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2. legal issues
3. legislation
4. tax laws

“TAX” IS NOT A FOUR-LETTER WORD:
IDEAS FOR A MORE PROGRESSIVE TAXATION
SYSTEM IN MONTANA
A Report of The Policy Institute, Montana’s Progressive Think Tank
January 2012
The Policy Institute blends authoritative research and hands-on political engagement
to create public policy based on economic justice, fair taxation,
corporate accountability and environmental responsibility.
TABLE OF CONTENTS
INTRODUCTION .................................................................................................................................................. 3
A FEW TERMS DEFINED ................................................................................................................................... 3
WHAT IS PROGRESSIVE TAXATION .............................................................................................................. 3
TAXATION IN MONTANA: A HISTORY ......................................................................................................... 4
Montana Territory to the 1980s ................................................................................................................ 4
Significant Changes from the 1980s to 1999 ............................................................................................. 5
The early 2000s to the present .................................................................................................................. 6
IDEAS FOR A MORE PROGRESSIVE TAXATION SYSTEM IN MONTANA
INCREASE THE PROGRESSIVITY OF THE INCOME TAX SYSTEM ................................................ 9
By Sen. Christine Kaufmann
ELIMINATE CORPORATE TAX HAVENS .......................................................................................... 13
By Sen. Ron Erickson
REDUCE THE REGRESSIVITY OF PROPERTY TAX ASSISTANCE ................................................. 19
By Rep. Dick Barrett
REPEAL THE OIL AND GAS TAX HOLIDAY ...................................................................................... 23
By Bob Decker and Molly Severtson, The Policy Institute
EQUALIZE TAX RATES OF ROYALTY-HOLDERS AND COMPANIES .......................................... 30
By Former Rep. Julie French
IN CONCLUSION ............................................................................................................................................... 32
ACKNOWLEDGMENTS .................................................................................................................................... 32
2
INTRODUCTION
Following a 2009 study by the Institute on Taxation and Economic Policy, a Washington, D.C., research group, director
Matthew Gardner said, “No one would ever design an income tax with lower tax rates for the best-off taxpayers. But
that is exactly what Montana’s tax system overall does. In other words, Montana has an unfair, regressive tax system.”1
In this report, The Policy Institute and our contributors will define progressive taxation and its benefits, outline how
Montana’s unfair system was built over time, and identify key pieces of legislation that made it what it is today. We will
then identify five specific ideas of how Montana’s overall taxation system could be made more progressive. These ideas
are 1. Increase the progressivity of the income tax system, 2. Eliminate corporate tax havens, 3. Reduce the regressivity
of property tax assistance, 4. Repeal the oil and gas tax holiday, and 5. Equalize tax rates of royalty-holders and
companies.
Indeed, “tax” is not a four-letter word, as some would have us believe. In fact, a progressive tax system is the best way
to provide both tax fairness to all Montanans and the revenue needed to support the social infrastructure that makes
Montana a great place to live and work.
A FEW TERMS DEFINED2
PROGRESSIVE TAX: A tax in which upper-income families pay a larger share of their incomes in tax than do those with
lower incomes.
REGRESSIVE TAX: Makes middle- and low-income families pay a larger share of their incomes than the rich.
PROPORTIONAL (OR FLAT) TAX: Takes the same percentage of income from everyone, regardless of how much or how
little they earn.
VERTICAL EQUITY: Addresses how a tax affects different families from the bottom of the income spectrum to the top.
HORIZONTAL EQUITY: A measure of whether taxpayers in similar circumstances pay similar amounts of tax.
WHAT IS PROGRESSIVE TAXATION?
As defined above, a progressive taxation system is one that requires those with higher incomes to pay a higher tax rate
than those with lower incomes. The idea that progressivity – or ability to pay – is inherently the fairest type of tax
system is an idea that goes back centuries, including the French Declaration of the Rights of Man and of the Citizen in
1789 and the Biblical story of the widow’s mite.
The idea behind supporting a progressive system is this: For a family making $20,000 a year, it is much harder to give up
say 5% of their income – or $1,000 – than it is for a family making $300,000 a year to give up the same percentage of
their income, because their basic needs – and then some – are already being met. Therefore, it is fair to tax people at an
increasing percentage in accordance with their income. The impact of each of the different tax rates on those families
will be felt in much the same way, making the system fair.
1
2
“Group criticizes Montana tax system as regressive,” The Billings Gazette, November 19, 2009.
The ITEP Guide to Fair State and Local Taxes, 2011, Institute on Taxation and Economic Policy.
3
It is also important to remember that high-income people benefit at a higher level from the social infrastructure
supported by a stable tax system, including public safety and public roads. If you own a profitable business on a busy
street, you benefit at a higher level from people being able to access your business than someone who simply uses the
same road to drive to a modest-paying job. It is to your great benefit that the road be maintained, and so it follows that
you should contribute a higher percentage of your income to support it.
Progressives generally support progressive taxation both for its inherent fairness, and for its ability to provide sufficient
revenue to support the social infrastructure which allows all citizens to enjoy a higher quality of life.
TAXATION IN MONTANA: A HISTORY3
Before we turn our attention to ideas for a more progressive taxation system in Montana, it will be instructive to look
back at the history of taxation in Montana.
Montana Territory to the 1980s4
Property taxes on natural resource production were the first taxes levied in Montana, while it was still a territory. The
federal government allowed the Montana Territory to impose a levy of four mills per $100 of production value of
minerals in 1864. Property taxation remained virtually the only source of state and local revenue in Montana until 1917,
when the Corporate License Tax was enacted. It was set at a rate of 1% of net corporate income. In 1971, the rate was
set at 6.75%, where it remains today.
Montana implemented an individual income tax in 1933, at the height of the Great Depression. The original rates were:
1% on income less than $2,000; 2% on income from $2,000-4,000; 3% on incomes between $4,000-6,000; and 4% on
income above $6,000. The 1934 Special Session of the Montana Legislature imposed an extremely progressive surcharge
on all taxable incomes, topping out at 25% for incomes over $100,000, but this was quickly declared unconstitutional
(according to Montana’s 1889 Constitution, which was replaced in 1972) by the Montana Supreme Court.
In times of economic crisis, Montana’s legislature has looked to individual income tax surcharges as a means of
budgetary salvation. In 1972, the legislature placed a referendum on the ballot giving the Montana electorate a choice
between a one-year 40% income tax surcharge or the imposition of a sales tax. The income tax surcharge won in a walk5.
There were also legislatively-imposed surtaxes of 10% during most of the 1970s and some of the 1980s. In a 1992 special
session, the legislature imposed a surtax of 7%, known as “The Seven Percent Solution,” on almost all forms of taxation.
One of the most significant and far-sighted taxes in the history of Montana was the Coal Severance Tax of 1975. The rate
was first set at 30%, where it remained until 1987, when it was reduced to 15% in a failed attempt to increase coal
production. In 1976, Constitutional Amendment 3 was passed by the Montana electorate, setting up the Coal Tax Trust
Fund. The trust receives 50% of the income from the Coal Severance Tax. The corpus (the body or principal) of the trust
is protected from appropriation by the requirement of a ¾ vote of both houses of the legislature to access it. Both the
Coal Severance Tax and the income from the trust have been significant sources of revenue for Montana for years.
3
Much of the information for this section was taken from “Taxes and Fairness: Healing the Regressive Trend in Montana’s Tax Policy,” a Report of The Policy Institute,
by Jim Elliot, February 2003.
4
The Policy Institute is deeply indebted to David Boyher and Pat Murdo of the Montana Legislative Services Division for research on this topic.
5
The measure was presented as a choice between two courses of action in a single ballot issue. With the ratification of the Montana Constitution in 1972, that is no
longer possible. Each issue – income tax surcharge and sales tax – would now have to be voted on in their own individual ballot questions.
4
Significant Changes from the 1980s to 19996
The Slippery Slope of Tax Reduction, the Canola Oil Saga: During the 1989 special session of the legislature, which was
called to address schooll funding issues, a group of Butte legislators proposed lowering tax rates on certain specific
property types used in the processing of canola oil, the sole purpose being to lure a canola oil processing plant to Butte.
They were not successful in getting passage
assage of the bill. Success, of a sort, came only because conservative legislators,
who would not support lowering those specific tax rates, were willing to support a bill which took all property tax rates
above 9% down to 9%. Not hesitating to look a gift horse in the mouth, some Butte legislators joined the conservatives
and the bill passed.
So, there was success in getting tax breaks for canola processing, but not in getting the company to move to Butte. The
cost of the tax break was then estimated at $18.3 million a year, $12 million of it being lost to local governments, with
no gain in employment or taxable property whatsoever. As of 2003, the Canola Bill represented $29 million per year in
foregone state and local revenue7.
Business Equipment Tax Cuts
uts Shift the Burden of Property Taxes: Also in 1989, the legislature voted to reduce the
business equipment tax. This began a series of reductions between 1989 and 2009, which cumulatively lowered the
equipment tax by another 70 percent. One reduction included Senate Bill 200, sponsored by Mike Taylor (R-Proctor),
(R
passed in 1999, which had the effect of drastically shifting the property tax obligation away from businesses and toward
homeowners (See Graph 1).
GRAPH 1: The Effect of Cutting the Property Tax Rate on Property Owned by Businesses and Utilities8
50%
Share of Total
45%
40%
35%
Homeowners
30%
Large Businesses
25%
20%
1994
1995
1996
1997
1998
1999
2000
2001
Tax Year
2002
2003
2004
2005
2006
6
Much of the information for this section was taken from
rom “Taxes and Fairness: Healing the Regressive Trend in Montana
Montana’s
’s Tax Policy,” a Report of The Policy Institute,
by Jim Elliot, February 2003.
