MISSOULA — When the Legislature established a new appraisal process in 1972, it required the state to “appraise, assess and equalize the valuation of all property,” and it required those properties to be taxed in accordance with the law.
But over the last few years, the Legislature has neglected the call for equalization and its appraisal process has fallen deeply out of balance. The result has left Montana's tax system in “serious trouble,” requiring homeowners to pay a greater share of taxes while corporate and business taxes fall.
“Taxes have been shifted unfairly to residential property, and they've been shifted away from the other properties,” said Dan Bucks, a nationally recognized expert on taxation. “Homeowners and renters are paying taxes that they shouldn't be asked to pay – taxes that belong instead to various corporate and business classes of properties.”
Bucks, the former director of the Montana Department of Revenue, met with members of the Missoula City Council on Wednesday to detail the state's shift in taxation and the ever-increasing burden it has placed on homeowners.
In the last year, he said, residential property taxes jumped nearly $270 million in Montana while commercial property taxes rose $37 million. In comparison, corporate and mining taxes fell by $72 million while taxes on agriculture and forest land fell by nearly $4 million.
“What this means is that residential property not only ended up paying a bigger share of state and local property taxes, but on top of that, they also paid for the $72 million in tax cuts enjoyed by other classes of property. It's a double effect in the tax shift,” Bucks said.
The root of corporate tax cuts
While residential property taxes have spiked in recent years alongside home values, taxes on corporate and business properties have fallen, though Bucks said that doesn't paint a true picture of corporate wealth in Montana.
The state every two years appraises residential properties, and it has powerful tools to do so. Bucks described it as the gold standard for valuation and it's backed by a large database of residential property sales.
But in comparison, corporate and business properties aren't valued by the same standards and the tools used by the state amount to a broken yardstick. When taken together, the state overvalues residential properties while intentionally undervaluing corporate and business properties.
“When it comes to these other properties, we have inadequate methods and inadequate data,” said Bucks. “The measuring tools are different from one kind of property to another, and they don't produce equal results.”
Some argue that Western Montana is now driven by housing wealth as industry has dried up. But Bucks said that's a false argument. There's other wealth the state has failed to measure, or, through intentional legislative loopholes, is hiding from taxation.
The result has cost the state $100 million in lost revenue. It also has left homeowners to cover the taxes that aren't paid by other classes of properties, Bucks said.
“Not only is it unfair, it's also unconstitutional and illegal in my view,” Bucks said. “The state's constitutional provision and the statute are being violated, and with a great and unfortunate impact on homeowners.”
A complicated formula
Montana's current approach to taxing residential properties is largely based on intangibles, including location. Bucks said such intangible values are captured and taxed by the state. But corporate properties, or centrally assessed properties, are offered an exclusion from similar intangible values.
Bucks used a cell phone as an example. If one were to remove the Wi-Fi mechanism, the apps and the software, then the phone would be seen as having little value. The state has done the same when taxing such entities as telecommunications by neglecting the value of the company's federal operating license, radio waves, towers and software.
“This type of legislative loophole has shifted roughly $100 million away from these companies, given them the tax break, and placed it on other property owners, primarily residences, who pick up the largest share of the cost of that loophole,” Bucks said.
Not only does the current system place a heavier burden on homeowners, it's also impacting schools, Bucks said. And when schools need added funding, they again turn to residential property owners to make up the difference.
The root of the problem lies with the state's failure to properly define property wealth.
“If you don't properly value property and equalize the value of property, you're turning some poor districts into rich districts and rich districts into poor districts. It fouls up school equalization,” Bucks said. “This situation is not right and it needs to be corrected. I'm hoping we can find our way again in this state where we have a viable, fair and equitable property tax system.”
