Finis

By Bob Decker
April 29, 2009

“Sine die” means “without day,” but because direct Latin-English translations are frequently awkward and unrevealing, a more applicable definition for the term is “without any future date being designated.”

The latter meaning is what “sine die” holds in a legislative context, as in, “We’re adjourned, we’re leaving, and, barring a special session made necessary by either our blunder or the imposition of fate, we won’t be back for two years.”

To all but the most blindingly sunny of dispositions that may reside within any of the legion of legislators, lobbyists, support staff, reporters, and political junkies who participate in Montana’s ninety-day legislative sessions, “sine die” also conveys a sense of gratitude, as in “Thank you for not one more day of this.”

If fewer people were repressed by the idea that the use of foreign phrases reveals a weak commitment to the exceptionalism of our mother tongue, or more people discovered the dead-on suitability and conversational uplift that the world’s bon mots can provide, “Sine die” would be the preferred spoken expression of fond and final parting between the diverse players in Montana’s biennial exercise of democratic lawmaking. Hugs, handshakes, regrets, relief … “Sine die!”

The question of pronunciation is a barrier to such usage, as an internet search will give you sigh na dah´ yee, sin ay dee´ ay, and sign ee die´ ee. For people who sought or hoped for significant progressive changes to Montana’s tax structure, the preferred pronunciation might be so nee´ dee, or “so needy,” for the aftertaste of a session that did almost nothing to improve Montana’s tax system and a few things to worsen it.

Property Tax Reappraisal

This was the sole major tax issue that played a part in the legislative finale, not because its resolution would significantly alter the terms of the budgetary endgame that defined the end of the session, but because property reappraisal had been a central focus of attention for most of the session, because several proposals had been tardily introduced to address it, and because of a universal legislative law that requires a long-discussed topic to have a long-delayed denouement (seeking conversational uplift here).

HB 658 was the vehicle for property reappraisal, but because almost all principals (House, Senate, Dems, GOP, Governor) agreed from the get-go that the final property tax policy would be “revenue-neutral,” i.e., not raise property tax revenue from 2008 levels, the outcome of the bill did not have a significant impact on state revenue numbers.

Reappraisal of property values (for houses, commercial buildings, agricultural and forest lands, power plants and pipelines, etc.) has been a weighty topic in this session because reappraisal occurs only once every six years (this question of frequency has been a part of the session’s dialogue), and a reappraisal has just been completed. Montana’s growth boom of recent years has driven property values, especially for residences, dramatically upward, which created apprehension in people about parallel increases in property taxation.

To complicate matters, the current economic crisis could unfold to lower residential market values (although a statewide trend toward lower market values has not yet been identified in Montana).

During the session, The Policy Institute supported the incorporation of a “general circuit breaker” into Montana’s property tax system. A circuit breaker limits property tax liability to a percentage of annual income, an approach that lessens property tax payments for low-income homeowners and elevates payments for the wealthy (as circuit-breaker policy is structured by most states). Montana already has four constituency-specific circuit breakers in place, including one for low-income seniors and one for disabled veterans, but a “general” circuit breaker would simultaneously replace or revise those specific models and create a formula that assisted more low-income property owners.

The idea for a general circuit breaker generated substantial discussion during the session, but was ultimately rejected by Senate Republicans, who opposed the shift of tax responsibility from low-income to high-income taxpayers of the circuit breaker approach.

Income Tax

Of several introduced bills related to Montana’s income tax system, the most significant ones addressed the impacts of SB 407, a comprehensive income tax bill passed in 2003. SB 407 shifted state income tax responsibility in Montana from the wealthy to low-income taxpayers by flattening marginal tax rates and lowering rates on capital gains.

The Policy Institute supported a bill by Rep. Dave McAlpin (D-Missoula) to create a new top marginal tax rate of 7.9%, above the current maximum rate of 6.9%. McAlpin’s bill failed in the House Tax Committee on a tie vote.

The Policy Institute opposed a bill by Rep. Tom McGillvray (R-Billings) to increase income tax deductions, a change that would have resulted in disproportionate benefit to high-income taxpayers as well as a state revenue reduction of $20 million annually. McGillvray’s bill died on a tie vote in the House Tax Committee.

Capital Gains

As explained above, Montana’s tax rate on capital gains was lowered by 2% in the 2003 session. The Policy Institute supported a bill by Sen. Ron Erickson (D-Missoula) to repeal that tax break, but the bill died in the Senate Tax Committee.