7
This assumes
umes that neither the Canola Bill nor subsequent business equipment tax breaks had been enacted, and that the statewide market
marke value of business
equipment had grown at its historical average.
8
Tax and Policy Research, Montana Department of Revenue, July 22009.
5
The Year of the Business Tax Cuts: 1999 was arguably the most significant year of tax reductions in the history of
Montana, including the following:
• House Bill 174, sponsored by Chase Hibbard (R-Helena): Cut the tax rate on telephone and electrical generating
properties in half and replaced them with excise taxes. But the excise taxes did not fully replace the lost revenue
to the state, falling short by $5.3 million per year, and failing to offset the loss to local governments. The only
way for local governments to recoup the lost revenue was to raise local mill levies, which most did.
•
Senate Bill 184, sponsored by Lorents Grosfield (R-Big Timber): Lowered residential and commercial real
property taxes by phasing in reappraisal effects over four years, reducing the tax rate on that property, and
increasing property tax exemptions, which more than offset any tax increases due to reappraisal. If reappraisal
had gone ahead as planned for the 2001 biennium, state, local governments, and schools would have seen a
revenue increase of $69 million.
•
House Bill 460, sponsored by Shiell Anderson (R-Livingston): A voter-approved legislative initiative that reduced
motor vehicle taxes by $49 million in 2002.
Other Cuts in 1999:
• The legislature reduced natural resources taxes, with most of the reductions going to the oil and gas industry,
and a lesser amount to the mining industry. Fifty-nine percent of the revenue lost because of this change would
have gone to schools and local governments.
•
The legislature lowered the severance tax for oil and gas production and also enacted a “tax holiday” for new oil
and gas wells. Those tax breaks, in effect even when oil surged to more than $100 per barrel in 2008, decreased
revenue to the state general fund and to county governments by an average of $100 million annually from 200320079. (See Graph 6 in “REPEAL THE OIL AND GAS TAX HOLIDAY” later in this report.)
The early 2000s to the present
A significant change was made to the income tax system in Montana in 2003, when the legislature lowered individual
state income tax rates with Senate Bill 40710, sponsored by Bob Depratu (R-Whitefish). While lawmakers predicted that
the cut would impact all households similarly, half of the resulting tax reduction went to households with annual
incomes of $500,000 or more. In 2006, low-income taxpayers received an average tax reduction from the legislation of
less than $50, while the 1,586 wealthiest households in Montana received an average annual tax reduction of $30,50011,
which was greater than the annual pay for the average Montana job.
Graph 2 below illustrates the effects of SB 407, and shows the disparity in what was predicted at the time of passage,
and what actually occurred. (See more about Montana’s income tax system in “INCREASE THE PROGRESSIVITY OF THE
INCOME TAX SYSTEM” later in this report.)
9
Montana Department of Revenue, Office of Tax Policy and Research, September 2, 2008.
Montana Senate Bill 407, 2003, http://data.opi.mt.gov/bills/2003/billhtml/SB0407.htm.
11
Tax and Policy Research, Montana Department of Revenue, December 2006.
10
6
GRAPH 2: SB 407 Total Savings – Predicted in 2003 and Actual12
Income Range and Number of Households
$0.0
-$5.0
$0-20K
$20-65K
158,094
162,848
-$3.7 -$3.6
-$4.5 -$3.7
$65-150K
63,105
$150-500K
10,460
-$6.1
-$5.8
$500K+
1,567
-$6.0
Total Savings ($ million)
-$10.0
-$15.0
-$17.0
-$20.0
2003 Predicted
-$25.0
-$30.0
2005 Actual
-$28.3
-$35.0
-$40.0
-$45.0
-$50.0
-$47.0
Seldom has a tax change since the late 1980s resulted in direct benefit to the average Montanan. Most recently, in the
2011 Montana Legislative Session, lawmakers failed to pass several common-sense bills that would have made the
Montana tax system more progressive, including the following13:
•
House Bill 222, sponsored by Dick Barrett (D-Missoula), would have made sure that out-of-staters paid taxes
(already owed under current statute) at the time of real estate sales, significantly increasing compliance.
•
Senate Bill 360, sponsored by Mary Caferro (D-Helena), would have enacted a state earned income tax credit.
•
Senate Bill 408, sponsored by Christine Kaufmann (D-Helena), would have revised the state’s oil and gas tax
holiday.
•
Senate Bill 42, sponsored by Christine Kaufmann (D-Helena), would have created a state equalized mill for K-12
education.
•
Senate Bill 94, sponsored by Ron Erickson (D-Helena), would have limited the use of foreign tax shelters by
multi-national corporations.
The 2011 Legislature also worsened the situation by passing Senate Bill 372, sponsored by Bruce Tutvedt (R-Kalispell),
which cut the business equipment tax in Montana to 2% on the first $2 million worth of business property14. This
12
Tax and Policy Research, Montana Department of Revenue, December 2006.
Montana Legislature, Bill Information Online, http://laws.leg.mt.gov.
14
Montana Senate Bill 372, 2011, http://data.opi.mt.gov/bills/2011/billpdf/SB0372.pdf.
13
7
legislation gave away $23 million, with large, multinational corporations like Exxon Mobile and Conoco Philips
benefitting the most.15
In light of all of this, what can be done to improve Montana’s tax system? The Policy Institute and the contributors to
this report offer the following five ideas, which would increase the progressivity of Montana’s tax system, providing
more tax fairness for all Montanans and providing needed revenue to support the social structures and programs that
make Montana a great place to live and work.
15
Governor’s Office of Budge and Planning, “SB372: Fiscal Note 2013 Biennium,” June 30, 2011.
8
INCREASE THE PROGRESSIVITY OF THE INCOME TAX SYSTEM
By Sen. Christine Kaufmann
CAN WE HOLD ON TO THE MIDDLE CLASS?
The role of progressive individual income taxes in a just society
Recently the Republican chair of Montana’s Senate Taxation Committee asserted a tired,
conservative mantra that, “we all know that we can’t tax our way to prosperity.” Actually…
we can. That is exactly what we did in this country during the second half of the last
century.
As a result, we created a society where it was still possible for some folks to accumulate
large amounts of wealth while the vast majority of us lived comfortably within a secure
middle class, with freedom to make decisions about our ed
education, employment, housing,
and recreational pursuits. Our tax policies have provided for an investment in public
structures and systems that have made us one of the strongest democracies in the world.
Do we really want to throw that away? It would appea
appear so.
The Congressional Budget Office just released a study of changes in distribution of household income between 1979 and
200716. While household income grew overall by 62%, the income of the fifth of the population with the least earnings
grew by only 18%. Overall, income of the “bottom 99 percent” grew by 48%. And the income of the “top
“
one percent”
grew by 275%!
GRAPH 3: Growth in Real After-Tax
Tax Income from 1979 to 200717
300
275 percent growth
Percent Growth
250
200
150
100
62 percent growth
50
18 percent growth
0
Lowest Quintile
Average Household
Top 1 Percent
Income Group
Given that uneven income growth, the income distribution was significantly mor
more
e unequal in 2007 than in 1979. The
reasons for this can be argued about, but we should not assume it is accidental or that that it is about to get better.
While tax policies are not the primary reason for income disparity, they are a useful way to correct a trend toward
16
17
Congress of the United States, Congressional Budget Office, “Trends in the Distribution of Household Income between 1979 and 2007.”
Ibid.
9
greater inequity as other market forces are adjusted. Correcting that trend would have to be a goal of those in power,
however.
Republican presidential candidates continue to try to out-duel each other with regressive flat tax proposals that would
further widen the income gap. Yet the American people overwhelmingly support a tax structure that asks more of the
wealthy, particularly in difficult economic times. In fact, according to a September 2011 Gallup poll, 66% of Americans
support raising taxes on individuals who make over $200,000.
The lower a person’s income, the greater percentage of it a person must spend on life’s basic necessities such as food,
housing, and medical care. A wealthy person need use only a small percentage of their much larger income for living
expenses, giving her or him much more disposable income. A progressive income tax structure takes into account that
greater ability to pay by setting increasingly higher tax rates as an individual’s income increases.
At the federal level, after standard and personal deductions of about $19,500, a single parent with two children is taxed
at a rate of 10% on the next $12,000 in earnings, 15% on the next $34,000, with increasing rates as income increases up
to a top rate of 35% for earnings over $379,000. If the single parent makes $27,000, she would owe about $750 in taxes.
She could then access the federal earned income tax credit (EITC) which would likely erase her tax liability, and put an
extra thousand dollars or so in her pocket. The EITC supplements low wages and helps make the federal tax rates more
progressive.
At times in our history, tax rates have been much more progressive. In 1960 for example, rates increased in numerous
$4,000 increments from 20% for the first $4,000 of taxable income up to 91% for income over $400,000.
A flat tax makes the income tax regressive. Everyone would pay the same tax rate, for example 10%, on every dollar they
earn. This would not only diminish revenues to invest in shared endeavors such as roads, public safety, or health care, it
would also take a huge bite out of those with fewer resources. A flat tax eliminates the standard and personal
deductions as well as the earned income tax credit. The single parent mentioned above would pay 10%, or $2,700 in
taxes, leaving only about $24,300 to raise two children. A person making $250,000 would pay the same rate of 10% or
$25,000, leaving a comfortable $225,000 on which to live. If the flat rate were raised to bring in needed revenue, it
would continue to harm the lowest wage earners disproportionately.
