Montana may be about to join the collection of states - including its neighbor - seeking to lower its income tax to remain competitive.
Governor Greg Gianforte's budget announcement this past week included using much of the state's surplus to lower the state's top income tax rate from 6.5% to 5.9%. Montana's top income tax rate kicks in at $18,800, so most state residents pay the highest amount.
Idaho just lowered its income tax from 6.5% to 6.0%, and then to 5.8% in its special legislative session in September. The 5.8% rate is a new, flat rate.
Both states have been seeing record tax revenues and have been looking at ways to give at least some of their surplus back to citizens. Concentrating some of that effort on income tax rates is a good idea.
This is because many other states have sought to lower income tax rates over the past year. They include Iowa (to 3.9%), Arizona (to 2.5%), Mississippi (to 4.0%) and Georgia (to 4.9%).
Montana's new rate brings it closer to Idaho's, but policymakers in both states could go a step further by tying their continued excess revenue to automatic reductions in their income tax rate. It makes little sense for a state to collect more dollars than it needs, only to turn around and decide where the money should be refunded. It's best for the state government not take the money in the first place.
In Idaho, for example, every 0.1% of the state income tax is equal to roughly $40 million. If state revenue is consistently $40 million over estimates, the state would have a mechanism whereby the rate would automatically decline by 0.1% (from 5.8% now to 5.7%, and so on...)
No extraordinary sessions. No special requests. No political battles. Just a simple formula that sends a message of growth and opportunity.
More to come on this policy idea in the coming weeks.