A Big Ball of Wax

As you’ll probably remember, a month or so ago Republicans in Helena were all about cutting your taxes. They claimed to be upset over the fact that the state had $400 million dollars in the bank that was really the taxpayers’ money, and they were going to by God send it back where it belonged!

Well, it turns out that they were just kidding. The plan now is to claw that money back from homeowners and small business folks and farmers and ranchers and give it to – you guessed it – a handful of corporations. The vehicle for this sleight of hand is SB 394, sponsored by Senator Mark Blasdel. Backed by the Montana Taxpayers Association, the Chamber of Commerce, corporate lobbyists and the other usual suspects, SB 394 sailed through the Senate with hardly a peep and is now in the House, where it will no doubt be joyously embraced.

You’ve got to get a little wonky to understand how this bill works, but bear with me. It’s kind of interesting, albeit in a depressing way.

It turns out that under Montana law there are companies that are “centrally assessed” for property tax purposes. These are companies that have some sort of extensive unit operation using a bunch of land, buildings and equipment that spills across county lines. Think of a pipeline or cell phone company network or railroad. For property tax purposes, the Department of Revenue calculates a statewide unit value for these outfits and then uses a formula to allocate that value out to the various taxing jurisdictions – cities, counties, districts, etc. – where they operate.

Here’s the rub: only the tangible, physical assets of centrally assessed companies – the stuff you can actually touch – are subject to the property tax, while intangible assets – things like intellectual property, licenses, customer good will, and the like – are not. Now there’s really no sensible way to sort out the value of the stuff that’s taxable versus the stuff that’s not. After all, all of it’s valuable because it produces an income for the owners, and all of the assets, tangible and intangible, work together in a great big ball of wax to make that income happen. There’s no obvious way of picking a chunk of wax off the ball and saying what it’s worth in isolation.

But the law says that’s what has to be done and accountants somehow have to figure out a way to do it. Of course the companies, who pay the accountants, want them to assign as much of the value of the business as possible to intangibles (so they can low ball their taxes), and for years now they have been locking horns with the Department of Revenue – in appeals, hearings, court cases and legislative committees - over how that gets done.  And while some companies have been fairly successful at exempting a growing share of their property from taxes, they never seen to be quite satisfied. Enter SB 394. You can read it for yourself (it’s quite short and deceptively simple) so I’ll spare you the details, but the bottom line is this: SB 394 allows centrally assessed companies to treat even more of their property as intangible than they already do, and in the process, gives them a great big property tax cut. The numbers get pretty impressive.

For example, when it comes to calculating the value of intangibles, there appears to be nobody more inventive than Verizon. They already claim that 70% of their asset value is intangible, and the Department of Revenue estimates that under SB 394, that will go to 82%. Think about that. Verizon is saying that if, tonight, space aliens descended on Montana and took all its physical assets away – if  its cell towers, retail stores, computers, office desks, coffee makers, wires, and switching equipment were all beamed up and gone forever – the company tomorrow would still be worth 82% of what it’s worth today!

By making itself even more intangible than it already is, under SB 394 Verizon will lower its state property taxes by about $3 million a year. When all the other centrally assessed companies pile on, state property taxes (which pay for schools) will go down by something north of $11 million a year. Where the money will come from to keep schools whole and make up for that largesse is anyone’s guess, but my guess is the state General Fund and that means – you guessed it – your income taxes!

But wait, there’s more! When all this property gets declared intangible it will disappear from the tax bases of school districts and local governments all across the state. To keep the doors open and the lights on, school boards, county commissions, city councils and the like will have to raise property tax mills, and the Department of  Revenue figures that that will increase the property taxes of homeowners, local businesses, farms and ranches by about $45 million a year. Make no mistake about it: SB 394 will raise your property taxes.

So before you start thinking about what you are going to do with that juicy income tax cut the Republicans promised you, just remember you might need it when your property tax bill shows up in the mail box.