Montana small businesses are taxed disproportionately to other taxpayers, a situation that imposes disadvantages on business in the state. The higher taxes place greater costs on Montana businesses which puts them at a disadvantage in competing with out-of-state businesses, and the higher taxes make it more difficult for the state to attract new business.
That is the basic conclusion of a study conducted on behalf of the Montana Chamber of Commerce, which was released Oct. 26, during the organization’s annual convention. Fundamentally, the study concludes that Montana’s business climate would be better if some Montana business taxes were lowered and other broader taxes increased or instituted, most specifically a sales tax, often referred to as a consumption tax, which might include a value added tax, or gross receipts tax, etc.
The study was conducted by The State Tax Research Institute (STRI) “Montana’s lack of a broad based consumption tax requires greater reliance on property and income taxes, which result in a less favorable business tax competitiveness environment for many Montana industries compared to neighboring states,” said Tom Neubig, one of the economists working on the Montana Chamber’s tax study. “Total business taxes in Montana as a share of the state economy is the 12th highest among all states. We analyzed some potential tax restructuring options including business equipment tax relief, equalizing property tax rates, a sales tax and a business entity level tax on consumption.”
“This study is one of the fruits of our research initiative through Envision 2026, our 10-year strategic plan,” said Webb Scott Brown, Montana Chamber of Commerce president/CEO. “This report gives us some hard data to point to when we talk about the tax climate in Montana, and it shows how we compare to our neighbors. In order to achieve the goals of our 10-year strategic plan such as job growth in Montana, we need to have a tax friendly climate that will attract companies to make Montana home.”
This report compared Montana’s tax climate to six neighboring states and a cross-section of business types. It highlighted “sore thumbs” in Montana’s business tax climate and gives consideration to maintaining stable revenues while offering recommendations to make Montana a more tax friendly state.
The states to which Montana was compared were Colorado, Idaho, North Dakota, Utah, Washington and Wyoming.
The business types focused upon were: small pass-through manufacturer, metal fabrication, food & beverage retail, credit card processor, wholesale drug distributor, and data processing (information services).
Montana’s taxation of the credit card processing is higher than that of any other state in the comparison group ranging from 115 percent higher than Idaho to 425 percent higher than Wyoming.
The only business type in which Montana had a consistently lower tax rate of all the compared states was food & beverage, retail, but even then it was higher than that of North Dakota.
Montana’s total business tax was much higher in all categories when compared to those of North Dakota—and by quite a margin, ranging from 119 percent in food & beverage/ retail to 299 percent higher in credit card processing.
Compared to Wyoming, Montana’s business taxes were again higher across all business types, except for food & beverage/ retail where it is only two percent under that of Wyoming. Credit card processing was taxed 425 percent high than Wyoming.
The state with which Montana emerged most competitive seemed to be Washington where Montana’s taxation only exceeded that of Washington in metal fabricating and credit card processing.
While Montana has no sales tax, the states to which comparisons were made had combined sales taxes which ranged from 5.2 percent in Wyoming to 8.1 percent in Washington.
Other conclusions of the study were:
—Montana’s total effective tax rate on business income is 5.1% is 13% higher than the US average of 4.5%
—Montana’s tax is organized in a way that weighs heavily on capital investments and new businesses
—High business property taxes, corporate income taxes as well as a relatively high overall business tax rate make it harder to make capital investments in Montana
Possible areas of tax reform recognized were:
— Incremental tax reforms – Business equipment tax relief – Compliance and administrative issues – Corporate income tax improvements, such as lower rate, 100% destination sales apportionment, repeal tax haven black list
— Broader reform options to reduce income and property taxes – Equalize business and residential property tax rates – Retail sales tax – Business entity level tax on consumption.