Can a value-added tax fix Montana's tax problem?
Montana has a tax problem. Property taxes provide the state with nearly 60 percent of its money, leaving landowners groaning under punitive rates. Fluctuations in the real estate market make for fiscal and constitutional vexation as legislators try to figure out some way to keep property taxes mildly equitable.
Still, property tax reform has proven an elusive beast in session after session of the Montana Legislature, and the taxation committees of both houses are grappling with a number of proposals, most seeking to use a sales tax to replace revenues from property levies.
The problem is that a sales tax has to pass muster with the voters. Last time Montanans voted on a sales tax, in 1993, they squashed Governor Marc Racicot's plans into paste. Some polls have suggested that, now, a sales tax offering significant property tax reductions might survive an election. We'll believe it when we see it.
Unions oppose sales taxes because they disproportionally burden working-class folks, who have to spend a greater percentage of their income on basic consumer goods. Business interests oppose them because they don't like taxes in general and taxes that might drive down custom in particular.
Racicot thinks he has a better idea. It's called a value-added tax, or VAT. In Racicot's version, which has yet to be introduced to the Legislature, businesses would pay a four-percent tax on the cost of processing a product or providing a service. That includes labor, equipment depreciation, interest paid on borrowed capital and profit. For example, if a business buys $10 worth of paper clips and fashions those clips into a commemorative paper-clip bust of Racicot that sells for $20, the tax would be $.40.
Mary Bryson, the director of the Department of Revenue, argues that, since tax reform is badly needed, a VAT is the most efficient, least painful way to go about it.
"We believe it to be simpler to administer," she says. "The application is much cleaner. This tax is included in the price of an item, not tacked on at the sales counter. The end object of both is the same, but of the ways to get there this is the more straightforward."
Racicot's VAT would produce about $376 million in revenue. $125 million would go to eliminating all property taxes on business equipment-a fond wish of Montana capitalists. $8 million would eliminate taxes on livestock. $74 million would relieve residential property taxes and $51 million would reduce income taxes. $88 million would ease property taxes on motor vehicles, and there are an array of miscellaneous uses forecast by the department.
If the VAT goes through (and it has to face a vote of the people as well), property taxes would generate only 38 percent of the state's revenues.
Along with the raw numbers, Bryson and other VAT advocates note that, unlike sales taxes that cashiers have to ring up, businesses are under no obligation to pass the four-percent increase on the customer.
"The assumption we make is that, yes, it would be passed on," Bryson says. "But there is the potential that the market will drive prices for some businesses rather than the cost of the tax. That could be seen as a competitive tactic."
The Administration is waiting for drafts of its entire taxation package to be written before throwing the VAT to the wolves of the Legislature, but opposition to the scheme is already lining up. Labor and organized business both have a lot to say about the VAT.
"I think the basic premise is contrary to what we should be doing in the state," says Webb Brown of the Montana Chamber of Commerce. "For what it's being promoted as-a fairly simple and straightforward tax-it's actually quite complicated. And for such a unique tax to go into effect in Montana-well, a lot of businesses might decide it's time not to be in Montana anymore."
Don Judge of the state AFL-CIO chapter, on the other hand, thinks tax reform efforts are too focused on relieving businesses and making consumers-i.e., workers-pay.
Of particular concern to Judge is a VAT provision that would exempt products manufactured in Montana and sold out of state. "What happens when natural resource industries export their products out of state?" Judge asks. "They export their taxes. If we're going to let them off the hook-and they should pay, because our natural resources and our environment pay the price on the production end-who does it fall back on? Montanans, that's who."
The Montana Taxpayers Association and the Montana Association of Counties also have some qualms about the VAT. Both organizations point out that many Montana industries, such as agriculture, are unable to set their own prices and thus will not be free to decide whether to pass the tax along. They'll have to pay it when they sell their products into international markets, and that's it.
Judge, finally, avers that the VAT is just a fancy way of imposing a sales tax.
"When you get stabbed in the front, at least you know who's stabbing you," he says. "This is like getting stabbed in the back."
The VAT is expected to be introduced in the next few weeks.