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Montana taxation and expenditures: trends and comparisons.

Editor's Note: Tax debates are often acrimonious, and decisions about tax policy must be made in the political arena. However, much standard information about state taxes is available, and we present some of it here. The following compilation is part of a much longer study by the author.

Montana's economy is the source from which most state and local revenues are derived. Consequently, changes in the economy can and do have important impacts on the revenue and budget situation of government. Our current fiscal problems in Montana in part stem from recent trends in the economy.

Compare Montana's per capita income--a common measure of economic performance--with that of neighboring states (Idaho, Wyoming, North and South Dakota) and the United States as a whole. In 1968, Montana's income was only about 83 percent of the national average; the 1970s resulted in some catching up, but weak performance in the 1980s erased those gains. By 1991 (and with the national economy in recession), statewide per capita income was about 84 percent of the national average.

In 1990, about one-third of Montana's total expenditures (state and local combined) went to education. Social services received the next largest share, followed by transportation (mostly highways) and insurance trusts (unemployment, workman's compensation, and the public employee retirement funds). Administration and safety programs include police, fire, and corrections. Included in the "other" category are liquor stores, debt service, and all other functions of state and local government.

How do Montana's overall state and local expenditures compare with other states? For fiscal year 1990, Montana's per capita expenditure of $3,655 is above Idaho and South Dakota, below North Dakota and the U.S. average, and far below Wyoming. However, as a percent of income, Montanans spend more than the national average because the state's per capita income is lower than the national average.

Montana spends more than the U.S. average--and more than most neighbors--on K-12 education. The reverse is true for higher education, where Montana spends less than the national average, and less than its neighbors. Social services spending is below the national average in Montana, but higher than any neighbor except North Dakota. Montana's insurance trust expenditures are the region's highest and considerably higher than the national average.

Over the past twenty years, Montana's K-12 spending increased about $280 per capita, while higher education spending remained roughly constant. Transportation spending actually declined. Social services spending increased significantly. Insurance trust spending data is not available for 1970, but in the decade 1980-1990 it climbed about $190 per capita.

Despite concerns about effectiveness, public schools are probably one of the most valued government services. Figure 6 shows per full-time student spending (excluding capital expenditures) through time for Montana and its neighbors. Note that the state's dramatic increase in K-12 spending is fairly typical for the country and the region.

By contrast, the state's per capita spending for higher education did not increase between 1970 and 1990. Montana's level of spending in 1990 is lower than any of its neighbors and 66 percent below the national average. This results from both a relatively low level of expenditure per capita (78 percent of the national average), and from a relatively high number of students per capita.

TABULAR DATA OMITTED

Social services spending is about half as large as education spending in Montana. The largest item within this category (and doubling every decade) is vendor payments, primarily to Medicaid providers, but also for burials and other commodities and services. Programs which utilize cash assistance payments include Aid to Families with Dependent Children, Old Age Assistance, Aid to the Blind, and Aid to the Disabled. Administration costs are included under "other."

Overall, Montana's spending for insurance trusts is the region's highest. Public employee retirement spending accounts for a large portion and is above U.S. averages. The biggest factor, however, is workers' compensation. Some states, such as South Dakota, rely almost entirely on private insurers. But Montana's expenditures are very high even in comparison with states (i.e., North Dakota and Wyoming) that provide workers' compensation insurance entirely through the government.

Taxes provided less than half of Montana's 1990 state and local revenues. Almost a fifth of total receipts came from the federal government, primarily for welfare, highways, and education. User fees included charges for education, health care and other services provided by government. In 1990, three-quarters of miscellaneous revenue was interest income. Since then, revenues from this source have declined--a contributing factor in the state's current fiscal crisis.

Montana collected significant amounts of natural resource taxes during the energy crisis of the 1970s and early 1980s. Resource revenues were 4 percent of the total in 1970, rose to 24 percent in 1983, then declined to 11 percent in 1990. To put the 24 percent figure in perspective, this is about the amount a typical state would receive from a general sales tax, if it had one.

How do Montana's general revenues compare with neighboring states? On a per capita basis, Montana revenues were seventeenth highest in the country at $3,495, and sixth highest as a percentage of income (Table 2). These figures are roughly comparable to North Dakota, lower than Wyoming, but considerably higher than Idaho, South Dakota and the U.S. average.