The Policy Institute opposed a bill by Sen. Jeff Essmann (R-Billings) to further decrease Montana’s tax rate on capital gains for the sale of certain businesses created within Montana in the next several years. Essmann’s bill, passed by the Senate in mid-session, was passed by the House in the waning days of the session.

Earned Income Tax Credit

This tax idea (“EITC”), which provides an income tax credit to working taxpayers in low-income families, is widely recognized as the most effective anti-poverty policy in the nation. First initiated at the federal level, during the administration of President Ford, the EITC has since become an element of tax policy in 25 states. Before and during the session, The Policy Institute worked with a coalition of church, low-income, and senior organizations to establish an EITC for Montana.

Sen. Christine Kaufmann (D-Helena) introduced an EITC bill in the Senate, which was tabled by the Senate Tax Committee. Rep. Mary Caferro (D-Helena) introduced an EITC bill in the House, which was approved by the House Tax Committee and subsequently by the full House. The bill then was tabled on a tie, partisan vote in the House Appropriation Committee, where Republicans opposed adding a new reduction in state revenue to the budget (the annual cost of a state EITC in Montana would have ranged from $5 million to $20 million, depending on the percentage credit adopted). Caferro’s bill also failed on the House floor on a “blast” motion.

Business Equipment Tax

This element of Montana’s property tax system has been under siege since 1989, when the state’s tax rate on business equipment was, on average, 11%. The rate has been successively lowered and today operates at 3%.

Several bills were introduced by Republicans in this session to reduce the tax further, but the bills’ price tags, varying from $20 million to $50 million annually, depending on the size of the tax-cutting blade applied, prevented the Tax Committee on the House side from passing any of the bills, including a version adopted by the Senate.

The Policy Institute opposed further reductions in the business equipment tax, largely on the argument that Montana’s tax climate for business is currently judged to be quite favorable by various national economic, tax, and business development organizations that perform state-by-state comparisons. (For example, Montana’s business tax climate is rated the sixth most business-friendly in the nation by the Tax Foundation, which produces what may be the most comprehensive analysis of state business taxes.)

Tax Compliance

This category includes a handful of bills that attempted to close some of the loopholes that allow certain taxpayers, including individuals, partnerships, and corporations, to avoid full payment of state taxes. The loopholes related to such topics as insurance company structures, off-shore tax havens, and non-resident sales of real estate.

All but the most innocuous of the compliance bills failed, mostly on the argument from Republicans that either the targeted problem was not a serious one or the Department of Revenue already had sufficient authority and resources to address the alleged problem.

This arena of tax legislation was frustrating in the session because the proposed changes rested not on philosophical positions about the level of taxation or the distribution of tax responsibility, but on the seemingly sensible and simple argument that Montana’s existing tax requirements should apply equally to all taxpayers who are eligible for a particular tax. “Sensible” is a subjective concept, however, and little in the legislative world is simple.

Oil and Gas

The Policy Institute made a concerted effort to advance bills that corrected what we judge to be excessive tax breaks given by the Montana Legislature to the oil and gas industry over the past 20 years. Regrettably, the major bills on this subject failed.

For an overview of Montana’s system of oil and gas taxation, as well as an analysis of the state’s oil and gas tax “holiday” and recommendations for change, go to this page of The Policy Institute’s website. For a brief summary of Montana’s oil and gas tax policy, go to this opinion column.


Coal Tax

Reducing Montana’s severance tax on coal is a perennial exercise for coal companies and their elected allies in the Legislature. For the most part, the efforts have failed, with the notable exception of the passage of a 1987 bill that reduced the severance tax from 30% to the current 15%.

Sen. Jeff Essmann (R-Billings) introduced a bill to halve yet again the coal tax - to 7.5% -on coal mined for consumption in coal power plants or coal gasification plants that sequester carbon dioxide emissions. The Policy Institute opposed the bill, both because Montana’s coal tax has been one of the most successful tax policies in Montana’s history (it has provided significant, steady revenue to the state without constraining coal development) and because Essmann’s bill was worded so as to qualify even established coal production for the lower tax rate under certain – and likely - scenarios. Essmann’s bill passed the Senate, but was tabled by the House Tax Committee.

Confirmation of Dan Bucks as Revenue Director

Toward the end of the session, some Republicans soured - quite suddenly - on the notion that Dan Bucks would be confirmed by the Senate to continue serving as Director of Revenue, the state’s tax agency. Bucks is recognized as profoundly knowledgeable in tax policy and has a productive record of administering the Department of Revenue for four years under Governor Schweitzer. However, forthright and fair as Bucks is, he doesn’t veil his belief in progressive taxation and sometimes frustrates legislators (of both parties) with his tendency to overwhelm interlocutors with detail.

