Five Ways To Lower Montana's Residential Property Taxes

Homeowners across Montana received a nasty shock in the mail last month, coming in the form of state property reappraisal notices that generally indicated the 2023 valuations used to calculate property taxes have spiked over the two-year reappraisal cycle.

It’s unlikely those valuation increases, 46% on median statewide, will translate into equivalent increases when country treasurers mail out actual property tax bills this fall. That’s because the tax estimates included on the reappraisal notices don’t account for how across-the-board value growth will let cities, counties and school districts fund their budgets with lower tax rates. Regardless, reappraisal sticker shock has driven widespread discussion about Montana’s tax system as homeowners fret over their tax bills.

The Republican-controlled 2023 Legislature, which was informed about the looming reappraisal spike by a November memo from the Montana Department of Revenue, took some action on property tax policy this year. It modernized an assistance program for low-income taxpayers and spent a chunk of the state’s historic budget surplus on a pair of one-time property tax rebates for homeowners, $675 for each of 2022 and 2023.

Lawmakers also retooled a state-level tax levy that collects money to balance school funding between districts in different parts of Montana, redirecting some of the money collected there to lowering school taxes assessed at the local level.

While both majority Republicans and minority Democrats proposed other long-term property tax legislation, no significant property tax proposals beyond those garnered the support to make it to the desk of Gov. Greg Gianforte, a Republican. As reappraisal notices raise taxpayers’ hackles, Democrats have sought to make political hay over taxes in recent weeks, arguing Republicans failed to do enough on the issue and calling for a special session to consider further tax legislation.

While that special session call appears unlikely to garner traction with Republicans, some of the proposals discussed this year could well resurface as the Legislature meets in 2025. And local government leaders and tax activists have their own ideas for ways to reshape the state’s tax system to lighten the load it places on residential properties.

Here’s a sampling of what’s in the mix:

Idea #1: Rebalance taxes between property classes

According to the revenue department, Montana residential property values typically grew much faster than commercial ones this reappraisal cycle — 46% versus 27% on median. Because property owners pay taxes proportionally to their share of their local tax base, that means the reappraisal will generally pull the tax burden onto homeowners from commercial and agricultural properties.

That’s likely to be a significant shift — enough that taxes for many non-residential properties will actually go down even as homeowners pay more. A memo produced this week by the nonpartisan Legislative Fiscal Division estimates that property taxes will collect an additional $196.9 million from residential property in the 2023-24 fiscal year, while bringing in $34.5 million less on other types of property.

Historically, the Legislature has tweaked the tax code following reappraisal cycles to prevent that sort of tax shift. The November memo from the revenue department, presented to the Legislature’s Revenue Interim Committee as required by state law, laid out an explicit template for doing that again this year. Lawmakers, it suggested, could in effect shield a greater share of residential property values from taxation in order to counterbalance the tax shift produced by skyrocketing home values.

As it turned out, neither Republican nor Democratic lawmakers introduced a rebalancing bill in this year’s Legislature. In recent weeks, though, Democrats, including former Gov. Brian Schweitzer, have seized on the idea as they’ve agitated for a special session.

“I think something needs to be done,” Sen. Shannon O’Brien, D-Missoula, said in an interview this week. “I think Montanans don’t want to wait for another year and a half, or two years, for that to happen.”

O’Brien also said that Democrats hadn’t brought a rebalancing bill during this year’s session because they were focused on advocating for other tax reform measures that were stymied by Republicans.

Senate Taxation Chair Greg Hertz, R-Polson, said in an interview this week that Republicans hadn’t brought a rebalancing bill because they determined rebalancing was unnecessary since the state switched residential properties from a six-year to a two-year reappraisal cycle in 2015.

“Was that the right decision? Time will tell,” Hertz said. “We’ll have to revisit in 2025, particularly if we have another big increase, or maybe by that time we’ll have a decrease in market values — who knows?”

House Appropriations Chair Llew Jones, R-Conrad, said in an interview this week that he didn’t think it was good policy to put more tax burden on brick-and-mortar retail businesses that are in many cases struggling to compete with e-commerce businesses like Amazon.

