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Stimulus bill offers tax credits as lawmakers aim to hold down property taxes

by Molly PriddyCommunity News Service
| April 7, 2009 12:00 AM

HELENA – Despite dozens of tax-relief bills this session, officials say only two tax measures are likely to affect most Montanans in the end: a federal tax cut and a plan to keep property taxes in check.

Most major tax proposals from legislators failed earlier this session, including a plan to cut income taxes for the working poor and a plan to give cities the option of enacting local sales taxes, the proceeds of which would have been used to lower local property taxes.

Montana Department of Revenue Director Dan Bucks said the biggest tax effect Montanans will feel in the next two years won’t come directly from the Legislature but from the federal government.

“There’s nothing of general impact like (the) federal stimulus,” Bucks said.

As part of the Obama administration’s stimulus law, Montanans were promised $575 million in tax credits from the federal government. Bucks said $485 million of those credits go directly to Montanans and $90 million will go toward business incentives.

For starters, Bucks said, 97 percent of Montana taxpayers should see more in their paychecks starting this month from a provision called the “Making Work Pay” tax credit.

Couples were given an $800 federal tax credit, and individuals given a $400 credit. This means, beginning April 1, couples in Montana began to see an extra $67 in their combined paychecks because their federal withholding decreased. Individuals should see $33 added to their paychecks.

“This is a major plus for Montana households,” Bucks said.

Another perk offered by the federal government is a generous tax credit for energy conservation and alternative energy investments in home repairs. Bucks said projects that qualify under both state and federal requirements will get a 55 percent tax credit on the first $2,000 spent.

“If you’ve got an old, inefficient water heater, this is the time to replace it,” Bucks said.

Bucks also said the tax credits will help get electricians, plumbers and contractors back to work.

“That’s a benefit to Montana,” Bucks said. “It will save money for the Montana households making that investment.”

Montanans can check the state and federal Web sites to see which projects qualify, and a comprehensive Web site listing these projects should be up soon, Bucks said.

State Rep. Dick Barrett, D-Missoula, said the House Taxation Committee has seen plenty of tax-credit bills this session but he predicted few will pass. As a former economics professor at the University of Montana, Barrett said it’s not always a bad thing for most of the tax credit bills to fail.

“It makes the tax code very complicated and very, very sloppy,” he said.

Barrett said the surviving bill with the biggest potential affect on Montanans is House Bill 658, which seeks to keep property taxes from rising due to increases in property values.

Property in Montana is reappraised every six years to ensure equity in property taxes. The most recent reappraisal reported an average statewide increase of more than 50 percent. To stave off sudden hikes in property taxes, past legislatures have gradually increased property-tax exemptions and lowered tax rates.

HB 658 would gradually increase the main property-tax deduction, the so-called homestead exemption, from 35.9 percent to 42 percent by 2014. That means 42 percent of the property value would be exempt from taxes. The tax rate on residential property would gradually decline from 2.85 percent to 2.25 percent over the same period.

Because property values and incomes vary statewide, not everyone gets similar relief.

Barrett said HB 658 has an inherent problem because many Montanans’ paychecks haven’t gone up as much as their property values.

Since residential property value in Montana has increased by 55 percent in the last six years, anyone whose property value has gone up more than that could be facing property tax increases.

“In the Flathead, property values went up over 70 percent,” Barrett said. “There are people up there whose income didn’t go up 70 percent.”

Barrett said a general “circuit breaker” could help ease the impact. That’s tax-speak for setting property-tax levels based on the owner’s income. Since low-income people pay a higher percentage of their income in property taxes, Barrett said, today’s system is unfair.

“It reinforces inequality,” Barrett said.

Bucks said there are state programs to help homeowners cope with rising costs, and there are provisions in the bill that help the elderly, the poor and disabled veterans.

One of HB 658 supporters, Rep. Bob Lake, R-Hamilton, said the bill mirrors what was done in 2005 and 2007 for reappraisal mitigation.

“This is a fair way of property taxation,” Lake said during the bill’s debate. “It is a good place for us to start.”

The Senate has to vote on HB 658 before it could take affect.

Meanwhile, another tax issues discussed widely by Republicans and Democrats during the fall’s campaigns were reducing or eliminating the business equipment tax.

Lawmakers from both parties have proposed bills to reduce the business equipment taxes to create incentives for companies to come to Montana. But the bills are in a partisan logjam the House Taxation Committee.

That includes Gov. Brian Schweitzer’s plan to reduce the business tax and replace the lost revenue by more aggressive tax collecting from corporations and out-of-state residents, a feature many Republicans oppose.

Nor do all Democrats like the idea. Barrett said he would rather see any extra money raised used to provide tax relief for low-income wage earners though a so-called earned income tax credit.

A bill to create such a tax was killed in the House on party lines earlier this session. House Bill 360, sponsored by Rep. Mary Caferro, D-Helena, was touted by Democrats as an effective way to battle poverty. However, Republicans said the $28 million price tag made it too expensive for this session.

(Community News Service is produced by the University of Montana School of Journalism).