Montana’s personal income tax system is nearly flat, far more regressive than the federal income tax and many other
state income taxes. Montana is one of only a few states that taxes working people living in poverty. We begin taxing that
single parent with two children when she makes over $10,200 in annual income. Like everyone else, she pays 1% on the
next $2,600 in income, and it goes up 1% for each $2000 -$3,000 increment to 6.9% for taxable income over $15,600.
If this parent has a full time, minimum wage, job she’d earn only $15,080 a year, less than half the $39,000 that living
wage calculations estimate she needs for her family’s basic necessities. Montana would still ask her to pay about $75 in
taxes. If she made $27,000, still far short of a living wage, she would be in the highest tax bracket of 6.9% along with
Montana’s millionaires. Her taxes would be about $660. Montana does not have a state earned income tax credit to
blunt the impact.
It wasn’t always this way. A major tax policy change made in 2003 significantly reduced the progressivity of Montana’s
individual income tax system. The new law reduced income taxes at most levels, but far more significantly for the top
wage earners. Some middle-income taxpayers actually received a small increase. Instead of reaching the top income
10
bracket at $92,900, taxpayers reached it when they got their first job over minimum wage with a taxable income over
$15,600. In addition, the top marginal rate dropped from 11% to 6.9%.
At the time, the change was expected to reduce state revenue by $26 million the first two years; instead, it cost us
$100.3 million. Nearly half of that money (47.6%) was handed to 1,586 taxpayers with income greater than $500,000.
That’s less than 2% of the top 1%. Their average gift from the rest of us was about $30,500, close to the average annual
wage in Montana. (See Graphs 2 and 3 in the Introduction of this report.) Of course Republicans argued the tax cut
would spur investment and result in increased revenues. By the time it was fully implemented, however, we were
headed into a recession. This tax policy change continues to reward the wealthy and take away from our shared
investment that benefits all of us.
WAYS TO IMPROVE THE SYSTEM
We don’t have to look far for good initial steps to reforming the individual income tax system in Montana. Numerous
proposals have been introduced by Democrats in recent sessions. All have been scuttled with opposition from both
parties.
First, we need to restructure the tax rates and brackets. It is morally wrong to require persons who cannot afford food
to return their earnings to the government. It is morally wrong to require persons with a taxable income of $15,601 to
pay the same rate of taxation as millionaires. It doesn’t have to be this way.
Second, we need to end the tax break on capital gains. That’s a tax on the profit people make when they sell a large
asset, such as a stock investment, a house or business. The 2003 proposal provided a 2% tax credit on capital gains,
essentially cutting taxes again for top income earners. Public investment in financial, educational, legal and
transportation systems have provided the infrastructure for these assets to grow over time. It makes sense for those
who have profited to help invest in maintaining those systems.
Third, we need to end the ability to deduct federal income tax payments from our Montana taxes. We are one of only
a few states to do this. The deduction was capped at $5,000 in the 2003 proposal and was characterized as a trade-off
for the lowered tax rates. However, most of the benefit of allowing any deduction goes to those who pay the most in
federal taxes. This policy change will increase state tax payments for many of us, but it’s a policy that asks more of those
with a greater ability to put resources toward public investment.
Finally, we need to implement an earned income tax credit patterned after the federal law that has enjoyed bipartisan
support since it was created in 1975. Former President Reagan referred it as “the best anti-poverty, the best pro-family,
the best job-creation measure to come out of Congress.” It’s one of the few tax credits that benefit low income working
people. It supports businesses and families by supplementing low wages. In addition to making the income tax more
progressive, it is one of the most efficient ways to stimulate the economy by putting money in the pockets of people
who will spend it locally. Over 17,000 families headed by wage earners still live in poverty in Montana. They need to buy
goods to meet their basic needs. Their basic needs cannot be met without supplementation. The policy can be paid for
with revenue gained from the previous three proposals.
Of course I’ll be accused of class warfare. We’ve seen class warfare in Montana, and the top 1 percent has been winning.
But it does not have to be war. We can all be on the same team, investing in public structures and systems that benefit
all of us—a good education system, clean air and water, safe highways and bridges, adequate police and fire protection,
11
an accessible court system, a secure financial system, and an effective public health system to stop the spread of
disease. This is not about punishing success. It’s about recognizing our obligations as moral citizens.
The tax proposals are ready. They are not complicated. What we need is grassroots mobilization with a fresh voice. The
government is not a “thief.” Taxes are not a “burden.” The government is “us” investing in the structures we cannot
build in isolation, making our communities function, and ensuring opportunity to achieve quality of life. Taxes are how
we get it done. We have the right and responsibility to ask for increased investment, especially when the economy is not
working well for many of us.
12
ELIMINATE CORPORATE TAX HAVENS
By Sen. Ron Erickson
INTRODUCTION
Last December there was an interesting Dilbert cartoon. The dog tells the boss that his
corporate taxes can be lowered using a strategy called a “Dutch Sandwich.” The boss
replies “so… that would transfer our tax burden to people who can’t afford tax
attorneys18.” As usual, the boss has it partially right. In this essay I will start with the
disgrace that defines our present federal corporate tax laws then attempt to connect those
national problems to Montana’s corporate income tax system and the ways we in the
legislature have attempted to bring fairness to Montana’s code.
THE NATIONAL SCENE
The boss in Dilbert is right – there is a whole lot of transferring going on, but the businesses
that can’t afford tax attorneys (though they may be being hurt competitively) aren’t paying more. The big international
corporations are paying a whole lot less than they really should. Those corporations are engaged in what’s known as
“transfer pricing.” The simplestt example of transfer pricing we can imagine is this: Corporation A wants to sell widgets in
this country – they have a wholly-owned
owned subsidiary overseas that manufactures the widgets for ten cents each and sells
them to Corporation A for a dollar each. The widgets are sold here for $1.05 each. The corporation has very little profit
on which to pay taxes. Their subsidiary will pay whatever low rate is due in the manufacturing country. For this
particular example, the “arms length” rule would probably force ccompliance
ompliance with our 35% corporate tax rate, but good,
resourceful tax attorneys have come up with a host of tax transfer practices that ensure that major corporations pay
ridiculously low corporate income tax rates. Almost all of these schemes involve the u
use
se of other nations – often tiny –
19
popularly known as tax havens .
Here is a real life example: Wal-Mart
Mart does not own many of its stores or the properties on which those stores are
located. They are owned by one of their subsidiaries, a real estate invest
investment
ment trust, located in Florence, Italy20. Poor
Wal-Mart
Mart does not make as much profit as they might because of the rents they must pay to their own subsidiary. Yes,
that’s a loss to our treasury, but it’s also anti
anti-competitive. A couple of years ago when I talked
alked about Wal-Mart
Wal
at a
18
Dilbert.com, December 28, 2010. Copyright Scott Adams, Inc.
The Multistate Tax Commission’s definition for a tax haven follows: “Tax haven” means a jurisdict
jurisdiction
ion that, during the tax year in question:
i. is identified by the Organization for Economic Co-operation
operation and Development (OECD) as a tax haven or as having a harmful preferential tax regime, or
ii. exhibits the following characteristics established by tthe OECD in its 1998 report entitled “Harmful
Harmful Tax Competition: An Emerging Global Issue”
Issue as indicative of
a tax haven or as a jurisdiction having a harmful preferential tax regime, regardless of whether it is listed by the OECD as an un-cooperative
un
tax haven:
(a) has no or nominal effective tax on the relevant income; and
(b) (1) has laws or practices that prevent effective exchange of information for tax purposes with other governments on taxpayers benefiting
ben
from the tax
regime;
(2) has tax regime which lacks transparency. A tax regime lacks transparency if the details of legislative, legal or administrative provisions
p
are not open and
apparent or are not consistently applied among similarly situated taxpayers, or if the information need
needed
ed by tax authorities to determine a taxpayer’s
correct tax liability, such as accounting records and underlying documentation, is not adequately available;
(3) facilitates the establishment of foreign-owned
owned entities without the need for a local substanti
substantive
ve presence or prohibits these entities from having any
commercial impact on the local economy;
(4) explicitly or implicitly excludes the jurisdiction’s resident taxpayers from taking advantage of the tax regime’s benefits or prohibits enterprises that
benefit
nefit from the regime from operating in the jurisdiction’s domestic market; or
(5) has created a tax regime which is favorable for tax avoidance, based upon an overall assessment of relevant factors, including whether
wh
the jurisdiction
has a significant untaxed offshore financial/other services sector relative to its overall economy.
20
A good analysis of Wal-Mart’s
Mart’s tax avoidance schemes can be found at WALMARTWATCH.com, in particular a major report in June of 2008. Also see Jesse Drucker,
D
Wall Street Journal, November 14, 2007.
19
13
legislative hearing, I mentioned a particular local grocer who gets no such advantage. The grocer’s statement to me the
next time we met was, “I never expect an even playing field, but this is ridiculous.”
A third example, this time quoting an article from the Wall Street Journal: “A law firm’s office on a quiet downtown
street in Dublin, Ireland, houses an obscure subsidiary of Microsoft that helps the computer giant shave at least $500
million from its annual tax bill. The four-year-old subsidiary, Round Island One Ltd., has a thin roster of employees but
controls more than $16 billion in Microsoft assets. Virtually unknown in Ireland, on paper it has quickly become one of
the country’s biggest companies, with gross profits of nearly $9 billion in 200421.”