He also argued that the two-time property tax rebates and reductions from the school funding measure, which he sponsored, would come close to offsetting the extra tax burden expected to fall on residential properties over the next two years. The Legislative Fiscal Division memo, which was produced at Jones’ request, estimates residential taxpayers will pay $394 million over the next two years while the state provides $350 million in property tax rebates and reduces collections by another $33 million as a result of the school shift.

“When you look at the tax rebates, they don’t go to ag guys, they don’t go to businesses,” Jones said.

(Those rebates, which homeowners can apply for starting in August, also won’t be available to renters, who typically pay their landlords’ property taxes as part of their rent.)

Idea #2: Put income tax dollars toward property tax relief

State government, which is primarily funded by income tax collections, came into this year’s legislative session with a historic $2.5 billion budget surplus. The governor and legislative Republicans responded by cutting the state’s top-bracket income tax rate and directing $889 million of the surplus toward short-term income and property tax rebates.

Democrats, however, argued Montana would have been better served by foregoing the income tax cuts — which they saw as disproportionately favoring wealthy taxpayers — and instead directing money toward lowering the property taxes paid by low- and middle-income residents.

One proposal, House Bill 280, would have offered a state income tax credit to homeowners making up to $130,000 a year to reimburse them for a portion of their property tax bill. It was voted down on the House floor in February with opposition from most Republicans.

Jones argued in an interview this week that leaning too hard on income tax is risky for the state because income tax collections tend to swing up and down with the economy. He said that means substituting income taxes for property taxes could set up schools and local governments for a budget crisis if income-based collections fall in a future recession.

“The discussion needs to be on spending. If you don’t control spending, somebody has to pay,” he said.

Idea #3: Limit or cut local government spending

Most Montana property tax collections flow directly or indirectly to local governments: schools, which consume a majority of Montana property tax dollars, as well as counties and cities. As such, many Republicans point the finger for property tax frustrations at local government leaders, blaming them for growing their budgets too quickly.

“The state did not create the property tax problem, and it’s not our job to fix the property tax problem,” Rep. Jennifer Carlson, R-Manhattan, said during floor debate on HB 280.

Gianforte has also said he believes the responsibility for keeping property taxes in check primarily falls on local governments.

“While the governor’s property tax rebate will help this year and next, Montanans have seen property taxes rise too much as some local governments grow their spending at alarming rates, driven in part by a series of voter-approved mill levies,” Gianforte Press Secretary Kaitlin Price said in a statement Thursday. “The governor is committed to working with local partners and the legislature to make permanent reforms to provide homeowners with significant, long-term property tax relief.”

Local government taxes are in theory capped by state law, which limits cities and counties to growing their property tax collections to half the average rate of inflation, excepting most taxes levied on new development and increases approved directly by voters. That statute is a perennial frustration for city and county leaders, who say setting a cap below the rate at which the cost of goods and services increases over time squeezes their budgets and prevents them from adequately funding their communities’ needs.

Even so, many Republicans believe the current law has failed to keep property taxes in check, pointing to data they say shows local government budgets are rising faster than would be proportional to inflation and population growth.

Prominent Republicans, including the governor, backed a measure this year, Senate Bill 511, that would have reworked the tax cap, letting local governments grow their tax collections as much as 4.75% a year but strengthening collection limits in other ways.

SB 511 was opposed by local governments and public service advocates, who argued it would make it too difficult for cities and counties to fund police departments, build sewer lines and maintain roads.

One opponent, Montana Police Protective Association lobbyist Shelby DeMars, testified against the bill during a hearing March 23 before the Senate Taxation Committee, saying it would force cuts to law enforcement spending. Public safety spending composes the lion’s share of many local government budgets, she testified, adding that many municipalities are already having a hard time equipping officers with equipment like bulletproof vests and body cameras.

“There are a lot of folks in this room that want to back the blue. And it’s really easy to say that and it’s really easy to put a sign up in your yard. But when the rubber hits the road this is the sort of stuff that backs the blue,” she said.

