A new analysis by the Legislative Services Division shows how a proposed property tax initiative could shift taxes away from certain residential properties and result in lost revenue for local governments or additional tax shifts.
Proponents of Constitutional Initiative 121 are currently gathering signatures to qualify it for the November general election ballot. CI-121 amends the Montana Constitution to revise the property tax system in 2024 by reverting to 2019 base values for most residential property, by holding annual changes in certain residential property value to the lower of 2% or the consumer price index (CPI), and by limiting value-based residential property taxes to 1% of assessed property value.
The limit on annual value changes does not apply to newly constructed property or property with a change in ownership or significant improvement. These properties will be valued at fair market value for the year of construction, improvement, or change in ownership, and future annual changes in value will be limited to 2% or CPI.
Precise impacts of CI-121 are difficult to analyze because of differences in taxing jurisdictions’ mix of property types and level of property taxes as well as unknown factors such as how the initiative would be implemented and when homeowners will sell their homes. However, absent changes to property tax rates or procedures by which local governments calculate their maximum property tax levies, a couple of outcomes may be expected.
Assuming local governments hold revenues constant, limiting value changes for many residential properties to 2% or CPI will shift property taxes from capped residential property to non-capped residential property and to non-residential property. Local governments are permitted to levy mills sufficient to raise the amount of revenue raised in the prior year plus a small inflationary adjustment. The annual limit on residential value changes will reduce the taxable value of some residential property and increase the mill levy required to raise the revenue target. A higher mill levy will shift taxes to taxpayers whose values are not limited. This shift will occur in all taxing jurisdictions but impact areas with a large share of residential property the most.
The communities affected by the 1% limit on ad valorem property taxes can be identified by looking at current property taxes. As outlined in the CI-121 fiscal note, a 1% property tax limit on residential property taxed at the 1.35% statutory tax rate is equivalent to 740.74 mills. Most residential property subject to more than 740 mills will exceed the 1% property tax limit. (An exception is high-value homes: the value of dwellings above $1.5 million is taxed at 1.89% so the mill rate at which the 1% limit is met is lower but varies depending on the total value of the land and dwelling.)
The following maps show potential lost or shifted revenue by city and county using data provided by the Department of Revenue. Levy districts with mill levies greater than 740.74 mills are grouped together by city or by county (if the levy district does not contain a city). The estimated lost or shifted revenue is calculated by applying the mills that exceed 740.74 mills to the residential property value of the levy district and totaling by city or county. (The estimated lost or shifted revenue does not account for the lower mill rate at which the 1% limit impacts high-value dwellings so the numbers may be understated.)
The map on the left shows the total potential lost or shifted revenue by city and county, while the map on the right shows the same information but adjusts the potential lost or shifted revenue by the population of the city or county.
If CI-121 is enacted, the 2023 Legislature will have to make decisions about how to implement the new constitutional provisions. The limit on annual value changes will shift taxes away from capped residential properties. The effects of the limit on residential ad valorem property taxes are less certain and could include reductions in property tax revenue, regional shifting of property taxes, or new sources of revenue to replace property tax revenue. Regardless of what the Legislature decides, taxpayers and communities across the state would see changes to the property tax system under CI-121.