TABLE 1: Effective Tax Rates of Large U.S. Drug Companies: 1995-1997 and 2006-2008 Compared
Eli Lilly
27.2%
21.5%
Amgen
29.0%
16.5%
30.0%
29.4%
Wyeth
Pfizer
30.0%
16.1%
Bristol-Myers Squibb
27.4%
20.9%
Johnson & Johnson
27.9%
22.0%
Abbott
29.4%
19.5%
Merck
29.7%
12.7%
0%
5%
10%
1995-1997 Average
15%
20%
25%
30%
35%
2006-2008 Average
Most of the abuse, estimated to cause a loss of at least $28 billion per year, comes from high-tech, pharmaceutical, and
other intangible-intensive multi-national corporations22. These companies export their intangible assets (patents,
trademarks, copyrights, and financial assets) to subsidiaries offshore and then charge the affiliated companies in the U.S.
with tax-deductible royalties. And the problem keeps growing. Above is Table 123, which shows how the tax attorneys for
major pharmaceutical companies keep making more money for their bosses.
All of this un-distributed foreign profit adds up – at last count $681 billion as of 201124 and there are powerful corporate
voices asking that it be repatriated, tax-free. A better plan would be to enact international tax reform – but I’ll wait until
we bring the Montana part of the story into play before saying a few words about that.
21
As quoted in Finfacts Ireland (Ireland’s Top Business Website), March 7, 2007.
Martin A. Sullivan, Tax.com, July 23, 2010, “Transfer Pricing Costs U.S. at Least $28 Billion.” (This site is an excellent source for tax analysis from a progressive
perspective.)
23
Martin A. Sullivan, Tax.com, from an article “Economic Analysis: Transfer Pricing Abuse Job-Killing Corporate Welfare , first published on Aug. 2, 2010. This is a
particularly good read.
24
Martin A. Sullivan, Tax.com, July 25, 2011, “Foreign Tax Profiles of Top 50 U.S. Companies.”
22
14
THE MONTANA CORPORATION LICENSE TAX25
Montana is better off than the federal government in its potential capacity to collect corporate income tax. We are one
of nine states that require worldwide combined reporting. This means that corporations must include income from
subsidiaries incorporated outside the United States as well as income from foreign companies or their subsidiaries
incorporated outside of the United States. Another 14 states allow or require combined reporting.
That sounds great – our tax rate of 6.75 % should be applied fairly to all companies, foreign and domestic, large and
small, that make a profit in Montana, based on a formula comprised of property, payroll, and sales. But most of the
states mentioned above, including Montana, also have a section of law called “Water’s Edge Election.” Since 1987 this
section of corporate tax law has allowed companies to pay a higher rate, 7%, and to exclude earnings of foreign
subsidiaries. That is, the “water’s edge” is the boundary past which our Department of Revenue can’t look when
calculating taxes that are due. The result: international corporations, with help from their good tax attorneys, can hide
Montana revenue in overseas tax havens.
OUR ATTEMPTS TO MODIFY THE WATER’S EDGE LAW: Initial Success
Back in 2002 this problem was laid out for me by Dan Bucks, who at that time was the Director of the Multistate Tax
Commission and a personal aquaintence. He has been the Director of the Montana Department of Revenue (DOR) since
2005. I was aware of the national problem at the time but, with his help, I did a lot more reading of material by people
like Martin Sullivan, David Cay Johnson, and Jesse Drucker who analyze the national problem. What emerged was a bill I
sponsored, House Bill 721. In its simplest form, the bill said that a certain group of nations that were acting as tax havens
were, for tax purposes, no longer beyond the Water’s Edge. The bill also required that the DOR suggest updates to the
list of tax haven nations every two years.
The bill passed relatively easily (third reading was 79-20 in the House of Respresentatives). One factor, I believe, is that
Enron had been in the news in a way that digusted legislators of both parties. Enron’s use of tax haven countries was
immense. For example, of their 882 foreign subsidiaries, 692 were in the Cayman Islands, 119 in the Turks and Caicos,
and 8 in Bermuda26. These countries, identified as tax havens by the Organization for Economic Cooperation and
Development (OECD), and 34 others of similar size and obscurity, were included in HB 721.
A second reason for passage was that 2003 was one of those years where a bit of revenue was needed. The Senate
amended the bill to put at least $375,000 into the Department of Public Health and Human Services (DPHHS) as
matching funds for Medicaid. And this brings us to one of the issues met in every session when we try to change the
Water’s Edge law. How do you calculate a fiscal note27 when the basic point is to stop the hiding of an unknown amount
of revenue in a large number of countries? It is possible to look at past years – a DOR report in the fall of 2010 notes that
in 2008, 26 multinational corporations paid $ 4.2 million in taxes that would not have been due without our tax haven
law28.
25
This is the official name of the tax (MCA 15-31-401) but it’s often referred to as simply “the corp tax.”
David Cay Johnson, Tax Notes, January 17, 2002, Tax.com.
Fiscal Note: A note, required on all bills in the Montana Legislature having an effect on the revenues, expenditures, or fiscal liability of the state, describing the
effect in monetary terms. Definition taken from the Fiscal Note Training Manual, Office of Budget and Program Planning,
http://budget.mt.gov/content/fiscal/FN_Manual_11Session.pdf, accessed 10/20/2011.
28
Brenda J. Gilmore, Memorandum on “Corporate Tax Water’s Edge Election –Tax Haven Countries,” Nov. 10, 2010, presented to Revenue and Transportation
Interim Committee, a 15-page report.
26
27
15
OUR ATTEMPTS TO MODIFY THE WATER’S EDGE LAW: Still a Ways To Go
Since 2003, we have tried three times to amend the Water’s Edge section of the corp tax code. First, we have a bizarre
section in the law referred to as the 80-20 rule. This picks an arbitrary number, 20%, and allows subsidiaries of U.S.
companies who do less than 20% of their business in the United States to select Water’s Edge reporting. That’s silly
because profits made in Montana are just as real no matter what percentage of their business is done in this country. All
of the other states with similar laws to Montana’s disallow this rule by various means. Although there are rules against
the Montana DOR releasing the names of corporations taking advantage of the 80-20 rule, there are specific companies
mentioned in the press that have come under scruitiny from other states. Wal-Mart, due to the scam referred to earlier,
was taken to court by Illinois and that state had a case against McDonalds as well. (McDonalds has a Delaware financing
unit that owns restaurants in the Virgin Islands and conducts more than 80% of its business outside of the U.S.29) The
problem with Illinois’s laws is that they do not require worldwide reporting and, though the state has handled the 80-20
problem, they are still susceptible to tax haven countries.
Another state that has attempted to combat the problem is Minnesota, which had a case against Burlinton Northern
Santa Fe over tax-shifting to a Canadian subsidiary30. I don’t know if these three companies use Water’s Edge in
Montana, but I did get an answer when I asked the DOR if there were petroleum companies using Water’s Edge. I was
informed that there are “fewer than five” such firms, and it is probable that they use the 80-20 rule. The DOR made a
reasonable estimate of the loss of revenue to Montana due to the 80-20 rule in the fiscal note for this year’s bill (Senate
Bill 94) – $2 million a year.
The second legislative change, rejected in 2007, 2009, and 2011, is that when more than 20% of corporate income is
from intangible property or service-related activities, the Montana portion is taxable in Montana. This law change is
directed to corporations exemplified by the Microsoft in Ireland story, but it is not country-specfic.
Third, corporate tax attorneys have shifted their attention to well-known countries – it isn’t just the Cayman Islands, or
Tonga, or Vanuatu – increasingly it’s Ireland, The Netherlands, and Switzerland. That brings us back to the Dilbert
cartoon and the “Dutch Sandwich.” A good example of “the sandwich” is Google, which paid a corporate tax rate of 2.4%
and saved $3.1 billion in a recent three-year period. First Google (or any other company) sells or licenses foreign rights
to intellectual property to a subsidiary in Ireland. In the Google example, the Irish licensee was credited with 88% of its
non-U.S. sales in 2009. The profits don’t stay in Ireland – they go to an ”effective centre of management” in Bermuda.
But avoiding Irish taxes is also on Google’s agenda, so there is a detour – the money passes through The Netherlands, (to
a Google subsidiary with no employees), before it gets to Bermuda. Hence the “Dutch Sandwich.31 The Montana DOR
saw these shananigans as ample cause to add Ireland and the Netherlands to the list of tax haven countries, and they
were included in Senate Bill 94 (which I sponsored in the 2011 legislature).
The first two of these three changes were rejected in 2011 by the Senate Tax Committee (though there was some
Republican interest in the 80-20 provision), but the version of the bill adding the two new countries as tax havens passed
the committee easily and made it through the Senate on a 36-14 vote. It was a different story in the House. After being
tabled in committee it came back into play when Governor Schweitzer, meeting with Republican leadership, asked that
SB 94 be part of the final package of bills to end the session. At that time a revised fiscal note was prepared suggesting
that at least $2 million a year of added revenue would result from the the two-country addition. Though Republican
29
Jesse Drucker, “Why Wal-Mart Set Up Shop in Italy – Retailer Has No Stores, As Tax Spat Lays Bare,” Wall Street Journal, Nov. 14, 2007.
Ibid.
31
Jesse Drucker, Bloomberg News, October 21, 2010.
30
16
leadership seemed to agree to the package, when the bill got to the House floor, it failed 63- 37. It’s hard to know
exactly why this was so, but there was some pressure coming from the Irish ambassador.
SO, WHAT IS TO BE DONE?
For Montana tax policy there are two easy answers. Next legislative session lawmakers should either remove the entire
Water’s Edge section of code or pass SB 94 with a new sponsor. Perhaps the DOR will suggest adding other nations to
the tax haven list. Certainly there is evidence that Switzerland and Singapore should be added.
There are those who say that changing Montana’s corporate tax structure “sends a dangerous message,” but fairness is
never a dangerous message, and fairness is what we must achieve.
At the federal level it will be tougher. Much of the conversation has been about decreasing the corporate tax rate – Sen.
