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A bill to implement income tax rate reductions if certain fiscal measures are met got an initial OK in the House on Friday.

Senate Bill 182 is from Republican Sen. Greg Hertz, R-Polson, and was carried by Rep. Jeremy Trebas, a Great Falls Republican, in the House. It cleared second reading on a 66-33 party-line vote with GOP support and faces one final vote in the House before moving to the governor's desk.

The legislation is part of package of bills from Republican Gov. Greg Gianforte to lower the state's top income tax rate and make other tax reductions. Two other bills that would reduce the top income tax rate down to possibly 6.5%, from 6.9%, are advancing and likely to be combined.

Gianforte has acknowledged he wants to bring the top tax bracket down more than the 6.75% rate originally proposed at the start of the session, but said that tough economic conditions caused by the pandemic meant an incremental approach was necessary. SB 182 was seen as a way to achieve further reductions over time.

The bill sets up a complex series of triggers that could also lower the state's top income tax rate.

Trebas said lowering the tax rate will attract businesses to Montana and spur economic growth. In support of Gianforte's tax package, Montana Republicans have pointed to the state's top income tax rate being higher than surrounding states, though Montana does not have a general sales tax like the other states.

Minority Leader Kim Abbott, a Democrat from Helena, said it should fall to the Legislature to determine if it's appropriate to reduce tax rates, not a formula Abbott said could trigger and not be reversed if the state later hit an economic rough patch.

Abbott also said the focus is on higher-income earners, not those in the bottom tax brackets Democrats would like to see relief targeted for.

Under the legislation, money would flow into a new fund to offset a tax cut if the state's saving account, called the budget stabilization reserve fund, is full.

The savings account gets money when revenues come in higher than projected. If it fills to the maximum, which is about $115 million, any additional higher-than-expected revenues would be split between a capital development infrastructure fund and the taxpayer reduction fund the legislation creates — as long as other requirements were met.

One of those tests is calculating if the revenue growth outpaces what's called the annual compound growth rate, which provides for a seven-year snapshot of revenue growth. If revenues outpace that measure, the money can flow to the tax reduction fund.

The bill would also capture some of the money budgeted for state agencies if it isn't spent. By law, part of that over-appropriated money must go into the fire fund. But if the fire fund is full, which is about $105 million, under Hertz's bill 75% of any other excess goes to the tax reduction fund, with the remaining going to the general fund.

Then to tap the tax reduction fund to offset an income tax cut, another series of measures must be met: the budget stabilization reserve fund has to be full and the fire fund balance must be roughly 75% of the maximum.

At that point, in September of even-numbered years, the governor's office would review any possible tax rate cuts to make sure they wouldn't trigger a segment of state law that calls for budget reductions in the face of lower-than-expected revenues and check to see if the fire fund will be sufficient for that year's fire season.

If those tests are met, the governor can decide, in consultation with legislative interim committees, to implement the triggered tax reductions.

If the triggers aren't met or the governor decides to not make the tax cut, the money in the tax reduction fund goes back to the general fund.

The amount the top tax rate is cut would be based on how much is in the tax relief fund. For example, if the fund has between $10 million and $20 million, the cut would be 0.025%.

The rate goes up the more that's in the fund and if it exceeds $100 million, the cut would be 0.25%, the maximum allowed over a biennium.

The bill has a termination date of Dec. 31, 2025, though any tax cuts made would be permanent.

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