans, including American businesses, to turn away from coal, Republican leaders simply want to force Montanans to suffer the environmental consequences associated with dirty coal while also forcing Montanans to carry the economic burdens of that increasingly expensive energy source.