Montana's general revenues are high in comparison with other states, especially relative to a low per capita income (Table 3). But does that comparison hold true just for the tax portion of revenues? Montana's 1990 tax revenues were below the national average on a per capita basis, above average as a percentage of income, and higher then neighboring states, except for Wyoming. Thus while Montana's taxes may not be high on a per person basis, they are definitely above average when income is taken into account.

Montana's 1990 property tax revenues are in the top 20 percent of states both on a per capita basis and relative to income (Table 4). In fact, only Alaska and Wyoming collect larger amounts of property taxes relative to their incomes.
Tables 2, 3 & 4
Total Revenues, All Sources, 1990
 Per Capita Portion of Income
 Dollars Rank Percent Rank
Montana $3,495 17 24.6% 6
Idaho 2,836 41 20.6% 24
North Dakota 3,486 18 24.9% 5
South Dakota 2,911 38 20.7% 19
Wyoming 5,355 3 35.2% 2
U.S. Average 3,416 -- 22.3% --
Total Tax Revenues, 1990
 Per Capita Portion of Income
 Dollars Rank Percent Rank
Montana $1,795 31 12.7% 9
Idaho 1,560 44 11.3% 24
North Dakota 1,568 40 11.2% 25
South Dakota 1,447 47 10.3% 43
Wyoming 2,204 11 14.6% 4
U.S. Average 2,017 -- 11.5% --
Property Tax Revenues, 1990
 Per Capita Portion of Income
 Dollars Rank Percent Rank
Montana $828 9 5.8% 3
Idaho 414 37 3.0% 33
North Dakota 476 33 3.4% 26
South Dakota 583 29 4.2% 18
Wyoming 901 7 5.9% 2
U.S. Average 626 -- 4.1% --
Source: U.S. Bureau of the Census, Government Finances:
1989-90.
Table 5
Effective Property Tax Rates on Single Family Homes
 1971 1971 1987 1987
 Rate Rank Rate Rank
Montana 2.19 17 1.34 16
Idaho 1.72 28 0.87 34
North Dakota 2.08 21 1.38 15
South Dakota 2.71 7 2.17 3
Wyoming 1.38 40 0.57 46
U.S. Average 1.98 -- --
Source: ACIR, Significant Features of Fiscal Federalism, 1990.
Table 6
Property Tax Classifications, 1991
 Number of Classes
 Real Personal
Montana 11 13
Idaho 1 1
North Dakota 4 E(*)
South Dakota 2 E(*)
Wyoming 1 1
U.S. Median 1 1
Source: ACIR, Significant Features of Fiscal Federalism, Vol.
I, 1992.
* Exempt
Table 7
Individual Income Taxes, 1989
 Dollars Percent
 Per Capita Rank of Income Rank
Montana 329 28 2.5% 22
Idaho 342 26 2.7% 19
North Dakota 160 38 1.3% 39
South Dakota 0 -- 0% --
Wyoming 0 -- 0% --
U.S. Average 394 -- 2.4% --
Source: ACIR, Significant Features of Fiscal Federalism, 1991,
Vol. II.


What is Montana's effective rate for single family properties? (Effective rates are property taxes as a percentage of market value.) Montana's rates were somewhat above average in both 1971 and 1987, but not among the very highest (Table 5). Note that effective rates in Montana and other states have actually declined since the early 1970s.

Whether they're effectively high or not, Montana's property taxes are among the country's most complex (Table 6). In 1991, the state tax code contained eleven different classes of real property, which are taxed at several different rates. The median state has just two classifications, real and personal.

Montana's 1989 individual income tax revenues were about average for the U.S., both per capita as a percentage of income (Table 7). Idaho's revenues were quite similar, North Dakota's much lower. South Dakota and Wyoming do not tax individual incomes.
Table 8
Top Bracket Marginal Tax Rates for Individual Income Tax, 1990
 Statutory Rates Effective Rate
 Fed. Tax
 Amount Rank Deductible Amount Rank
Montana 11% 3 yes 5.9% 10
 11.6% 3 yes 6.2% 7
 13.2% 1 yes 7.1% 5
Idaho 8.2% 9 no 5.9% 9
North Dakota 14% no 2.7% 35
 12% 1 yes 6.4% 5
South Dakota -- -- -- -- --
Wyoming -- -- -- -- --
Source: ACIR, Significant Features of Fiscal Federalism, 1992,
Vol. 1.


