I was given a copy of some bullet points from one of the new proposed Montana tax simplification bills a few days ago, SB 282. The key points:
As you can imagine, tax code is frequently vilified for being overly complex. Montana's is no exception; a simple return can take an experienced out-of-state preparer a few hours to do the first time. The layout is awkward, and there are obscure credits specialized to Montana (which is not unlike every other state, but still).
Tax simplification is always scary though, because it generally is code for a regressive tax; the simplest tax might be that a flat fee that everyone pays, say, $12,000 a year in taxes! Simple, easy-to-compute, and horrifically unfair to the less fortunate.
A flat tax rate is also an awkward tool because again, charging a flat 25% is much more harmful to the person who makes $40,000 and has to relinquish $10,000 to the government than it is to the person making $200,000 and has to giving up $50,000 to the government. That is why we have the tax scale (0/15%/25%/35% is the simplest way to think of it, although it basically never scales that smoothly).
Follow me below the Orange Cloud of Tax Doom for analysis of the above bill, and why it appears to be a regressive tax bill.
We like simplicity. That's why the above bill appeals to legislators, however, in tax code, the simpler you make it, the less you can guide behavior and care for the less fortunate. As I said above, while a flat rate would be VERY simple, it would hammer the poor. What about if we went to a flat rate, but with credits and deductions? Say you got $2,000 personal deductions if you made below $50,000, and another $3,000 deduction for each dependent?
We're adding complexity to this theoretical simple flat fee tax, but it gives us the ability to help out those who might need it, and make the code more fair. What if we also said that if you make under $20,000, you owe no tax, but you still have to file, and you may get some credit for installing an energy efficient appliance, up to $500 back, in your pocket, as a check?
If we give a credit for energy efficient appliances, we can give tax-payers an incentive to do things we want. It might be to behave in an environmentally-friendly way, it might be donating to state universities, or it could be simply having children (so that we have a strong tax base going forwards).
The bill shown above has one bigggggg red flag:
"The tax rates are reduced for capital gains by 2% for taxpayers in the 4% bracket and 1.75% for taxpayers in the 5.9% bracket."
One big sticking point for this bill is that the lawmakers was a revenue-neutral bill; if we would save money by cutting back on some credits (in the repeal section), then we have to give that money back to taxpayers in another way. Hmm, how could we do that...
Let's think about this from another premise. What if the point of the bill was never (originally) to simply the tax code? What if the original question was, "How can we help the rich get richer?"
As we mostly all know, one way to help out wealthy people is to lower capital gains tax. What if the original question then shifted towards, "How can we lower capital gains taxes?"
This appears to be an attempt to cut back on credits to lower capital gains taxes. Now, what credits are we talking about? This seems important to know! Let's take a look (I had to go back into SB 253, referenced above to find out). Here are the highlights (lowlights?)
Alternative Energy Production Credit
Alternative Energy Systems Credit
Alternative Fuel Vehicle Conversion Credit
Biodiesel Blending Credit
Biodiesel Production Facility Credit
Energy Conservation Credit
Geothermal Heating Systems Credit
Mineral Exploration Credit
Oh. So the point of this bill is to cut much support for energy, especially alternative energy, while decreasing capital gains.
What can be done about this?
I'm glad you asked! Go here, pick the communication medium of your preference (see, I'm easy to get along with!) and add your voice against this bill in its current form.