For several days before the hearing on a bill to re-confirm him as Director of Revenue, it appeared as though Bucks’ chances of gaining approval by the Senate Tax Committee were minimal, and, even if committee assent occurred, it was doubtful in the full Senate.

During Bucks’ confirmation hearing, however, several individuals and organizations testified on Bucks’ behalf, and his detractors failed to mount a serious attack on his performance. He was subsequently endorsed by the Tax Committee, then by the full Senate.

For appointments to the governor’s cabinet, only confirmation by the Senate is required, so Bucks will remain at his post.

Sine die!

Leveling Lowering the Playing Field

By Bob Decker
April 9, 2009

Montana’s Coal Trust Fund earned a place in the state constitution in 1977 after voters approved the idea of directing 50 percent of the coal severance tax collected each year into a permanent trust. After the Coal Trust grew to a sizable savings account for the state, the earnings of which funded public works projects, it became eminently raidable. “The rainy day is now” is the chorus lyric that accompanies every wave of effort to get at the principal.

The most successful attack on the Coal Trust was not a raid on the existing balance, however; it was a statute passed by the 1987 Legislature to halve the coal tax rate – from 30 percent to 15 percent. Advocates for the tax reduction argued that it would incentivize coal production in Montana, but state production remained relatively flat, at around 36 million tons annually, for several years after the tax break. During those years, of course, the Coal Trust grew at half its previous speed.

Today, the balance of the Coal Trust is about $800 million, and it has produced more well over $1 billion in earnings, which have been expended on numerous local and state infrastructure projects over the years. In addition, the Trust’s healthy principal has given Montana an excellent bond rating, which has lowered borrowing costs for other major projects in the state.

The coal tax is currently generating about $40 million per year, half of which goes into the Coal Trust. The other 50 percent is appropriated by the Legislature for immediate budgetary purposes, including the state’s long-range building program, conservation districts and the State Library Commission, the State Parks Trust, renewable resources debt service, the Cultural Trust, and other targeted areas, including the state’s general fund.

SB 499, sponsored by Sen. Jeff Essmann (R-Billings), would cut Montana’s coal severance tax in half – from 15 percent to 7.5 percent, for coal produced from existing or new mines that is consumed in power-generating plants or coal-gasification facilities that sequester carbon dioxide.

SB 499 passed the Senate, largely on party lines. In presenting the bill to the House Tax Committee on April 6, Sen. Essmann contended that the bill was “designed to protect the long-term health of the Coal Trust,” and that it would do that by allowing Montana’s coal tax severance rates to compete with those of North Dakota and Wyoming.

Essmann got support for his bill from lobbyists representing Great Northern Properties (alleged to hold the state’s largest portion of coal reserves), Rio Tinto (which operates the state’s largest mine, near Decker), the Montana Coal Council, the Western Environmental Trade Association (a pro-industry group), and the Montana Association of Oil, Gas, and Coal Counties (34 of Montana’s 56 counties).

Opposition to SB 499 was led by former GOP legislator Verner Bertelson, who has been the long-time spokesman for Montanans for the Coal Trust, the nonprofit that has defended the Coal Trust and Montana’s coal tax rates since the late 1970s. Bertelson argued that the budgetary and tax benefits from coal taxation and the existence of the Coal Trust have been steady and significant for Montana for decades, and that the promise of economic bounce from lower tax rates is just as hollow as it is frequent.

Another former legislator, Ray Peck, who served in the House as a Democrat from Havre, testified that he felt regret for having been part of the majority that lowered the coal tax in 1987. Peck said that the lower tax did not elevate coal production and did not boost the state’s economy.

Anne Hedges, lobbyist for the Montana Environmental Information Center, opposed the bill by observing that Montana law does not define carbon dioxide “sequestration,” nor does SB 499 provide any pathway for determining what degree and method of carbon dioxide management would be necessary for a mine to pay lower taxes.

For The Policy Institute, I opposed SB 499 and raised two points:

1) Contrary to the assertion of the bill sponsor and supporting witnesses, the language of the bill did not assure that the current 30 percent tax rate on coal would remain for existing production at Montana mines. In fact, with the growing seriousness of the climate change issue and the increasing probability of regulation to control carbon emissions, it is conceivable that carbon control requirements will be placed on both new and existing power plants in coming years. Such a scenario would make it possible for all coal produced in Montana to be taxed at the lower rate.

