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Montana Viewpoint
TAX CUTTING AS AN ECONOMIC POLICY TOOL

January 31, 2005

Over the years a pack rat like me accumulates an awful lot of paper, so every once in a while, when there’s a task I want to avoid, I decide to clean out my files. (My theory on filing, by the way, is that since it takes longer to file a piece of paper than it does to root around on my desk, I file only papers that I think I’ll have to find more than once.)

In the process of this winnowing, I came across some research papers from the 1999 Legislative Session dealing with the 50% reduction in the business equipment tax, from 6% to 3%.

This is relevant today because of two bills that would prevent the business equipment tax from going to zero if a targeted level of economic growth is achieved in Montana. If the tax did go to zero, it would result in a loss of state revenue between $60 to $80 million. That would necessitate either a decrease in public services or a tax increase to preserve them at the same level.

Generally, among those who favor such tax cuts, the rationale is that they spur the economy and the resultant growth will soon bring in the same amount of revenue to the state that it lost in the tax expenditure. The paper that spurred this particular article was written by a senior member of the Legislature’s research staff in 1998 in response to a request from a legislator. The legislator wanted to know the amount of new economic activity that would have to occur to offset the cost of a 50% tax cut on business equipment.

Using a hypothetical figure of $80 million in lost revenue due to the proposed tax cut, the researcher estimated that to offset that revenue loss Montana would need either the equivalent of an increase of $3.4 billion in Montana personal income (35,500 jobs paying $25,000 a year); 50,390 new homes valued at $100,000; or 5040 new businesses each earning $1,000,000 a year. The taxes on any one of these events would amount to the $80 million needed to offset the lost revenue.

Well, as circumstances would have it, the business equipment tax was lowered by 50%, and about $60 million in taxes was lost. $24 million alone went to 23 of Montana’s largest businesses; BNSF, ASMI, Conoco, etc. (Note that local property taxes were allowed to increase to help cover the cost of the tax break.)

So what did happen to our economy since the tax break went into effect in 2000? At the then-current rate of 7,700 annual new job growth in Montana the researcher estimated it would take 17 years to recoup the revenue from income taxes. However, that job growth would have hypothetically occurred anyway, and would not be due to a result of cutting the business equipment tax. The actual average annual growth in new wage and salary employment between 1999 and 2003 was 5073 jobs; most of them in the health care professions.

Of course, any combination of job, business or housing growth that yielded $60 million in taxes would offset the revenue loss, but, again, how much of that would occur because of the business equipment tax cut, not in spite of it, is pure conjecture.

However, there are some statistics to refer to that are more pertinent to the industries that saw the greatest tax cuts—largely natural resource and manufacturing concerns. For one, the tax 1999 tax decrease didn’t spur an increase in the rate at which new equipment is purchased, and the number of coal mining jobs actually declined, much of it due to a more highly mechanized method of mining. Coal production through this period remained steady.

Among these papers was a piece of testimony from Paul Polzin of the Montana Bureau of Business and Economic Research. Polzin, an economic moderate, said “the connection between economic growth and tax policy is very ambiguous”; and that legislators “should be very suspicious of tax recommendations that [are] justified on improved economic growth.”

Polzin also said, however, that “Montana’s economic trends are still largely affected by our basic industries, and they are affected by specific levels of taxes.”

So, 50-50 and pick ’em; who can know what to do? The fact remains, though, that taxes on homeowners and small businesses have increased since the business equipment tax cuts first started in 1995 (school mills have more than doubled), and taxes on big businesses have decreased. Perhaps not what Montana’s first choice would have been.

It’s all a matter of policy priorities, and it’s—eventually—your choice.

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

jim@jimelliott.org