How to spend a $2.5 billion surplus? Lawmakers have no shortage of ideas.

Competing spending measures include tax rebates, infrastructure investments, mental health spending.

By Eric Dietrich MONTANA FREE PRESS

As lawmakers negotiate Montana’s next state budget this winter, the Republican-controlled Capitol has a once-in-a-generation windfall to spend — the state’s $2.5 billion surplus.

Naturally, opinions on what to do with the pile of cash vary. 

Republican Gov. Greg Gianforte has proposed a budget that would fill the state’s reserve accounts, patch up health and social service programs, and put $525 million into short-term property tax rebates. Various factions within the legislative GOP have their own ideas, however, with some Republicans wanting deeper rebates that also focus on refunding income taxes. 

For their part, super-minority party Democrats have proposed tax relief legislation they say better targets rebates to lower-income Montanans.

Three and a half weeks into the 2023 legislative session, those differences of opinion have already translated into jockeying over some of the bills introduced to enact the governor’s budget. For example, House Bill 222, which would have implemented the Gianforte property tax rebate, was tabled on a bipartisan vote by the House Taxation Committee Jan. 18 — an action that usually sounds a death knell for legislative bills.

HB 222 was, however, revived, amended and advanced by the committee on a party-line vote the following day, shortly after Gianforte told reporters at a press conference that he was “disappointed with the stalling and the delay.” The amendment halved the amount of property tax relief the bill would provide, from rebates of up to $1,000 per homeowner for 2022 and 2023 taxes to rebates of up to $500. Post-amendment, the bill’s total cost is about $270 million.

Gianforte said his administration is in dialogue with legislative Republicans about how to improve his budget proposals, but said he considers putting money back in taxpayers’ pockets an urgent task. 

“We need to provide significant tax relief to Montanans and I look forward to seeing those bills on my desk,” Gianforte said

Speaker of the House Matt Regier, R-Kalispell, said in a press briefing Tuesday that he expects Republicans to advance a package of six early session budget bills that would put some of the surplus toward rebates.

That package would include both property tax rebates in the amended HB 222 and income tax rebates in an amended version of House Bill 192, which has been backed by Republican leaders in the House and Senate as a more generous alternative to the governor’s rebate proposal. Regier said lawmakers plan to strip HB 192 down to its income tax provisions, spending roughly $450 million to provide rebates of up to $1,250 per taxpayer.

Also on Regier’s list is the Gianforte-backed House Bill 212, which would raise the exemption threshold for the state’s business equipment tax from $300,000 to $1 million. That shift would cost the state about $7 million a year, the governor’s budget office estimates, and exempt roughly 5,000 businesses from paying tax on equipment such as tractors and beer-brewing vats. The bill would also backfill the portion of the business equipment tax revenues that go to local governments.

Regier also said the early session finance package includes a $185 million measure to pay down state debt, House Bill 251; an adjustment to the state’s capital gains tax, House Bill 221; and a measure that would create a $100 million highway construction fund to help the state access more federal transportation match dollars, House Bill 267.

With those measures off its plate, Regier said, the Legislature could consider more tax relief later in the session.

“This is just the first bite at the apple,” he said.

The state is coming into this year’s Legislature with its accounts flush after years of unexpectedly high revenues, especially from individual income taxes. The official revenue estimate adopted by lawmakers in 2021 expected the state General Fund to see about $5.2 billion in collections in 2021 and 2022. In fact, the General Fund collected $6.7 billion — roughly $1,400 more than anticipated for each Montana resident.

State budget analysts attribute income tax revenue growth to extra money circulating in the economy as a result of massive federal stimulus spending during the COVID-19 pandemic, as well as to inflation and migration into the state by “high income individuals.” But with pandemic stimulus starting to run dry and some forecasters predicting a recession, it’s unclear whether the income tax revenues that drive the state budget will continue to rise in the coming years. (Most property tax collections, in comparison, flow to local government programs such as schools, parks and law enforcement.)

Regardless of how much rain comes in the next biennium, though, the state’s reservoir is full for the moment. As initially proposed, the Gianforte budget would keep historically large amounts in reserve, stashing hundreds of millions in the state’s rainy day account as well as its firefighting fund.

The governor also proposes substantial income tax cuts that, by reducing the state’s top-bracket rate from 6.5% to 5.9%, would divert collections before they flow into the state’s coffers. As proposed in Senate Bill 121, that tax cut and a companion boost to Montana’s Earned Income Tax Credit would cost the state about $160 million a year.

Gianforte also wants to pipe hundreds of millions of dollars to irrigate the state’s troubled behavioral health system. His proposals include funding for the Montana State Hospital in Warm Springs, which lost its federal accreditation last year, as well as boosting the Medicaid reimbursement rates the state pays to providers who provide mental health and substance abuse services.

There are many other surplus-spending ideas circulating in the Capitol as well — both by returning money to taxpayers and investing in public services.

Democrats say they want to focus on long-term property tax relief instead of scaling back income tax rates, arguing it’s property taxes rather than income tax rates that represent the most significant pain point for most Montanans.

They point to minority party proposals like House Bill 280, which would allow Montana taxpayers to claim an income tax credit to reimburse a portion of their property tax bill. As proposed, that credit would be available to both homeowners and renters.

“A one-time fix as proposed by the governor just doesn’t deal with the scale of the problem that homeowners are facing,” Senate Minority Leader Pat Flowers, D-Belgrade, said in a Tuesday press briefing. 

Hardline Republicans in the newly formed Montana Freedom Caucus, in comparison, want much larger rebates than the $500 million in one-time property tax relief proposed by the governor.

Their House Bill 307, would put a whopping $1.275 billion into income and property tax rebates. It would provide retroactive refunds up to $1,000 each year for property taxes paid in 2022 and 2021 and also send Montanans income tax rebates of up to $3,500 per taxpayer.

On the spending side, large proposals range from infrastructure investments to topping off public pension funds. The governor’s proposed budget, for example, includes $200 million to create a fund to subsidize construction of water and sewer lines necessary to build high-density housing. Additionally, public education advocates have said they want to use $60 million to set up a trust that makes it easier for school districts to provide teachers with health insurance.

House Appropriations Chair Rep. Llew Jones, R-Conrad, said last week he’d personally like to see an initial round of surplus spending including rebate bills and debt repayment totaling no more than a third of the $2.5 billion surplus figure, or roughly $800 million.

But Jones, the de facto leader of the comparatively moderate Republican Conservative Solutions Caucus, said what ultimately matters in the Capitol is which combination of ideas is able to win the votes necessary to clear the legislative process — the 26-vote majority to pass bills through the 50-member Senate, the 51-vote majority needed in the 100-member House, and then one final signature at the governor’s desk.

“It’s the magic: 26-51-1,” Jones said. “The governor’s willing to support and the House and Senate are willing to pass. We’re trying to put the magic together.”

Arren Kimbel-Sannit, Mara Silvers and Alex Sakariassen contributed reporting.