Problems with right-wing fiscal policy in Helena

If citizens elect an anti-tax, anti-government legislature – like Montana’s 67th - it is not surprising that they get legislation that undermines government finances and weakens government services.

Oklahoma and Kansas are two states that tried an ideological approach to fiscal policy a few years back. The results were disastrous cuts to public services, a fiscal crisis in each state, and near bankruptcy in the case of Oklahoma. They discovered that you cannot continually drain a state’s general fund and expect government to perform critical functions.

Montana had a good state government for decades, the result of center right Republicans and moderate Democrats finding common ground. No longer. We are witnessing many misguided tax cuts and so-called economic development bills.

House Bill 279 reduces the top tax rate from 6.9% to between 6.75% to 6.5%, depending upon the latest version of the bill. The amended bill would cost the state $84 million a year. Those with the highest incomes would get an average of $3,500 or more each year, while those working hard at minimum wages could get an average of $2.

This will reduce the general fund, not help most Montanans, and do little or nothing for economic development. State government fiscal policy seldom has a significant effect on economic development, although there are some exceptions. What drives economic development are good schools, transportation networks, modern infrastructure, affordable health care, a qualified workforce, and recreational opportunities. These are the foundational things that governments provide.

But the tax cut itself, if you will pardon the pejorative, is stupid. A genuine tax cut policy would be to leave the top rate where it is but make the stages of getting to the top rate more progressive or pass an expanded Earned Income Tax Credit. This would also use general funds, but the benefits would go to the neediest Montanans who would spend their extra dollars, leading to a more positive economic result from the multiplier effect.

SB 182 creates a complicated system of additional tax cuts benefitting the most affluent Montanans, if specific criteria are met. This is a violation of reasonable budgeting standards as it does not factor in future fiscal or situational needs. Rainy day funds, trust funds, and some earmarked revenue funds are justified, but this is just nonsense. If the legislature was serious about fiscal responsibility, the bill would include an automatic increase in taxes if revenue fell below estimates.

HB 279 provides tax credits for donations to private schools, draining public funds meant to educate most of Montana’s kids. It is a bill designed to fund private schools – primarily religious - with public tax money. If we wanted to improve educational outcomes and boost Montana’s competitiveness, we should instead fund public pre-school, a proven program that would benefit our entire state for generations.

All is not bad in Helena. The capital budget looks promising now that the Legislature has discovered that bonding is an appropriate method for funding long-term investments. Increasing teacher pay is positive. Governor Gianforte’s emphasis on substance abuse is certainly worthwhile. Corporate tax restructuring adds revenue, and recreational cannabis revenues and COVID-19 relief funds complicate everything in positive ways.

The tax cut bills will not undermine Montana immediately, as happened in Kansas and Oklahoma. But if all these bills pass – and these are just three of many — Montana will see some important services curtailed and will be sure to have a fiscal crisis eventually. The sooner these bills are put back in a box and replaced with responsible fiscal policy, the better off Montana will be.

David Darby was Montana State Budget Director under Republican Gov. Stan Stevens. He was also responsible for a federal agency budget in the Reagan administration. He served for a decade overseas as a senior U.S. Treasury Department budget advisor to foreign governments. He is retired and lives in Billings.