SB 511 ultimately failed narrowly, stalling on a 25-25 vote on the Senate floor in April.

Idea #4: Authorize more sales taxes

Montana is one of only five U.S. states without a statewide sales tax. That’s both a source of civic pride for many Montanans and a perennial concern for some tax wonks who say it leaves the state and local governments too dependent on property and income taxes — especially given the decades-long decline of natural resource industries that have historically anchored Montana tax bases with sawmills, oil pipelines and coal-fired power plants.

Currently, small Montana resort communities like Whitefish and West Yellowstone have the ability to ask their voters to enact local-option sales taxes that allows them to pull revenue from visitors who use city services like parks and law enforcement but don’t pay property taxes. Whitefish, for example, reported raising $6.3 million with a 3% resort tax in fiscal year 2022, some of which it routed to local property tax relief.

Leaders in larger cities with significant tourism, like Bozeman, have long wanted the Legislature to give them similar authority. Proposals to amend state law to give larger communities that option have, however, consistently floundered at the Legislature.

While some Republican lawmakers say publicly that they believe Montana will eventually need to adopt a statewide sales tax to round out its tax system, that’s widely seen as a politically unpopular option since the state’s voters beat down a series of sales tax proposals in the 1970s, 80s and 90s.

The governor says he’s also a firm opponent of a state sales tax.

“Montanans have spoken very clearly: They do not want a sales tax. So there is no plan that we’re considering that includes a sales tax,” Gianforte said at a press conference Feb. 2.

Idea #5: Enact a hard cap initiative

Another option for tax relief could come from beyond the walls of the Capitol, through a ballot initiative.

Lawmakers of both parties sought to whip support for their preferred property tax bills this year by raising the specter that legislative inaction could spur frustrated voters to vote for a sledgehammer-style initiative that both lowers taxes and subjects the state’s public institutions to blunt-force trauma.

Among them was Sen. Daniel Zolnikov, R-Billings, who sponsored the Republican tax cap bill and argued it was an important step toward heading off a poorly crafted initiative. “I’m talking about a ballot initiative that, who knows how well it’s written,” he said during the March Senate Taxation hearing. “The political steam is there to do something.”

Anti-tax activists led by Bozeman attorney Matt Monforton made an unsuccessful attempt last year to get a proposal modeled on California’s landmark Prop 13 on the Montana ballot. That push drew opposition, including litigation, from establishment advocacy organizations ranging from the Montana Federation of Public Employees to the Montana Association of Realtors. The anti-tax group ultimately failed to gather the signatures necessary to submit the proposal to voters.

Emboldened by the angst surrounding this year’s property reappraisal notices, the group is now organizing to promote a similar initiative, which it hopes to qualify for the 2024 ballot. That proposal, Ballot Measure 2, is currently mired in litigation as its backers challenge an opinion issued by Attorney General Austin Knudsen declaring their proposed initiative language “legally insufficient.” A decision by the Montana Supreme Court that could clear the initiative backers to begin signature gathering is forthcoming.

If backers can collect the 60,359 signatures necessary to qualify for the ballot and persuade a majority of voters to support the initiative, Ballot Measure 2 would cap property taxes for specific properties at 1% of their assessed value. It would also limit how fast the valuations used for tax purposes can grow unless properties are sold or remodeled, limiting growth to no more than a 2% annual increase relative to their 2020 value. Unlike last year’s proposal, Constitutional Initiative 121, those caps would apply to all “real property” instead of just residential property.

An analysis produced by the governor’s budget offices estimates Ballot Measure 2 would reduce property tax collections by $1.5 billion a year — an 88% decrease.

Monforton said in an interview last month he believes the 88% figure is based on flawed assumptions about how the Legislature would adjust property tax law to implement the initiative if it passes. He and other supporters also say they believe schools and other local governments could reduce their spending without significant harm to the quality of services.

“The opponents of our initiative are trotting out the same parade of horribles as they do in every other state in which this property tax reform is enacted,” Monforton said. “Those types of disasters never occur. Local governments learned to live within their means when they have to.”