In the important race for tax competition, Governor Gianforte has announced a major income tax reduction proposal for the Treasure State. Montana’s current income tax rate is 5.9%. The proposal for Governor Gianforte’s 2025 budget would reduce the income tax rate to 4.9%, leap-frogging Idaho’s 5.8% rate.
Governor Gianforte made the following comments when announcing his new budget:
“To achieve a more prosperous future, I am proud of what we’ve been able to accomplish to lower taxes. Over the last four years, we’ve cut taxes for Montanans at every income level, reducing the income tax rate most Montanans pay from 6.9% to 5.9%, substantially increasing the earned income tax credit to benefit lower-income, hardworking Montanans, and reduced the burden of the business equipment tax for more than 5,000 small businesses that fuel job creation.
We can’t, and shouldn’t rest on our laurels, especially with inflation from the Biden-Harris administration eating away at paychecks, making it harder to make ends meet, and creating a nationwide affordability crisis. We should do what we can to help Montanans keep more of what they earn and to give them more certainty well into the future. Because ultimately, this is your money – not the government’s.
That’s why my budget includes the largest income tax cut in state history. We propose reducing the income tax rate most Montanans pay from 5.9% to 4.9%. We propose expanding the earned income tax credit to help hardworking lower- and middle-income Montanans. Together, these proposals total more than $850 million in permanent tax relief for hardworking Montanans – a new record tax cut that benefits Montanans at every income level.
We also propose to further reform the business equipment tax to provide relief to small business owners, and family farmers and ranchers by raising the exemption to $3 million per business. This reform will take nearly 700 additional Montana small businesses and ag producers off the business equipment tax rolls and better allow them to invest in their business and create more good-paying jobs.”
I asked the Tax Foundation how these proposed tax changes would impact Montana’s national tax rankings. Here are the initial comments:
“Under our current State Tax Competitiveness Index, Montana boasts a very competitive tax code, with an overall rank of 5. If the top marginal personal income tax (PIT) rate were to be reduced to 4.9%, the overall rank would likely not change, but the PIT component could improve from 10 to 9. This improvement is based on what the rank would have been had the reform been in place on July 1, 2024, and without regard to what reforms states may pursue in the coming legislative session. They are not large moves, though they show the reforms are competitive, if financially feasible. The business equipment tax exemption increase is also a positive development.”
Though Montana is making a strong move for regional tax relief bragging rights, don’t count Idaho out of the race yet for further income tax rate reductions. Idaho’s Governor Little and state lawmakers have consistently prioritized tax relief and the next legislative session in the Gem State should be no exception.
As reported by Boise State Public Radio:
“State revenue forecasts have collections during the upcoming fiscal year pegged at more than $6.1 billion as lawmakers are preparing Idaho’s next budget.
That prediction comes from the Legislative Services Office Budget Division, which is the nonpartisan office advising state lawmakers on their spending plan.
‘Our revenue forecast is suggesting that Idaho’s economy has some real strength in it and we’re going to continue growing,’ said Keith Bybee, LSO’s budget division manager, in a presentation to the Joint Finance and Appropriations Committee Tuesday.”
Details on any additional tax relief plans in Idaho for 2025 will be available on January 6 when Governor Little releases his budget proposal.
One idea both Montana and Idaho lawmakers should consider is the use of automatic triggers to reduce income tax rates based on revenue growth. This would allow the race for income tax relief to continue at full speed without needing to take any pitstops.
As we noted in our new Policy Manual:
“By using automatic triggers, there would be no need for special sessions of the legislature or one-time tax rebate checks that show the government has over-collected. The reduction would happen automatically. The exact revenue percentage over expectations, the period of time required to make sure it is consistent, and the corresponding income tax rate reduction would all need to be set by lawmakers. Adopting this type of policy would send a clear message that Idaho and Montana will continue to lower the income tax burden it is placing on families and businesses. And the more the economy booms, the lower the rate.”
For example, Louisiana lawmakers are considering automatic triggers to reduce income taxes as part of their tax-cutting efforts. According to the Louisiana Illuminator:
"House Bill 1 also contains trigger provisions that will automatically reduce the income tax rate if state general fund revenues reach a certain threshold."
By further reducing the income tax burden and the economic drag these types of taxes create, lawmakers can put families, businesses, and a state’s economy in a strong position to win the race for the best overall tax climate for success.