John McCain (R-Arizona) suggests 25% – with various loophole closures. The obvious course is for the nation to follow
Montana and require worldwide reporting and, in fact, there is some conversation in the literature about that solution.
In 2010, Martin Sullivan, while suggesting ideas such as a minimum 10% tax on foreign earnings or a new territoriality
system (and generally arguing that all of the ideas coming from the Obama administration were too weak), also called
for “defenestration of the arms-length standard and its replacement with formulary methods32.”
A formulary standard is one like Montana uses. More recently Sullivan released a piece which praises two other authors
(Edward Kleinbard and Michael Durst), whose full ideas are yet unpublished33. But one of Kleinbard’s terms is a simple
one that we ought to start using. He calls profits shifted to tax havens where little or no business is conducted “stateless
income.” That term captures what’s going on. Multi-national corporations are without boundaries and whatever
solutions are to be found simply can’t be national. Sullivan, after quoting Kleinbard, “the eradication of stateless income
in the field is a highly implausible scenario,” credits him with the conclusion, “that probably the only workable and
acceptable method of taxing multinational corporations is a worldwide system – a system in which profit-shifting is
meaningless and stateless income cannot exist.” I agree.
SUMMARY
Increasingly, major corporations use a variety of transfer payment schemes to shelter revenue from taxation. Until
recently these transfers were mostly to small island nations (e.g. Bermuda, Vanuatu) but now Ireland and other larger
nations are the destination of revenue transfers. If the United States used Montana’s basic system of corporate taxation
(worldwide combined reporting based on payroll, property, and sales), at least $28 billion/year would be added to the
federal treasury.
Unfortunately Montana isn’t perfect. We allow corporations to exclude some transfer payment revenue through a
section of code called the “Water’s Edge election.” Since a revision to the code in 2003, corporations using obvious tax
havens, like Bermuda, must pay taxes due to Montana because those countries are considered to be within the Water’s
Edge. Our code still needs changes. Adding new countries to the tax haven country list and eliminating an 80-20 section
of code should be legislative priorities.
32
33
Martin A. Sullivan, Tax.com, from an article “Economic Analysis: Transfer Pricing Abuse Job-Killing Corporate Welfare,” first published on August 2, 2010.
Martin A. Sullivan, Tax.com, from “’Stateless Income’ Is Key to International Reform,” June 27, 2011.
17
Acknowledgement: I thank the Montana Department of Revenue (particularly Dan Bucks, Gene Walborn, Lee
Baerlocher, and Brian Staley) for their help in deciphering the Water’s Edge section of the MCA. Any mistakes are mine,
not theirs.
18
REDUCE THE REGRESSIVITY OF PROPERTY TAX ASSISTANCE
By Rep. Dick Barrett
INTRODUCTION
In the summer of 2008, the Montana Department of Revenue announced the stunning results
of its just-completed
completed reappraisal of taxable property: over the previous six years, the average
value of residential property had
ad risen 55 percent (See Table 22), with much, much bigger
increases in some counties (notably Flathead, Lake, and Gallatin) and smaller ones in others
(typically in the rural east).
Montanans were, to put it mildly, deeply concerned about these increases. Due, in part, to
misunderstanding complex provisions of the tax laws, they thought their property tax bills
would rise by comparable percentages (they wouldn’t) and that gov
governments would receive
a revenue windfall (they actually would receive no additional revenue as the result of
reappraisal). However mistaken these public perceptions were, reappraisal certainly had
significant and worrisome impacts, which the 2009 Legislat
Legislature was called upon to
“mitigate.”
TABLE 2:: Changes in Value Due to Reappraisal34
TYPE OF PROPERTY
2003 Reappraisal
Class 3 Agricultural Land
Class 4 Residential
$4,383,310,771
2009 Reappraisal Difference in Value % Change in Value
$1,258,914,347
29%
$50,886,118,523 $79,127,262,478 $28,241,143,955
55%
Class 4 Commercial
Class 10 Forest Land
$11,463,907,618
$1,975,410,723
$5,642,225,118
$15,368,908,254
$3,905,000,636
$2,997,054,968 $1,021,644,245
34%
52%
MITIGATION EFFORTS
In the course of that effort, and its aftermath during the 2009
2009-2011
2011 interim, several significant failings in the Montana
property tax system became obvious:
• Data provided by the Department of Revenue showed that among homeowners, the tax is vertically inequitable,
that is, highly
hly regressive with respect to income. This data did not include renters, who pay property taxes
embedded in their rent; if it had, the regressivity of the tax would have been even more pronounced.
• The state’s property tax assistance programs are plagued b
by horizontal inequities,, i.e. situations in which
taxpayers with almost identical ability to pay receive different, and sometimes very different, tax bills. Partly this
was due to provisions for qualifying for assistance: low
low-income
income homeowners can get help but low-income
renters cannot (unless they are elderly). Also, a homeowner whose home has appreciated rapidly in value gets
assistance but another, whose home appreciated slowly does not, even if, after appreciation, the value of the
two homes is the same.. Horizontal inequities also arise from the design of the assistance programs, which in
some instances provide for different amounts of assistance to two qualifying homeowners with almost exactly
the same income.
34
“Changes in Value Due to Reappraisal,” Montana Department of Revenue,
http://revenue.mt.gov/content/forindividuals/taxes_licenses_fees_permits/Property_Taxes/Property_Valuations_for_Individuals_and_B
://revenue.mt.gov/content/forindividuals/taxes_licenses_fees_permits/Property_Taxes/Property_Valuations_for_Individuals_and_Businesses/Statewide_Summ
://revenue.mt.gov/content/forindividuals/taxes_licenses_fees_permits/Property_Taxes/Property_Valuations_for_Individuals_and_B
ary_Table.pdf, accessed October 20, 2011.
19
•
The features of the property tax assistance programs that lead to horizontal inequities can also lead to low- and
moderate-income households facing extremely high marginal tax rates, indeed much higher than those faced by
high-income taxpayers. These high marginal tax rates are sometimes referred to as “notch effects,” and they
occur when, as a result of the design of the programs, a household earning a little additional income loses
assistance and faces an increase in property taxes that is very large when compared the additional income itself.
Indeed taxes can increase more than income, implying a marginal tax rate of more than 100 percent. This,
combined with similar effects in other tax and benefit programs, means that it can be very difficult for families in
poverty to increase after-tax income despite a successful effort to earn more.
Graph 4 illustrates the notch effects in the Montana PTAP (Property Tax Assistance Program). It shows the effect of PTAP
on the tax liability of a married couple who are homeowners and whose property tax bill would be $1,000 per year in the
absence of the program. If this couple had an income of less than $10,629, their property tax liability would reduced to
$200. But if their income increased to anything more than that, even $10,630, their property tax liability would rise by
$300 (to $500), possibly completely offsetting the rise in income that moved them into the lower assistance bracket.
Similarly, crossing the $18,601 income line would cause their taxes to rise by $200, and crossing the $26,573 income line
would make them ineligible for any assistance and raise their taxes by another $300.
Tax Liability with PTAP Assistance
GRAPH 4: Tax Liability by Income Level (Montana PTAP); Tax Liability of $1,000 (Without Assistance)
1200
1000
800
600
400
200
0
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
Income (Married Couple)
POSSIBLE SOLUTIONS
Recognizing these problems, the question of course became what could be done about them?
In 2009, Sen. Christine Kaufmann (D-Helena), who served on the select joint committee on reappraisal mitigation,
sought to both mitigate the effect of increasing property values and to eliminate the regressivity of the tax through the
application of a “circuit breaker.” Under a circuit breaker, a household’s property tax (at least the property tax on its
primary residence) is capped at a given percentage of its income. As proposed by Sen. Kaufmann, this percentage was
constant over all income levels up to a maximum. For households with incomes above that maximum, there was no cap,
although as a practical matter the property taxes of these high income households were, as a percentage of income,
below the circuit breaker percentage.
20
Critically, Sen. Kaufmann’s circuit breaker applied to all households – homeowners and renters – and it replaced the four
existing property tax assistance programs. For that reason, it eliminated almost all of the horizontal inequities, both
because almost everybody qualifies for assistance (in the form of a cap on the total property tax the household must
pay) and because households with similar incomes would always have similar caps.
The proposed circuit breaker also largely eliminated notch effects. Suppose, for example, that the circuit breaker was
four percent, i.e. households would not have to pay more than four percent of their income in property taxes. Then if a
household’s income rose by some amount, say $500, the most its property tax bill could increase by would be $20.
Finally, Sen. Kaufmann’s proposal almost eliminated the regressivity of property tax and instead made it proportional.
Over a broad range of household incomes, property taxes as a percentage of income were at or below the uniform
circuit breaker percentage. (A little regressivity remained in the system because households at higher income levels
were more likely to have taxes below the cap.)
The circuit breaker proposal was a bold stroke, and as it turned out, a little too bold for the 2009 Legislature. In
particular, Republicans were hostile to reducing property tax regressivity and shifting tax bills from lower income
households to their higher income constituency (although the term may not have been applied at the time, this type of
tax shift is currently being described by Republicans as “class warfare”). In addition, some Democrats wanted to
strengthen existing assistance programs rather than scrap them, because they believed that those programs met the
particular needs of their districts. In any case, the proposal didn’t advance.
During the 2009-2011 interim, the Revenue and Transportation Interim Committee studied the state’s property tax
assistance programs and identified many of the problems with them described above. As a result of those deliberations,
I proposed that the committee draft a bill establishing a circuit breaker program very similar to Sen. Kaufmann’s. On a
party line vote, the Committee declined to endorse the bill, and so I requested that it be drafted and carried it in the
2011 session.
