Legislators Hear Risks To Revenue, Set Official Estimate

State economists are expecting tax coffers will fill a little more slowly in Montana the next couple of years.

Stimulus money from the federal government has helped fill the state piggy bank, and income tax also rose steeply after the pandemic, according to recent budget reports.

Ahead of the 2025 Montana Legislature, however, the forecasters at the Legislative Fiscal Division and the governor’s budget office estimated slower revenue growth.

Lawmakers, in turn, took a conservative approach to budgeting.

Last week, after hearing the forecasts, the Interim Revenue Committee voted to set its estimate for revenue in advance of the session, and it adopted figures that are lower than the income that economists predicted would flow into state accounts.

The roughly $3.5 billion a year is a starting point for state budget conversations.

However, Ryan Evans, from the governor’s budget office, requested legislators continue to monitor revenue during the session and, if forecasts start to change, consider adjusting their formal estimates if necessary as well. The committee adopted official revenue estimates of $3.27 billion for fiscal year 2025, $3.53 billion for 2026 and $3.57 billion for 2027.

By comparison, a report from the Legislative Fiscal Division said the 2024 fiscal year closed out at the end of June with $3.8 million in revenue.

Sen. Greg Hertz, a Polson Republican who leads Senate Taxation, proposed the slight reduction of expected revenue compared to a preliminary figure the committee initially approved.

However, Hertz also said the legislature would have a clearer picture of tax collections in the middle of March and could subsequently adjust its estimates if necessary. He noted the figures are based on current law — not any changes the 2025 legislature may make.

Rep. Mark Thane, D-Missoula, said he appreciated the approach and agrees legislators will take another look at revenue before they adopt the state budget for the next two years.

“I think it’s wise for us to reduce the revenue estimate so that we don’t set ourselves with a spending target that might be excessive,” Thane said.

The committee adopted a surplus estimated to be roughly $1 billion.

However, Sen. Becky Beard, who serves as chairperson of the committee, said the figure will be closer to an estimate from the governor’s office, some $555 million, after some bills are paid.

Prior to adopting revenue estimates, the committee heard forecasts for the seven largest sources of revenue for the state, including property taxes, from the Legislative Fiscal Division.

It also heard a forecast from Evans of the governor’s budget office.

“Montana’s economy is as diverse as ever,” Evans said. “That’s good for the budget. It can be good for the economy. It certainly in some ways fortifies us against downturns.”

Evans said revenues are fairly flat, and a recession is not predicted, but it’s important to keep up-and-down economic cycles in mind nonetheless.

The report from the Legislative Fiscal Division noted residential values and taxes increased in the most recent cycle, and they are expected to go up again.

Initial data from the Department of Revenue suggests taxable value of residential property will jump another 21.5 percent for the 2026 tax cycle, according to the Legislative Fiscal Division.

Beard, the chairperson, said Montana residents are calling for accountability, and lawmakers must be able to answer their questions.

“One of the things we’ve been hearing resoundingly, over and over and over again, is taxes are too high,” said Beard, a Republican from Elliston.

The legislature is expected to take up proposals from Gov. Greg Gianforte’s property tax task force this session to address the problem. The legislature has adopted budgets that hold the line on spending, but state budgets also rely on a couple of sources that could change significantly in the future, said Amy Carlson, head of the Legislative Fiscal Division, in a risk report to the committee.

Last session, the legislature adopted a budget that is estimated to account for 16 percent more revenue than expenditures by the end of the 2025 fiscal year, Carlson said. She said lawmakers generally put that money into things that help absorb risk, such as its reserves and paying off liabilities.

But Montana relies heavily on income taxes, and doing so creates more volatility, Carlson said. A division report showed individual income tax accounts for 57 percent of ongoing general revenue.

Actions at the federal level also could have a significant impact on the state budget. While Montana is operating with a balanced budget, the federal government is spending 25 to 30 percent more than it’s collecting, Carlson said.

Federal funds account for 36.4 percent of the average state’s budget, but they account for 42.7 percent of state revenue in Montana, according to the division, citing a Pew Charitable Trusts study, Pew Fiscal 50.

“If they were to choose to balance their budget, that would have a material impact on Montana’s budget,” Carlson said of Congress.

Also citing Pew, she estimated unfunded pension liabilities to be 79.9 percent of state revenue, compared to 49.1 percent for the average state.

“In recent years, states have narrowed the gap between promised pension benefits and money set aside to pay for them, but the shortfall still amounts to nearly half of states’ own-source revenue — $836 billion in fiscal year 2021,” said the Pew study.

But in 2020, Montana’s unfunded liability was even higher, at 139.4 percent of state revenue, according to the Pew analysis.

Generally, Carlson estimated that 6 percent of state income could be characterized as “risky.”

She said the legislature could consider adopting a definition of “risky revenue,” and then dedicate income from volatile sources to things like pension liabilities or infrastructure backlogs.