Montana Viewpoint


January 29, 2001

It’s baaaack! And maybe it’s not the son of sales tax, but the great-great-grandson. You may have read in the paper that House Speaker Dan McGee (R-Laurel) has proposed a sales tax. His version would eliminate property tax on homes and lower the state income tax. I’ve always opposed a sales tax in Montana, for various reasons, but during my last campaign I found some support for one, especially if it replaced the property tax. I’m going to devote this article to some ruminations on taxes and the way they work. Maybe it will help put things in perspective.

Property tax is the oldest tax there is, going back to the Sumerians. In fact, I think one of the earliest Sumerian documents (actually a clay tablet) found was a tax receipt on a unit of grain. Our ability to tax is largely linked to our ability to count what we’re taxing, I suppose, and back then they sure didn’t have sophisticated methods. What they could see and count, they could establish value for, and tax, just as we do today. One way they established a value on homes in the middle ages was to count the number of windows. The more there were, the more you paid. Glass was a great luxury, and only the well off could afford it.

The property tax was the only tax for centuries, outside of tariffs on trade, which brought in a lot of money, and provided major funding for our government until the establishment of the income tax in 1864. Lincoln was looking for a way to pay the Civil War expenses, and inaugurated an income tax of 3% on income over $10,000. It was the first "flat tax", and as you might imagine, taxed only the very wealthy. Ten grand was high on the hog back then. That income tax lasted only as long as it took to pay off the war debt. Another was brought back in the 1880s, but was declared unconstitutional. The Constitution was changed, and we now live with a "progressive" income tax today.

Sales taxes came in the 1930s, and today all but 5 states have one. By their nature, taxes hit people in different ways. Income taxes are generally progressive: the more your income is, the more of it you pay in income tax. This means that middle class people pay a smaller percentage of their income in taxes than wealthy people. Property taxes are "proportional," meaning that everybody pays at the same rate. The tax rate on a $30,000 home is the same as on a $3,000,000 one. Sales taxes are "regressive". That means that for low income people a higher percentage of their income goes out in sales tax than for the wealthy. A "good" tax system is one that has a mix of all three of these taxes. That’s because they react in different ways to fluctuations in the economy. The property tax is always steady because it’s based on what you own, and that doesn’t change much from year to year. Sales and income tax receipts go down in bad times, and up in good times.

In Montana, we got away without a sales tax because we had high tax revenues from the tax on coal mined in Montana. In recent years, that income has plummeted. So have property tax receipts, but only because the Legislature cut taxes for business equipment. This has benefited all businesses, but the major beneficiaries have been 18 international corporations. Oddly enough, it’s those corporations, along with the Montana Chamber of Commerce, that have led the big push for a sales tax, which you and I will pay. Maybe now they’ll get their wish.

I knew a fellow once who said he much preferred a property tax to a sales tax. A sales tax, he claimed, was painless. Too painless. A penny here, a penny there, and you never knew how much you paid over the course of a year. With the property tax, you got a bill once a year, and knew exactly how much to complain.

Jim Elliott
Phone: 406-444-1556
Mail: State Senate Helena, MT 59620