The circuit breaker I proposed differed from Sen. Kaufmann’s in two significant respects. One is that rather than
employing a constant circuit breaker percentage, the percentage in my proposal rose continuously with the level of
household income. Thus families at the very lowest incomes would have had their property taxes (either as homeowners
or renters) capped at about two percent of income, while families with incomes of $80,000 would have a cap equal to 10
percent of income. The purpose of this continuously increasing cap percentage was to make the property tax
progressive.
A second feature of my proposal that differs from Senator Kaufmann’s is that there is no maximum income level above
which there is no cap. Even high-income families enjoy a cap, but since the circuit breaker percentage at high income
levels is also high, very few families pay enough property tax for the cap to actually apply.
The reason for not cutting off the circuit breaker at a maximum income level was evidence that for some taxpayers a
cutoff would create a large notch effect. Suppose, for example, that for a household with an income of $80,000,
property taxes were capped at 10 percent of income, or $8,000, but for households with income over $80,000, there
was no cap at all. An increase in a household’s income from $80,000 to, say, $80,500 would, in most cases, not increase
the household’s property taxes; that’s because in most cases, households in this income range are paying less than
$8,000 in the first place. The cap won’t reduce their tax bill and so losing the cap with an increase in income has no
effect.
21
But in a small number of cases (in the Whitefish area, for example), property values blew up so much with reappraisal
that a family with $80,000 in income, for example, might have a tax bill of $15,000. A 10 percent ($8,000) cap would
reduce this household’s property tax by $7,000. If, however, the circuit breaker cuts off at $80,000, then an increase in
this household’s income by $500 to $80,500, would increase its tax bill by $7,000.
The Legislature in 2011 was, if anything, less receptive than it was in 2009 to adopting a circuit breaker and carrying out
progressive reform of property tax administration and assistance programs. Such reform, however, should be part of any
larger progressive tax policy program, as, of course, should be the election of a progressive majority that can make
reform happen.
22
REPEAL THE OIL AND GAS TAX HOLIDAY
By Bob Decker and Molly Severtson, The Policy Institute
INTRODUCTION
Over the past 30 years, the Montana Legislature has steadily reduced the tax responsibility
of the oil and gas industry in the state. Decisions by the 1999 Legislature alone reduced tax
revenue to the state and counties by hundreds of millions of dollars in subsequent years.
The most influential of tax reduction methods ha
has been the oil and gas tax “holiday,” which
discounts tax rates on new wells for defined periods of time.
This analysis finds that academic research, empirical data, and the actions of other oil
oil- and
gas-producing
producing states collectively refute the assertion that the level of taxation is a significant
factor in decisions related to oil and gas development, and that questions of reserve
quantities, market prices, technological advances, and access to markets are more
important considerations. The analysis concl
concludes
udes with a recommendation for a new structure of oil and gas taxation in
Montana that will both increase revenue to state and local governments and assure fairness through tax rates that vary
with market prices of the resources.
BACKGROUND
Over the years,, Montana has utilized several forms of oil and gas taxation. The idea of a tax “holiday,” or a period of
time during which the production from an oil or gas well, usually a newly drilled one, is allowed a discount from the
standard severance tax rate, dates
es to at least 1979, when the Montana Legislature exempted production from natural
gas wells drilled to depths of 5,000 feet or more.
Other useful benchmarks include:
• 1981: The Legislature increased the state’s severance tax on oil from 2.65
2.65%
% to 5%for 1982-83
1982
and to 6%
thereafter. Montana’s severance tax on oil had not been increased since 1962, and the 1981 increase was
proposed to offset a reduction in vehicle license taxes. (Since 1981, however, the predominant theme in the
modification of oil and gas taxation in Montana has been to reduce the tax responsibility of oil and gas
producers.)
• 1995: Lawmakers enacted a bill which consolidated the state’s various oil and gas taxes and, according to the
bill’s promoters, simplified the state syste
system.
m. In the same year, another bill expanded the holiday concept by
providing a 24-month
month exemption from state severance tax on production for oil and gas wells drilled after March
31, 1995.
• 1999: Again under the banners of “simplification” and “incentive,” tthe
he Montana Legislature reduced tax rates
for various methods of oil and gas production. With enactment of Senate Bill 530, sponsored by Al Bishop (R(R
Billings), severance tax rates for all oil wells drilled before 1985 were reduced from 13.9%
13.9 to 12.5% (natural gas
was reduced from 18.55% to 14.8%
%).
). For new wells, i.e., those drilled after 1999, the basic severance rate on oil
was reduced from 12.5% to 9.0% (natural gas from 14.8
14.8% to 9.0%).
). For horizontally drilled wells, the top
severance rate on oil was reduced
uced from 12.5
12.5% to 9.0% for wells drilled after 1999 (natural gas from 15.5%
15.5 to
9.0%).
). The defined size of stripper oil wells was expanded from 10 to 15 barrels per day, and the severance rates
for stripper wells were also reduced. Also in 1999, the legisl
legislature
ature redefined the tax holiday for oil and natural
gas. Applying to wells drilled after 1999, the holiday period was set at 12 months for vertical wells and 18
23
•
months for horizontal wells. During the holiday period, the severance rate is 0.5% (for both oil and gas); upon
expiration of the holiday period, the rate returns to the basic level of 9.0% (both oil and gas).
2005: The legislature enacted a “bonus” tax reduction for oil stripper wells producing 3 barrels per day or less,
dropping the severance rate from 12.5% to 6% when the price of West Texas Intermediate crude oil was above
$38 per barrel.35
RATIONALE FOR THE HOLIDAY
Senate Bill 530 was the 1999 bill that defined the current holiday terms. At the time (and for all reductions in Montana
tax rates since the 1980s), the case for lowering tax rates for oil and gas production was that the tax breaks would create
jobs and promote economic growth in the state. The tax incentive was needed, the argument continued, because of low
oil and gas market prices (oil was selling for about $20 per barrel in 1999).
Promoters and defenders of oil and gas tax incentives in Montana have offered little evidence to demonstrate a direct
connection between lower oil and gas tax rates and job creation or economic growth. The advocates for incentives
frequently argue that increased oil production in Montana since the mid-1990s reflects the tax breaks passed in that
period by the Legislature. Indeed, oil production in Montana ended several years of decline around 1995, when
significant tax breaks were enacted, held steady for about six years (at 1.4 million barrels per month), then rose
dramatically to its 2007 level (approximately 3 million barrels per month). In addition, the number of new horizontal
wells, a category that received particular attention in tax rate reductions, rose from a negligible level in 1995 to a level
that produced about two thirds of all oil production in Montana by 2007.
Thus, a correlation exists between tax incentives and oil production, but is it causal, and if so, to what degree? At least
three other factors explain the pattern of Montana’s oil production since 1995:
• Price: Oil, selling for less than $20 per barrel (in 2007 dollars) in 1994, experienced a two-year rise, then dipped
in 1996-97. In 1998, oil prices began the sharp and generally steady rise that led to a 2007 average price of $66
per barrel and to a June 2008 high of $147 per barrel.
• Discovery: Around 1995, the East Lookout Butte field began to produce, and the Cedar Creek Anticline ReDevelopment began in 1997. The biggest discovery, however, was the Elm Coulee Field, in Richland County,
which began producing in 2000 and by 2005 had doubled Montana’s total oil output, meaning that this one new
field was producing more oil in Montana than all other fields in the state combined.
• Technology: Drilling methods and equipment evolved markedly during the 1990s. The use of horizontal drilling,
though not new to oil extraction, increased rapidly as technology advanced, oil prices rose, and the geology of
Montana’s predominant new field, Elm Coulee, proved highly suitable for the horizontal approach.
Another argument given for lowering Montana’s oil and gas tax rates is that lower production rates in neighboring states
draw development away from Montana. This is the established race-to-the-bottom approach to taxation wherein taxing
jurisdictions (states, local governments) compete for business investment by vying to be the most generous and least
demanding host. Currently, for example, industry representatives and local boosters in eastern Montana have
complained that oil and gas tax rates in North Dakota are now lower than those of Montana and are thus attracting
most available oil rigs, leaving Montana with too few rigs to adequately develop new resources.
35
Unless otherwise noted, oil prices provided in this analysis are for West Texas Intermediate, the most common benchmark for U.S. oil prices. Montana-produced oil
typically sells for less than West Texas Intermediate because of transportation and marketing factors.
24
DO LOWER TAXES REALLY INCENTIVIZE DRILLING?
Two recent studies have asked this important question
There is a diversity of approaches to oil and gas taxation taken by states, and some states tax less than others. Once
again, however, one must question how differences in tax rates figure into the investment decisions made by oil and gas
companies as compared to other factors, such as product price, labor availability and quality, the ease of transporting
the extracted product to markets, and the quantity, quality, and accessibility of the resource. Expressed in fundamental
terms: How significant a factor is the level of state taxation in decisions by oil and gas companies to develop resources in
particular states?
A reasonable answer to the question must transcend both ideological clichés, e.g., “Reducing taxes is always good for
the economy,” and the too-simple reference to a correlation between higher production with lowered severance taxes
that ignore the influential factors of reserves, market price, geology, and technological advances. Yet, given the variety
of tax methods in oil- and gas-producing states, together with the sizable state revenue to states generated by the taxes,
there are relatively few published analyses of the relative importance of state taxation to company decisions about
where, when, and how much to invest in oil and gas development.
THE UNIVERSITY OF WYOMING STUDY
One applicable study36 on the subject is “Mineral Tax Incentives, Mineral Production, and the Wyoming Economy,” a
paper published in 2000 by the University of Wyoming. One of the questions addressed by that paper resembled the
one we posed above:
“[T]o what extent do taxes, tax incentives, and environmental regulations alter employment and other economic
activity in Wyoming as compared with what would occur in their absence?”
