Objections to Montana income tax cuts were wrong then, and are wrong now
You may have heard objections to Governor Gianforte’s proposal to move Montana to a flat income tax. We’ve heard those objections before. Experience proved that they were wrong then. And they are wrong now.
Here are the facts.
In 2003, Montana income taxes were among the highest in the nation. The rate structure was designed to punish success. The tax rates rose faster than income and the top bracket of 11 percent was tied for the highest among all states. Supporters of excessive government spending claimed this tax system was “fair” and necessary to fund government.
Yet some of us knew better. Under this income tax system, Montana had become one of the poorest states in the nation. For several years—1988 through 1992—Montana ranked dead last in average salary. Per capita income was better, but not much. In 2003, Montana ranked 44th.
Without job opportunities, Montana’s children fled the state. “Montana’s most precious export,” we used to say, “are her young people.”
And the high tax rates didn’t even fund government. Because they discouraged enterprise, revenue often fell below estimates, causing deficits. The legislature had to meet repeatedly in special session to balance the state budget. Many people argued that we needed to raise taxes even further and enact a general sales tax.
But those of us who study economics knew that Montana’s high income tax was part of the problem and that raising it would only make that problem worse. To be vibrant, an economy needs business start-ups, and few entrepreneurs wanted to start a business in a state with an 11 percent income tax. Those that did start businesses kept them very small and opted not to expand them.
By 2003, many people had begun to understand this. That year, Senator Bob DePratu introduced Senate Bill 407 to lower the top state income tax bracket to 6.9 percent.
His proposal was met with howls of outrage. Supporters of high taxes claimed that the proposal would “blow a hole in the budget” and create permanent deficits.
But Senator DePratu’s bill passed. And guess what? The predicted disasters didn’t happen.
On the contrary, as Montana’s economy began to recover, state revenue grew—at first, slowly, and then faster. Montana’s per capita income ranking among the states began to rise, higher and higher. Today Montana ranks 27th and is still climbing!
This is an extraordinary turnaround from the bad old days of the 11 percent tax rate, and a highly unusual record for any state.
In view of this record, it would be common decency for those who were wrong to acknowledge their mistake and apologize to the people of Montana. Instead of an apology, as late as 2016, one tax-and-spend lobbying group issued a paper complaining about revenue “lost” to the tax cuts—even though state general fund spending (largely funded by the income tax) had risen in the interim more than 60 percent!
And now that the governor has proposed a 4.7 flat tax, we hear the same cries of outrage and warnings yet again. We should respond to those cries for what they are: the products of envy and ignorance.
The truth is that the governor’s proposal represents only one step, a necessary step for Montana to remain competitive. The world has not stood still since 2003. Other states have made their income tax structures flatter and fairer, or have established the goal of abolishing income levies altogether.
For they have learned the Montana lesson: income tax cuts work.
