While State of Montana officials are predicting that the state will lose up to $46.3 million in revenues in 2018, because of federal tax cuts passed by Congress this month, the Tax Foundation disagrees, stating that the state will likely come out slightly ahead in revenue than without the Tax Cuts and Jobs Act of 2017.
Montana is the only state that seems to anticipate such problems, noted the Tax Foundation.
Already struggling with declines in revenue because of declines in income taxes in Montana, the Montana Department of Revenue projected that federal cuts in corporate income taxes, higher individual income tax deductions, and the potential elimination of federal mineral royalty payments, would add to the State’s revenue woes. State economists projected that over the next four years, the annual loss would increase to $76.2 million in 2019, and hitting $67.3 million in 2021.
Montana was the only state projecting such negative impacts to its budget by the federal legislation, according to the Tax Foundation, otherwise, they said, “states are generally finding a revenue boost from the bill.”
The assumption of Montana officials that it would lose royalty payments is an incorrect assumption, wrote the Foundation in a recent release. The Tax Foundation, stated that PAYGO would likely be suspended – “as it always has been”. PAYGO calls for the federal government to reduce spending to prevent tax cuts from contributing to the federal deficit. With the suspension of PAYGO, Montana will continue to get its royalty payments, estimated at $24 million.
The State also estimated the pass-through deduction will trim state tax revenue by about $30 million a year. But, the pass-through deduction will not apply to Montana under current law (Montana follows federal adjusted gross income, not taxable income), said the Foundation, adding that updated revenue estimates for Montana with “less gloomy assumptions” will “ likely show a revenue boost as well.”
“Indirect effects of the tax bill must also be kept in mind. The federal bill includes repeal of the health-care individual mandate, which experts say will have negative effects on the individual health insurance market. States may feel obliged to help address these negative effects. Conversely, the pro-growth elements of the federal bill (even the center-left Urban-Brookings Tax Policy Center concluded the bill will boost economic growth) will increase state income and sales tax revenues in some indeterminate amount going forward.”
According to the Tax Foundation: “If states simply do nothing in response to federal tax reform, most will experience an increase in revenue due to the provisions of the federal tax reform bill. That’s because the base-broadening provisions flow through to most state tax codes, but the corresponding rate reductions do not. And now we discover that one significant base narrower—the pass-through deduction—won’t affect most states, either.
“That provision provides a 20 percent deduction against qualified pass-through business income for those with incomes below $315,000 (joint filers). For filers above that threshold, the deduction is limited to the greater of (a) 50 percent of wage income or (b) 25 percent of wage income plus 2.5 percent of the cost of tangible depreciable property, and many service businesses are excluded. (The benefit phases out between $315,000 and $415,000.)
“For policymakers in most states, the fact that the pass-through deduction doesn’t affect AGI should come as a relief. For those in the six states which use federal taxable income as their starting point for conformity, decoupling from the provision is an entirely viable option.”