The study answers this question in the context of various tax-change scenarios, including a once-and-for-all reduction of
2 percentage points in severance tax on oil, a 2 percentage-point reduction for one year and an elimination of the
incentive after that time, and a severance tax reduction of 4 percentage points in perpetuity. Estimated production
increases, as well as tax revenue decreases, vary with each scenario, but the outcomes are similar: changes in oil and gas
drilling and production attributable to lower tax rates are relatively small, but for state coffers “the overall story is one
of a substantial loss of revenue.”
“Why is the response of oil and gas output so small when production taxes are changed or tax incentives are applied?”
asks the Wyoming study. Four reasons are given:
1) “A reduction in production taxes offers no direct stimulus for exploration.” Because production is
predominantly driven by reserves, a reduction in severance tax does little to increase production, whereas
an incentive to drill, as opposed to produce, would lead to greater discovery and more production.
2) “Production taxes and tax incentives are deductible against federal corporate income tax liabilities.” When
severance tax rates are lowered, federal income tax liabilities rise. Thus, to a certain degree, when a state
lowers its severance tax, the oil and gas companies are required to yield a certain percentage of their gains
in the form of increased federal taxes.
3) “A reduction in production tax rates by, say, 2 percentage points has only a small impact on the net-of-tax
price received by operators.” By the time an oil company accounts for all federal, state, and local taxes, as
36
“Mineral Tax Incentives, Mineral Production, and the Wyoming Economy,” by Shelby Gerking, William Morgan, Mitch Kunce, and Joe Kerkvliet, University of
Wyoming, December 1, 2000.
25
well as royalties, a reduction in severance tax rate adds up to a relatively small increase in the after-tax price
per barrel of oil.
4) “Fourth, and most importantly, production of (as contrasted with exploration for) oil and gas is driven
mainly by reserves, not by prices37, production tax rates, or production tax incentives. This is a basic fact of
geology and petroleum engineering and is easily illustrated by Wyoming’s own history of oil production.”
The study notes that Wyoming’s production declined from 1970 to 1997, even during the late 1970s and
early 1980s, when oil prices rose by a factor of more than 10. “Thus,” the paper concludes, “even
comparatively large price increases or tax reductions are not expected to call forth much additional output.”
HEADWATERS ECONOMICS STUDY
A more recent analysis38 was published by Headwaters Economics, a nonprofit research group in Bozeman. “Energy
Revenue in the Intermountain West: State and Local Government Taxes and Royalties from Oil, Natural Gas, and Coal”
compares the taxing strategies of five Intermountain West States – Colorado, Montana, New Mexico, Utah, and
Wyoming – and how the respective states direct their revenues to fund public programs and build long-term wealth.
Importantly, the study examines the relationship between tax rates, resource development, and tax revenue.
The Headwaters study finds that Montana’s effective tax rate is toward the lower end of the five-state scale, which
includes Colorado at 6.2%, Montana at 9.8%, Utah at 12.1%, New Mexico at 15.0%, and Wyoming at 15.9%. Montana’s
rate has dropped significantly since 2001, when it, along with New Mexico’s effective rate, was the highest of the five
states.
To illustrate its findings on how state tax rates affect mineral exploration and government revenue, the Headwaters
study compared the policy paths taken by Montana and Wyoming in the late 1990s, when energy prices were low and
production levels were flat in both states. In 1999, Montana lowered its basic tax rates and enacted the holiday rates,
and Wyoming also lowered its severance tax rate by 2%.
In 2000, however, Wyoming repealed the 2%tax break it had enacted in 1999, and in subsequent years made other
changes that elevated its effective tax rate the subject minerals to 15.9%, the highest of the five profiled states. Thus,
Wyoming opted to increase oil and gas tax rates, while Montana chose to lower them. This is how the Headwaters study
characterized the results of the two approaches:
“Both states have experienced a surge in natural gas drilling and an increase in commodity prices since
2000. Wyoming added over $10 billion in production value and Montana about $2 billion between 2000
and 2006. New drilling continues in Wyoming at a faster pace than in Montana, and Wyoming’s energy
economy is significant. There is little evidence in the overall figures to suggest that firms fled Wyoming’s
higher tax climate and moved to Montana.”
Like the Wyoming study cited earlier in this analysis, the Headwaters report raises the “caution about drawing too many
conclusions about industry activities from tax rates alone.” Yet it offers this summary finding on the subject:
“The oil, natural gas and coal industries are guided chiefly by the location of reserves, and are less able
to relocate than are industries with mobile capital resources (such as textile mills or auto-makers). Other
factors such as price, access to markets (e.g., oil and natural gas pipelines), and technology have more
37
This statement about the relative unimportance of price as a factor in production offers some contrast with a statement made in the subsequent discussion of a
study published by Headwaters Economics. Both papers agree, however, that resource reserves is a primary factor and tax rate is a minor factor.
38
“Energy Revenue in the Intermountain West: State and Local Government Taxes and Royalties from Oil, Natural Gas, and Coal,” Headwaters Economics, October
2008.
26
significant effects on industry activities. We also find no evidence to suggest that the dramatically
different effective tax rates in the Intermountain West have led to more or less investment from state to
state …. Wyoming has captured proportionately higher benefits than Montana from the current surge in
energy production value, and there is no evidence that Montana’s tax breaks worked – Montana has
stimulated less, not more energy development than Wyoming and left more than a half a billion in
revenue on the table.”
THE HIGH COST OF THE HOLIDAY
When the Headwaters Economics report stated that Montana “left more than a half a billion in revenue on the table,” it
was referring to the tax revenue lost as a result of tax breaks awarded by the Montana Legislature. In September 2008,
the Montana Department of Revenue released an analysis of impacts on state tax revenue from oil and gas tax changes
passed by the 2009 Montana Legislature and signed by then-Governor Marc Racicot. Spanning the five-year period,
2003-2007, the analysis addresses not only the holiday element of the changes, i.e., the reduced rates on new wells, but
the reduced basic severance tax on all wells drilled after 1999.
GRAPH 5: Reduction in Tax Revenue due to Oil and Natural Gas Tax Holidays (2003-2007)39
$1,400
$1,200
Tax Revenue (Millions)
$1,000
$800
Total Tax with Holidays in Place
$600
Total Tax if Holidays Were Not in Place
$400
Lost Revenue Due to Tax Holidays
$200
$0
2003
2004
2005
2006
2007
Five-Year
Total
Calendar Year
According to the Department of Revenue analysis40, Montana’s state government, together with its oil- and gasproducing counties, experienced a loss of $515 million in revenue during the five-year period, 2003-2007, as a result of
the 1999 tax changes. In that period, the state and counties collected $584 million through oil and gas taxation; had the
1999 changes not been made (and assuming constant production levels), the state would have collected $944 million.
During the same five-year period, 2003-2007, the decreased revenue to state and county governments due to just the
holiday element of the tax structure was $258 million ($205 million for oil and $53 million for gas).
39
“Analysis of Oil and Natural Gas Tax Production Incentives for Production in Calendar Years 2003 through 2007,” Montana Department of Revenue, Office of Tax
Policy and Research, September 2, 2008.
40
“Analysis of Oil and Natural Gas Tax Production Incentives for Production in Calendar Years 2003 through 2007,” Montana Department of Revenue, Office of Tax
Policy and Research, September 2, 2008.
27
To put the revenue loss to the General Fund in perspective, the revenue loss from the 1999 oil and gas tax breaks in
Fiscal Year 2007 was approximately $73 million, or about 4% of the 2007 General Fund revenue of $1.8 billion.
RESTORING BALANCE TO OIL AND GAS TAXATION IN MONTANA
Any equitable proposal for changing the structure of oil and gas taxation in Montana should reflect these precepts:
• While it may be desirable to provide incentives through the tax system to promote specific forms of economic
development, such incentives should be established with evidence that they will serve as central motivating
factors in the investment deliberations of the beneficiaries of the incentives. Because tax incentives can either
decrease public revenue or increase tax burdens on others – and oftentimes both – they should be established
only with a compelling rationale for their effectiveness, and they should be continued only with proof that they
are functioning as intended.
• Because energy issues reverberate so powerfully in people’s lives – from the cost of heating a home to the
question of climate change to concerns about national security – it is tempting to focus anxiety about the
volatility and impacts of energy issues on the oil and gas industry. Yet, while the oil and gas industry should be
held fully accountable for its role in the economic, environmental, and diplomatic problems of our time, no tax
policy should be enacted for punitive reasons. Tax policy for the oil and gas industry should be based on the
same, fairness-based standards used for other taxpaying constituencies.
With regard to the second precept, i.e., maintaining fairness in taxation, a tax structure for oil and gas production should
account for both the cost of production and the volatility of product prices. These two factors suggest that a sliding scale
for a production tax is appropriate, so that as the market price for the product rose, the tax rate would rise also. This
approach would minimize the tax burden on producers when prices and, thus, industry profits were lower, and it would
ensure a fair industry contribution to the public weal when prices, and profits, were high. The Policy Institute’s
recommendation for sliding-scale taxation of oil and gas production in Montana is below:
TABLE 3: Recommendation for Taxation of Oil
Market Price
Tax Rate
Less than $40/barrel
$40-$80/barrel
$80-$100/barrel
$100-$120/barrel
$120-$150/barrel
Greater than $150/barrel
9.0%
12.5%
15.0%
20.0%
25.0%
30.0%
TABLE 4: Recommendation for Taxation of Natural Gas
Market Price
Tax Rate
Less than $6/mcf
$6-$8/mcf
$8-$10/mcf
$10-$12/mcf
$12-$14/mcf
Greater than $14/mcf
9.0%
12.5%
25.0%
20.0%
25.0%
30.0%
28
The effect of the above structure is twofold: 1) it removes the tax holiday for all new wells; and 2) it applies a lower tax
rate when product price is low and increases the rate as prices increase. The recommended structure leaves the reduced
production tax rates set by the 1999 Legislature in place for oil and gas when prices are below $40/barrel and $6/mcf,
respectively.
