Fixing a 'Two-Legged Stool'

It is an age-old problem for governments – and one that has divided the left from the right for the better part of the century – how to best fund government services and which services, if any, should be funded.

That is the precise question facing a state-wide bipartisan legislative subcommittee this coming year as they prepare a study of the state’s revenue and spending models. The questions at hand being how best to fund the Montana governmental services people have grown accustomed to, what services can be cut or optimized and what can be done to diversify and sustain those revenue sources.

The subcommittee was formed in the last legislative session under HB 715, sponsored by representatives Llew Jones (R, HD 18) and Nancy Ballance (R, HD 87). One element of the wide-ranging bill is to establish the “Legislative financial modernization and risk analysis study” and the “Long-term budget stabilization study” to be conducted by a subcommittee consisting of both bipartisan members of the House and Senate but also of non-politician appointees.

Among those non-politician appointees is Glasgow’s own Sarah Swanson who was appointed by subcommittee co-chair Sen. Ryan Osmundson (R, SD15). Swanson discussed the appointment and her hopes for the committee with the Courier, saying she was glad to be there for eastern Montana and the large tax-paying base that calls rural Montana home.

“I’m looking forward to being a voice for eastern Montana,” said Swanson. “I want to make sure our voice is heard.” She pointed out that none of Northeast Montana’s legislative representatives sit on a finance or appropriations committee and that she thinks it is, “really important that our communities have a voice in studying the tax process.”

Starting in January, 2020 the group will be studying how the government – both local and state – fund their services, spend their money and how efficient those methods of government funding and services are and whether or not they can be optimized. The results of those studies will then be used to propose changes in the next legislative session in 2021.

Swanson said she likes the way the studies have been structured to first analyze the needs, then analyze how it is funded and then plan for the long term. She is also excited that the study is nonpartisan and data driven.

“I’m going in with a really open mind,” said Swanson, adding that she is excited to work with the other appointees, many of whom have worked in government finance for some time and bring, according to Swanson, unique perspectives to the table as they go forward with their mission.

One such perspective, is HB 715 sponsor and Legislative Finance Committee member Llew Jones, who spoke to the Courier about the subcommittee’s overall goals and the political fight, he sees, going forward if proposed changes are made in the next legislative session.

Jones started by explaining Montana’s two-pronged revenue system. Those are property tax and income tax. Aside from resort taxes and TBID funds, no other revenue exists for state finances to tap into. Jones points out that property taxes keep going up, and will continue to do so, and income tax is wildly unpredictable making it difficult for the state to understand how much revenue it will actually have when planning a two-year budget.

Swanson referred to the two-source-revenue system as a “two-legged stool”, suggesting the model has grown unstable – a fact demonstrated by the recent budget shortfall fights that have taken place between legislative sessions. When coupled with the unpredictability of income tax revenue, the bulk of the Montana tax structure falls to property owners, natural resources and business owners to pay for the services rendered.

Those services such as education, health care, law and justice and infrastructure are mostly provided by local governments. In total, he said, almost 100 percent of property taxes – minus six mills for higher education – are sent back to the local government for services.

The other revenue stream, income tax, is also spent mostly on services or administering them at the local level. Those numbers are: 51.3 percent to education; 26.5 percent to health and human services; 15.4 percent to justice, law enforcement and corrections; and 1.9 percent to natural resources and transportation. The remaining 4.9 percent is the bulk of government administration based primarily in Helena.

Jones points out that those services are what makes cutting spending difficult for Montana legislators, because most cuts would take away or reduce services – especially in rural areas – such as hospitals, roads, water, schools, law enforcement and so on. He said many politicians, and people in general, talk about wanting cuts to spending across the board, but few ever talk about what they will actually cut.

“I’d love a cut of 15 percent spending,” said Jones rhetorically, “but what services can we provide more efficiently or cut altogether?” It is the second part of the question that never gets talked about says Jones. In regards to the study he stated, “It’s a sustainability question, are we going to be able to provide the services that people are demanding going forward.” That is one of the key questions he hopes the study will solve.

Jones said the traditional Montana economy has shifted from agriculture, mining and construction to services. In fact, services (doctors, engineers, accountants, restaurants, hotels, barbers and so on) make up 60 percent of the state’s labor income. Agriculture, construction, manufacturing, mining, oil and timber make up just over 20 percent. The remaining 19.7 percent is made up of government jobs.

He explained that the problem is not that the economy has shifted, but rather that the Montana revenue system has not also shifted. The traditional tax structure is good at collecting revenue from agriculture, manufacturing, mining and so on said Jones, but does very little to collect revenue from industries like Uber, Lyft, Air BNB, Amazon, Netflix and the like. Which means that industries like construction pay a disproportionate ratio of taxes across Montana when compared to their share of wages and income.

So one of the questions Jones hopes to look at is, “Do we need to recognize that our revenue system is dated? We do a good job at taxing the local flower shop’s square footage, but a not-so-good job on Netflix and Amazon.”

As far as solutions are concerned, Jones – like Swanson – is going to suspend judgement on what the outcomes will be in hopes of taking a data-driven approach.

“First I like to begin with the data,” said Jones. “So I’ll be careful what I say because I feel the data should drive our decision.”

He did say that he thinks they will have to understand ways to better tax the services sectors of the state. He also thinks that revenue from the internet and tech economy will need to be looked at if the state is to have any revenue certainty going forward. Jones pointed out that as Amazon grows the state’s largest employer, Walmart, is also looking at transitioning to a partial e-commerce model which may have further negative revenue effects across the state.

The other dilemma Jones sees in all of this is the rural divide. From 2000 to 2015 the Montana economy grew faster than the total US economy. Personal income in the state was up 49 percent compared to the national average of 30 percent and per capita income was more than double the national average according to figures provided by Jones.

Much of that growth – and the jobs that come with it – has occurred in the state’s five largest counties, and many small rural counties have seen net job losses in that same time period. Those include neighboring Phillips and Daniels counties. As the state’s population shifts from rural to urban, the strain of services becomes even more pronounced.

“The services sector is so much larger than before,” said Jones, “so we need to hold a conversation as the rural gets more rural about what services we can provide and at what level.”

A key indicator of a lack of efficiency for Jones is the 403 school districts across Montana. He sees that number as being wasteful as some school administrations are being paid to administer only a few students when compared to what one school administration in Billings is doing for thousands. Jones suggest that if they were able to cut school districts and consolidate administrations they could possibly pay teachers thus attracting them to more rural areas.

Similarly, Jones pointed out that there are entire counties in the state that contain less than a thousand residents. He asked the rhetorical question of whether there is a need for a county government for so few people or if they should merge with a larger county and have satellite offices to save taxpayers on administrative costs.

“I think we need to hold an honest conversation,” said Jones, before conceding “It won’t be a very popular discussion.”

Swanson thinks this is a good chance to set the state up in a way that makes budget planning and revenue viable over a two-year planning cycle. She is also looking forward to sitting down with the group of appointees to try and set the state up for a better future.

“This is a big opportunity to really plan for the future,” said Swanson. “With some really big thinkers in a really cool bipartisan way. I’m honored for the opportunity.”