Why do low-income families pay a greater share? To answer this, let’s see how three types of tax (income, property, and sales) influence tax fairness.
In many states, sales tax is a significant source of revenue. This disproportionately impacts low-income families, because we all must purchase essential items like food and clothing, and all individuals pay the same percentage of tax, regardless of income. Sales tax is one example of a “regressive” tax, where lower-income individuals pay a greater proportion of their earnings in taxes. While Montana does not have a statewide sales tax, we do have excise taxes on goods like gas, cigarettes, and cellphone services. Also, some communities in Montana, like Whitefish, have a resort tax to help maintain the community’s local infrastructure, which undergoes wear-and tear during tourist season.
Additionally, Montana relies heavily on property taxes to fund public services. Like sales and excise taxes, low-wage earners often pay a higher share of their income in property taxes. Housing costs tend to be a larger proportion of low-income families’ earnings, compared to high-income earners. For example, a family making $50,000 a year may own a home worth $150,000, or three times their income. While a family making $1 million per year may own a home worth $500,000, or half of their income. Renters also pay because landlords pass along these taxes when setting rent.
While low-income families pay more than their fair share in property and excise taxes, Montana’s income tax helps balance (but not completely neutralize) our overall tax structure. In Montana, the highest-paid individuals pay 3.8 percent of their annual earnings into income taxes, while the lowest-paid individuals pay less than 1 percent. While our state income tax helps mitigate the effects that property and local taxes have on low-income families, there’s still work to be done.
While not perfect, Montana’s tax structure is ranked third most fair in terms of state and local taxes. Of course, like all states, we can improve. For example, Montana remains one of five states that continue to impose income taxes on families living in poverty. Legislators could help balance our tax system and mitigate the impact that income taxes have on these families by adopting a state earned income tax credit, which could support Montana’s low-income workers, our communities, and state economy.
Now that you’ve brushed up, help us celebrate this important day. As you file your returns, remember that taxes are critical to making our state and local communities the places we love to live in.
MBPC is a nonprofit organization focused on providing credible and timely research and analysis on budget, tax, and economic issues that impact low- and moderate-income Montana families.