Montana's top marginal tax rate of 11 percent is third highest in the nation. But federal taxes are deductible, so the effective rate is 5.9 percent, tenth highest among the states (Table 8). A 20 percent income tax surcharge would raise the highest statutory rate to 13.2 percent and the highest effective rate to 7.1 percent, which would rank fifth.

Montana's corporate income taxes were about average among states in 1989 (Table 9). South Dakota, which taxes only financial institutions, received considerably less revenues. Wyoming does not have corporate income taxes.

Montana does not have a general sales tax, but it does levy a variety of selective sales (excise) taxes (Table 10). Even when these selective and general sales taxes are combined, Montana's revenues from this source are about the lowest among all states.
Table 9
Corporate Income Taxes, 1989
 Per Capita Portion of Income
 Dollars Rank Percent Rank
Montana $70 27 0.5% 20
Idaho 71 25 0.6% 17
North Dakota 64 40 0.5% 23
South Dakota 37 45 0.3% 45
Wyoming 0 -- 0% --
U.S. Average 104 -- 0.6% --
Source: ACIR, Significant Features of Fiscal Federalism, 1991,
Vol. II.
Table 10
General and Selective Sales Taxes, 1990
 Per Capita Portion of Income
 Dollars Rank Percent Rank
Montana $229 50 1.6% 47
Idaho 561 41 4.1% 25
North Dakota 621 31 4.4% 20
South Dakota 693 18 4.9% 13
Wyoming 581 38 3.8% 33
U.S. Average 715 -- 2.1% --
Source: U.S. Bureau of the Census.
Table 11
Estimated Tax Burden on Montana Families (Income, Property,
Sales, and Automobile Tax)
 Montana U.S.
Income Percent Income
Level Tax of Income Rank Tax Level
$25,000 $1,727 7.1% 39 $2,163 8.7%
$50,000 $3,964 7.9% 35 $4,460 8.9%
$100,000 $9,320 9.3% 31 $9,785 9.8%
Source: Department of Finance and Revenue, Government of the
District of Columbia, "Tax Rates and Tax Burdens in the
District of Columbia: A Nationwide Comparison," 1991.


Exactly who bears the burden of various taxes is difficult to determine, but two recent studies which analyze taxes on individuals are of interest. Each study attempts to estimate how much families would pay in taxes if they lived in the various states. The first study (Table 11) includes in its calculations individual income taxes, residential property taxes, sales taxes, and automobile (gasoline, registration, excise, and personal property) taxes. By that measure Montana's taxes on families are below average at every income level, but especially at the lowest income level for which calculations were made.

In the second study (Table 12), taxes are determined by actually examining IRS return data from each state. Moreover, "income" is defined to include many items normally subtracted as losses on tax returns--such as rental, partnership and small business losses. These deductions reduce taxable incomes (but TABULAR DATA OMITTED not the definition of income used by the study). So estimated tax rates are reduced, especially at higher gross income levels where such deductions are concentrated. This study also accounts for the deductibility of state and local taxes on returns. Note that this methodology yields somewhat different results, but both studies agree that Montana taxes on individuals are low.

Summary

The level of spending by Montana's state and local governments is below the U.S. average when measured on a per capita basis, but above average when measured relative to per capita income. In particular, expenditures for K-12 education, transportation, and the insurance trusts (especially workers' compensation) are exceptionally high. Spending for higher education and for social services, on the other hand, is exceptionally low in Montana.

Compared with other states, Montana's total revenues are high too, both on a per capita basis and as a percentage of income. Specific categories that yield high revenues for Montana include: federal government transfers, total tax revenues, and property taxes. Both individual and corporate tax revenues are near average; sales/excise revenues are low. Despite substantial increases in income and property taxes in recent years, Montana's taxes levied directly on individuals remain comparatively low.

Montanans benefitted from growing natural resource revenues during the 1970s and early 1980s. At its peak, this source provided about the same amount of revenue as a typical state would receive from a sales tax. Since 1985, however, natural resource revenues have fallen dramatically, contributing to the state's fiscal woes.

Douglas J. Young is a professor in the department of Agricultural Economics and Economics at Montana State University in Bozeman, MT.
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Author:Young, Douglas J.
Publication:Montana Business Quarterly
Date:Sep 22, 1992
Words:2331
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