Applied to production in 2008, when the average price of oil was $95/barrel and that of gas was $8.03/MCF, The Policy
Institute’s recommended matrix would have generated $206 million in additional revenue to state and local
governments in Montana. Of that total, 57% would have come from the rescission of holiday tax rates, and 43% from
elevated regular production tax rates.
VIEW TO THE FUTURE
Given the number and volatility of variables (resource reserves, discoveries, market prices, access to market,
technological advances, and others) that influence oil and gas production, it is difficult to predict tax revenue, no matter
what method of taxation is used. But one thing is clear: Montana’s taxation on the extraction of oil and gas should be
accomplished through a system that reflects the value and irreplaceability of the resource, recognizes the hierarchy of
factors that influence development, and assures fairness by applying variable tax rates over the full spectrum of market
price possibilities.
29
EQUALIZE TAX RATES OF ROYALTY
ROYALTY-HOLDERS
HOLDERS AND COMPANIES
By Former Rep. Julie French
INTRODUCTION
As the Bakken oil activity in North Dakota moves into northeastern Montana, there is a lot
of excitement and concern among the people living in this very rural and sparsely
sparselypopulated area of Montana. Excitement is over the prospects of money made from leasing
mineral rights
ights and eventual oil wells, as well as the potential for economic growth in these
small, rural communities. Concern is over the impacts on the infrastructures and the
“boom and bust” cycle that has been seen by this area in the past.
As a mineral right owner myself, and a former legislator from northeastern Montana, I
have tried to educate myself on the issues surrounding oil development. One of the
biggest surprises I had when first delving into this, was the eighteen
eighteen-month production tax
holiday on new horizontal drilling these oil companies get in Montana. The other surprise
was that I, as a mineral right owner, get no tax holiday. The minute that well starts producing, I start paying my taxes.
Why shouldn’t the oil companies be doing the same?
WHAT REALLY MOTIVATES AN OIL COMPANY TO DRILL?
As a legislator, I heard over and over again that oil companies were avoiding coming to Montana because of our “high”
taxes and that we had to have that eighteen
eighteen-month
month holiday to “entice” them to drill in Montana. That may have been
true with vertical drilling but may not be so anymore with the new technology of horizontal drilling. (See more in
“REPEAL THE OIL AND GAS TAX HOLIDAY” earlier in this report.)
LOCATION OF WELLS AND OIL PRICES
The porosity of the shale in this part of the Bakken is more dense and has been a factor in horizontal drilling here. Oil
companies are going to go to where there are “sweet spots,” places of natural fractures in rocks, before they go to areas
requiring more intense fracturing. It has been too expensive to drill here, and drilling potential has depended on the
price of oil. The Energy Policy Research Foundation, in its paper “The Bakken Boom,41” said oil needs to be at $50/barrel
for production to be sustained. The price of oil has, in the past and will into the future, played a role in drilling in
Montana.
PRODUCTIVITY OF WELLS
Another factor has been the amount of oil that can be drilled from one well alone in North Dakota, compared to wells in
Montana. Again according to the Energy
gy Policy Research Foundation42, in 2008, there were on average 138,000 barrels
per day (b/d) produced in North Dakota. In April 2011, there were on average 360,000 b/d produced there. In Montana,
according to the U.S. Energy Information Administration, in 2010, 69,000 b/d were produced. The barrels per day gotten
out of many of the wells in North Dakota have kept oil companies there. As more is being learned about the Bakken
formation and underlying formations, which are both in North Dakota and northeaster
northeastern
n Montana, and with new
41
“The Bakken Boom: An Introduction to North Dakota’s Shale Oil,” by the Energy Policy Research Foundation, Inc., A
August
ugust 3, 2011,
http://www.eprinc.org/pdf/EPRINC-BakkenBoom.pdf,, accessed October 26, 2011.
42
Ibid.
30
developments happening with this type of drilling and fracturing, oil companies are beginning to move into northeastern
Montana.
AMOUNT OF INFRASTRUCTURE
One more factor that certainly plays into all of this is the lack of infrastructure in some of these small communities in
northeastern Montana. Presently, the Bakken oil price is discounted due to infrastructure constraints in transportation,
mainly pipelines. A shortage of pipelines is part of the issue but also the lack of railways. In some very small
northeastern Montana counties, like Daniels County, the tracks have been taken up in some areas and therefore there is
no rail service. Trucking has proven to be very expensive as well, due to some communities having some of the highest
fuel costs in Montana and the poor conditions of the highways and county roads.
AVAILABILITY OF RIGS AND WORKERS
Last but not least, there is the issue of availability of oil rigs and fracturing crews. In visiting with a leasing company here
in Daniels County, I was told that there is a limited number of rigs and there are waiting lists for those rigs. In North
Dakota, there are 170 rigs and only 15 fracturing crews43. Once a well is drilled, it may have a wait before it can actually
begin to produce, depending on when the fracturing crew can get there.
A TAX HOLIDAY FOR COMPANIES, BUT NOT FOR ROYALTY-OWNERS
And then there is the tax issue. At the present time, according to the Energy Policy Research Foundation, oil companies
pay 10.3% in crude oil taxes on production and extraction in North Dakota. Montana charges a 9% production tax, with
an 18-month holiday from paying the tax on new wells. However, I as a royalty owner pay a 14.8% royalty tax with no
holiday.
The tax holiday is ostensibly in place as an incentive for oil companies to drill in Montana. But, as discussed above,
location of wells, productivity of wells, amount of infrastructure and availability of rigs and workers are the real factors
that play into an oil company’s decision to drill in a particular area. My question is, if taxes really were the issue,
wouldn’t there also be an incentive for mineral right owners to lease?
The unfairness I see in this tax structure is the difference in the tax rate of the mineral right owners and the oil
companies. I’ve been told that the oil company has all the cost of extraction and transportation, which justifies the lower
tax rate. Yet, most contracts that a mineral right owner signs, state that they, the mineral right owner, will share a
percentage of costs for transportation, compression and marketing! At the present time, there is nothing in statute that
mandates any royalty owner pay these costs, but the companies are trying to change that. Senate Bill 415, sponsored by
Bob Lake (R-Hamilton) during the 2011 legislative session, would have mandated that the state pay a portion of the
transportation costs of oil produced on state trust lands. The bill passed both houses, but was vetoed by the governor.
Had this bill become law, it would have set a precedent that would have made it possible to force royalty-holders to pay
these same costs. For now, oil companies are just in the practice of having this requirement added to the contracts for
private mineral right owners, but they are also working to bring in enforcement of these clauses, through the back door.
We are told that the oil companies take all the “risks” and costs of oil production and therefore need the “break” in
taxes. Do we do the same for small businesses in Montana that have to take the risks and costs associated with starting
up and owning a business? And what about the surface right owner that takes on the “risks” of having an oil well on
43
Ibid.
31
their property, fracturing going on, and increased traffic across their land? Shouldn’t they get a tax break as well? If I as
mineral right owner am expected to share in these costs and pay the full tax, shouldn’t the oil company pay their full
tax? I believe taxes on oil production in Montana need to be reviewed. I believe a threshold needs to be put in place and
once that threshold is met, the tax holiday goes away. In North Dakota, once a crude oil price threshold has been
reached, the tax holiday ends.
Knowing that oil development is coming to northeastern Montana, I believe it is vital for those of us that live in these
rural communities to be proactive in addressing the issues surrounding this development. One of the best ways is for
individual mineral right owners to be well educated on the laws in Montana dealing with oil production and taxation and
to be keenly aware of what they are signing in regards to contracts. Small communities must also look ahead at what are
the demands that could possibly be put on their infrastructures and try to address them before the “boom” hits. I am
part of a group in my own community that is trying to do this. One of the things we are doing is reviewing our city
ordinances to see what changes have to be made to ensure our community doesn’t have the same problems other
communities have had that are already experiencing the “boom.”
As a mineral right owner, I want to see that development is done in a safe and prudent manner without my community
being “torn asunder.” I also want to ensure that I and other mineral right owners have our rights protected and are
taxed fairly.
IN CONCLUSION
The mission of The Policy Institute is to work for economic justice, fair taxation, corporate accountability, and
environmental responsibility. It is our hope that this report will help educate lawmakers, decision-makers, and the
general public on the importance of progressive taxation and will provide ideas on how to increase the progressivity of
Montana’s tax system. For more information, or to join The Policy Institute as we pursue our mission, please visit us at
www.thepolicyinstitute.org.
ACKNOWLEDGMENTS
The Policy Institute is deeply grateful to Sen. Christine Kaufmann, Sen. Ron Erickson, Rep. Dick Barrett and Former Rep.
Julie French for sharing their time and expertise by contributing to this report. The Policy Institute also acknowledges the
work of former Executive Director Bob Decker for his work on the piece “Montana’s Oil and Gas Tax Holiday: Analysis
and Recommendation for Change,” and other parts of this report. Thanks too, to Jim Elliot for his work on the report,
“Taxes and Fairness: Halting the Regressive Trend in Montana’s Tax Policy,” from which significant portions of this report
were taken.
32