The mostly friendly state battle for tax competition and economic competitiveness is alive and well in our region. Except for some states on the left coast (looking at you Washington), prioritizing additional tax relief is front and center in state capitals across the country. This includes major income tax reduction proposals in Idaho and Montana. Though Idaho currently boasts a lower income tax rate, Montana may soon leapfrog that if Governor Gianforte gets his way.
We previously highlighted how Montana’s Governor has proposed dropping the Treasure State’s income tax rate from 5.9% to 4.9%. Recently discussing this proposal Governor Gianforte noted:
“As I meet with Montanans in every corner of our state, I hear loud and clear: tax relief is a priority. That’s why we’ve proposed to cut taxes again this session, to once again deliver the largest tax cut in state history. Our tax cuts will let Montanans keep more of what they earn, help folks navigate the nationwide affordability crisis, and create a more prosperous future for our state and people.”
Here are some of the current regional income tax rates:
Montana - 5.9% (Gianforte proposal to drop to 4.9%)
Idaho - 5.695% (lawmakers are currently advancing a reduction to 5.3%)
Utah – 4.55%
Colorado – 4.25% (temporary – capped at 4.40%)
North Dakota – 2.5%
Nevada/South Dakota/Washington/Wyoming – No personal income tax (though Washington does have a standalone 7% capital gains income tax)
There have been some complaints in Montana and Idaho that income tax reductions only benefit the wealthy. A couple of things to keep in mind about this.
First, the tax code shouldn’t exist to redistribute income. Its focus should be on funding the core functions of government using the principles of transparency, simplicity, neutrality, and stability while causing the least amount of economic distortions possible.
Second, when talking about taxes based on a percentage of income, the relief will be proportional to the tax paid. There are many exemptions, deductions, and targeted credits specifically designed to help alleviate the tax burden for the low-income.
Finally, don’t overlook the impact of corporate income tax cuts on increased economic activity including more business investment, increased employment and higher wages. Here is a good primer from the Tax Foundation on how corporate income tax cuts impact those important economic variables.
Another tax relief idea for lawmakers to consider is using automatic triggers to reduce income tax rates based on revenue growth. This is one of the recommendations in our Policy Manual. For example, Indiana lawmakers are currently considering an automatic trigger to reduce its income tax:
"Indiana’s individual income tax rate will go down to 2.9 percent in 2027, the third lowest rate in the country for states with an income tax. Sen. Travis Holdman’s (R-Markle) bill would automatically lower the tax rate further by 0.05 percent every even-numbered year, beginning in 2030 — but only if state revenues grow by at least 3 percent in the previous even-numbered year."
It is exciting to see policymakers in Idaho and Montana prioritizing additional income tax relief to grow their state economies and ensure that local businesses remain competitive with those across the region.