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.