2) The argument that Montana must lower its tax rate on coal production to become competitive and “level the playing field” with respect to other states is an argument made for the benefit of industry, not for the financial well being of Montana’s citizens. If advocates for competitive taxes were true to the principal of establishing competitive tax rates for the benefit of the state, they would advocate for higher taxes in Montana on the production of oil and gas. Montana’s tax rates on oil and gas are lower than Wyoming’s rates, for example, yet Wyoming’s oil and gas production has grown much faster than Montana’s in the past decade.

In fact, Montana’s “competitive” tax rates on oil and gas, which are a third lower than Wyoming’s, have cost Montana more than $600 million in lost revenue in the past six years.

For most advocates of lower tax rates on resource extraction, the “competition” is usually between the industry and the state, not between the states. In the past 20 years, Montana’s legislators have consistently competed for industry and have not negotiated assertively and adroitly (i.e., “competed”) for the interests of Montana residents and taxpayers.

The House Tax Committee did not take action on SB 499 on the day of the hearing.

Update: On April 8, the House Tax Committee tabled SB 499.

70% is a Mandate - We Are Outraged, Are You?

By Kim Abbott, Montana Human Rights Network
April 7, 2009

We at the Montana Human Rights Network are angry and we are frustrated, but our fight to ensure that the Healthy Montana Kids Plan is fully funded, as mandated by Montana Voters, continues. Yesterday the Network, with allies, engaged in direct action and descended on the Senate Finance and Claims Committee to protest the cut of 15,000 children from the Healthy Montana Kids Plan. Twenty two of us wore T-Shirts that said "FULLY FUND I-155! I REPRESENT 15,000 HEALTHY MONTANA KIDS VOTERS."

This protest was in direct response to actions by the committee. On Friday night, 10 Senate Republicans voted to pass an amendment that reduced funding for the Healthy Montana Kids Plan by half. Just as outrageous, this amendment eliminated the Special Revenue Account that voters established by passing I-155. This account was meant to fully and consistently fund the program. As it is written now, the money for this account is gone. This behavior is simply undemocratic. I-155 passed in every legislative district, in every county, and it carried 70% of the total vote.

The Network is going to keep fighting for the will of the Montana voters to be enacted. The next vote will be Thursday April 9th on the Senate floor. You can help by calling your senator and telling them to reinstate funding for the Healthy Montana Kids Plan. Please consider writing a letter to the editor of your local paper as well. We are doing the best we can here in Helena and we will keep pushing until the very end!

Contact your senator now by clicking here or calling 406-444-4800.

Wyoming Tax Formula Creates Massive Fund, Not Industry Exodus

By Molly Severtson
April 2, 2009

One of The Policy Institute’s priorities in the 2009 legislative session has been the repeal of Montana’s oil and gas tax holiday, which has cost the state more than $500 million in revenue since 2003. In "Montana’s Oil and Gas Tax Holiday: Analysis and Recommendation for Change" (here), we report that, according to recent academic studies, production tax rates have little effect on industry investment and activity. In fact, location of reserves is the major factor influencing energy companies, along with price, access to markets and technology. In the past and throughout this session, oil and gas industry representatives have offered neither substantive rebuttal to these studies nor evidence to the contrary.

Three bills asking the oil and gas industry to pay a more fair share have been introduced this session, the latest of which is HB 675, sponsored by Rep. Brady Wiseman, D-Bozeman. Wiseman’s bill would repeal the 18-month holiday for new horizontal oil and natural gas wells and deposit the increased revenue into a trust fund that would help fund state school equalization aid while reducing property taxes.

Opponents of the bill offer the well-worn argument that eliminating the holiday will push the oil and gas industry away from Montana to states with a presumably more favorable tax landscape. With that argument in mind, it’s instructive to look at the reality of one of Montana’s closest neighbors: Wyoming.

Unlike legislators in Montana, Wyoming lawmakers have not been afraid to ask for the state’s fair share of mineral revenues As a result, both the mineral industry and the state treasury in Wyoming have flourished.

In 1974, under the leadership of Republican Governor Stan Hathaway, Wyoming voters approved an amendment to the state constitution establishing a 1.5% excise tax on the gross value of extracted coal, petroleum, natural gas, oil shale, and other minerals, the proceeds of which are deposited into the Permanent Wyoming Mineral Trust Fund (PWMTF). The investment returns of the PWMTF are deposited annually in the state’s general fund. The value of the fund, which also occasionally receives direct appropriations from the Wyoming Legislature, is expected to exceed $4 billion by summer 2009.

