The Montana State Capitol building in Helena.

The Montana State Capitol building in Helena.

Thom Bridge, thom.bridge@helenair.com

State Republican lawmakers are pushing back against suggestions that federal tax cuts will put a $29 million hurt on state revenue collections and require a special meeting of the Montana Legislature to fix.

Republican legislators say the state’s top tax man, Revenue Director Mike Kadas, is misinterpreting the law. They now have a legal opinion by their own legislative staff attorney to back their claims.

At issue is a 20 percent federal deduction for pass-through businesses in the Trump tax plan, which state revenue officials say Montana will have to automatically duplicate because of the way state and federal tax law interact.

The $29 million loss comes as Montana wrestles with lower-than-expected tax collections. State government has already cut more than 100 jobs and trimmed delivery of public services. Kadas has said the only way the revenue loss might be avoided is by calling legislators back to Helena to undo the tax deduction.

But Republican legislators say no special session is necessary. Senate Majority Leader Fred Thomas, R-Stevensville, on Thursday produced a 15-page report explaining why the newly created deduction should be harmless. The analysis by legislative staff attorney Jaret R. Coles points to several times in the past when Montana avoided revenue challenges by breaking with federal tax rules.

The legislative report sets up a debate that may be settled only with a legal opinion issued by the state’s Republican attorney general, or a lawsuit. Thomas said he’s hopeful it won’t come to that.

“The attorney general has to always use his power cautiously and carefully. My thought is, we take this opinion to the Interim Revenue Committee, present it and have them say, ‘OK, we’re going to adopt Mr. Cole's letters and positions,'” Thomas said. “So, then you kind of have an official position of the revenue side of the Legislature.”

In strange twist, it’s the Department of Revenue that is arguing it should be collecting less taxes from pass-through businesses as a result of federal tax law changes and Republicans contending the reduction isn’t needed.

The Department of Revenue’s opinion would mean a double bonus for some income tax filers, but an unforeseen loss for state coffers.

Pass-through businesses include sole proprietorships, limited liability companies, partnerships and small corporations taxed as partnerships. The broad pass-through category includes small start-up businesses, as well as real estate partnerships and farms.

Pass-through businesses do not pay corporate income tax. Instead, the owner reports business income as personal income on a 1040 tax form. And in Montana, pass-through income appears on roughly 381,170 tax returns. Many of those filers have no income to report, but the minority do report significant amounts of income.

State Republicans have been questioning DOR’s assessment since the day after Christmas, when analysts at the D.C.-based Tax Foundation concluded that the new pass-through deduction had been written in a way to protect states like Montana that hardwire state income tax collections to terms set by federal income tax law.

Montana appears to be the only state with tax officials suggesting the federal shield is ineffective. Republicans accuse the Department of Revenue, part of Democratic Gov. Steve Bullock’s executive branch, of politicizing its analysis.

Montana’s Republican U.S. Sen. Steve Daines mounted an early push to get the tax credit for pass-through businesses included in the tax reform package.

Thursday, the Department of Revenue said in a statement that it stands by its conclusion that a revenue loss stemming from the pass-through income deduction is likely. However, the issue has become politicized and DOR is now referring all questions to state Budget Director Dan Villa.

“The Department of Revenue and the Office of Budget and Policy Planning are reviewing the recently passed federal tax reform bill (HR1) and its potential impacts on Montana’s tax system. With HR1 being the most significant federal tax reform in 30 years it will take additional time to sort through the bill. Although it will truly take months to work through the entire bill, as soon as a thorough, initial assessment is complete we will work with the governor to determine a careful path forward,” according to a statement attributed to Kadas.

No one has contacted Attorney General Tim Fox yet about offering a legal opinion on how Montana tax law should be interpreted, said Eric Sell, the AG’s communications director.

The Attorney General’s opinions in Montana can settle questions of law raised by public agencies or officials. The opinions carry the weight of law, unless overturned by a court or if the Legislature changes the law in question. Fox, a Republican, has issued six opinions since taking office in 2013.

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