Executive summary: Montana doubles down on tax relief and taxpayer-friendly changes
On March 13, 2023, Montana Gov. Greg Gianforte signed a package of tax bills aimed at providing both individuals and businesses tax relief. The bills include a reduction of the individual income tax rate, real estate property tax relief, business property tax relief, single-sales factor apportionment, changes to the capital gains tax regime and income tax rebates to individuals.
Individual and business taxpayer-friendly changes in a six-bill package
The following is a highlighted summary of the six tax bills recently signed into law by Gov. Gianforte:
Individual income tax rate reductions: Already planned for tax years beginning Jan. 1, 2024, the individual income tax rate was to be imposed at 4.7% on the first $20,500 of taxable income for individual filers, $41,000 for joint filers, and 6.5% on amounts over those thresholds. Those rates were enacted in 2021 (effective in 2024), scheduling a reduction of the current seven income brackets into two. Senate Bill 121 will reduce the top rate of 6.5% to 5.9%, effective as previously scheduled on Jan. 1, 2024. The bill also increases the Montana Earned Income Tax Credit from 3% of the federal credit to 10%.
Apportionment changes: Senate Bill 124 amends the current apportionment formula from three-factor with double-weighted sales to single-sales factor effective Jan. 1, 2025. The bill also provides additional definitions for clarification.
Business property tax exemption: House Bill 212 increases the “class 8” business equipment property tax market value exemption from $300,000 to $1,000,000. Current tax rates on this class of property are 1.5% between $300,000 and $6,000,000, and 3% in excess of $6,000,000. House Bill 212 exempts another $700,000 of taxable value.
Long-term capital gains changes: House Bill 221 makes a number of changes to the state’s long-term capital gains deduction effective Jan. 1, 2024. The bill replaces the 30% net long-term capital gain deduction, currently scheduled effective Jan. 1, 2024, with two separate capital gains tax rates based on income. The tax is 3% on income minus nonqualified income for the following filing statuses: single filers ($20,500), joint filers ($41,000) and head of household filers ($30,750), and 4.1% for all other income. The rates will be adjusted for inflation in subsequent years.
Income tax rebates: House Bill 192 provides $480 million in rebates to certain full-year residents who filed a tax return in 2021.
Property tax rebates: House Bill 222 provides up to a $500 rebate for tax years 2022 and 2023 for qualifying principal residences.
Montana’s sweeping tax reform of income tax rate reductions, various property tax exemptions and corporate tax changes is no doubt a continued result of a major budget surplus coming out of the last fiscal year. The total amount of relief is estimated to be over $1 billion. While early estimates suggested that the last few years of surpluses would begin to decline, the rate of that decline has been slow to materialize in many states. Sales tax collections and personal income tax collections continues to largely beat estimates throughout the country as the unemployment rate remains low and consumer spending remains robust. A number of other states are also considering tax reductions, with Kentucky taking the first steps to do so.
Noteworthy, Montana House Bills 192, 212, 221 and 222 included various contingencies based on all the other bills passing with two other House Bills, 251 and 267. The four tax bills included triggers reducing the amount of relief, or increasing tax rates, in the event any of the six failed to be enacted. However, all of the bills were signed into law by the governor.
Taxpayers with questions about Montana’s tax relief should speak to their state and local tax adviser.