In addition to underwriting various infrastructure projects, including the construction of new schools and libraries and improvements at universities and recreation centers, the fund provides Wyoming with a degree of protection against the volatility of a natural resource-based economy and recessions like the one we’re currently facing.

Over the years, there has been much debate as to whether money from the PWMTF can or should be used for purposes beyond deposits to the general fund and whether money intended for the PWMTF could be directed to other accounts. A 2006 legislative resolution specified all monies deposited in the fund to be inviolate. Efforts in 2007 and 2008 to use funds destined for the PWMTF for state road improvements failed.

In light of the current economic crisis and projected state revenue shortfalls, tapping into the massive account again became attractive to legislators who decided during the 2009 session to divert half of an additional 1% mineral severance tax (over and above the constitutionally-mandated 1.5%) to the Spending Policy Reserve Account, a holding account for the PWMTF, over the remainder of the biennium. This amounts to $64.8 million that may eventually flow into the corpus of the PWMTF, but if necessary, can be used to offset revenue shortfalls.

While arguments over the use of the fund and its dividends are sure to persist, it’s clear that Wyoming’s willingness to ask its mineral industry to pay its fair share has greatly contributed to the economic health of the state. We’re sorry that the 61st Montana Legislature has failed to do the same.

Montana’s Nickel-A-Widget Business Plan

By Bob Decker
April 1, 2009

Suppose you own a business that sells widgets. In a given period of time, would you rather sell 100 widgets at a nickel apiece, or 95 widgets at a dime apiece?

In determining a tax policy for oil and gas production in the state, the Montana Legislature has adopted, in defiance of common business sense and in servility to industry, a nickel-a-widget approach. The mismanagement has cost the state hundreds of millions of dollars.

Over the past 20 years, the Legislature has steadily lowered taxes for the oil and gas industry. The state’s generosity peaked in 1999, when the Legislature both expanded the applicability of tax “holidays” and significantly reduced basic severance tax rates.

Oil was selling for $20 per barrel in 1999, but soon began a multi-year climb: $28 in 2003, $50 in 2005, $67 in 2007. All the while, Montana’s discounted tax rates remained in place, even as oil reached $145 per barrel in mid-2008. According to data from the Montana Department of Revenue, the Legislature’s 1999 actions produced a decrease in revenue to state government and oil- and gas-producing counties of $500 million during the period 2003-2007. Add another $100 million for 2008.

Oil and gas companies contend that differences in state tax rates figure centrally in their decisions about where to drill wells, but they don’t substantiate the argument. In fact, evidence demonstrates that drilling decisions are based predominantly on the location of reserves and secondarily on global product prices and accessibility to markets. Tax rates are down the list.

Montana could learn from Wyoming, which also lowered its oil and gas tax rates in 1999, yet took the additional step of mandating research on the question of how tax rates affect development. The resulting study published by the University of Wyoming concluded that the reduced tax rates would generate 2.3 percent more production over 40 years, but would decrease state revenue by 37 percent.

Following the study, Wyoming repealed its tax reduction and hasn’t looked back. Mineral development has boomed there in the past decade, yet the state now has the highest effective tax rate for oil and gas production in the intermountain West. It has built a $3 billion mineral trust fund, fueled mostly by oil and gas taxes.

Wyoming is an aggressively pro-growth state, but its Legislature recognized the truth about drilling decisions and the value to the state of setting higher tax rates. By choosing to sell a fraction fewer widgets at a higher price, it increased its revenue stream and built a sizable savings account that provides permanent income to the state.

When Montana’s Legislature swerved errantly in 1999, both Republicans and Democrats were culpable. In the current session, however, the lines are clearly drawn. Several bills have been introduced by Democrats to terminate or amend Montana’s oil and gas tax holiday; all of them have been opposed – and defeated – by Republicans.

Republicans portray themselves as the “party of business,” but the brand is misleading. Most Republican legislators simply serve established wealth and have little interest in pursuing good business principles or negotiating firmly on behalf of the state. Some Republicans are so hostile to the existence of government that they reflexively resist a fundamentally conservative idea – a Montana oil and gas trust fund – that would increase earnings, protect the corpus, and provide tax relief for most Montanans.

If your answer to the opening query was to sell 95 widgets at a dime apiece, your business instincts are sound. Now you should examine Montana’s oil and gas tax policy and ask your own question: Who’s running the store?