Among several changes to Montana’s income tax system that took effect at the beginning of the year is a provision that makes income from tips subject to state taxes.
The shift aligns Montana with the federal tax system, in which tips have long been taxed alongside salaries and wages. It also means that many service-sector workers will likely have their state income tax obligation increased by hundreds of dollars a year.
The change was made by the 2021 Legislature as part of Senate Bill 399, a comprehensive reform measure that reshaped many parts of Montana’s income tax system, including repealing a variety of tax credits and collapsing the state system into just two income tax brackets. Many of the bill’s provisions, including the tipped income change, didn’t take effect until the beginning of this year.
Montana’s top-bracket tax rate, which now applies to annual taxable incomes over $20,500, is 5.9%. That means that many service sector workers will owe an additional $5.90 in state taxes for every $100 of tip income they report on their tax filings.
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According to the Montana Department of Revenue, about 22,300 Montana taxpayers reported a combined $105.4 million in exempt tipped income in 2021. If that income were to have been taxed at 5.9%, those taxpayers would have paid a combined $6.2 million more in taxes, or $279 more per taxpayer, on average.
As the bill was debated on the Senate floor in April 2021, sponsor Sen. Greg Hertz, R-Polson, argued that it isn’t fair to let waiters and waitresses, for example, take their tip earnings home without paying state income taxes while colleagues who are compensated entirely on a wage basis do pay.
“It’s just not fair — it makes no sense for these individuals to not have to pay their fair share of taxes on just a particular type of income that they get,” Hertz said.
Democrats pushed to keep the exemption, saying it is unfair to increase taxes on workers who are in many cases scraping to get by.
“We’re talking about our lowest-income Montanans here,” said then-Senate Minority Leader Jill Cohenour, D-East Helena.
The broader bill, which Hertz described as an effort to make it simpler to file Montana income taxes by minimizing the differences between state and federal tax codes, ultimately passed the Legislature with support from nearly all Republicans and opposition from nearly all Democrats.
Montana remains one of seven states that doesn’t credit tip income against its minimum wage, according to the Pew Research Center, meaning restaurants and other service businesses can’t pay tipped workers less than minimum wage if tips make up the difference. While the state’s tight labor market has put pressure on many employers to increase their pay above minimum wage in recent years, Montana’s current legal minimum wage is $10.30 an hour.
This story is published by Montana Free Press as part of the Long Streets Project, which explores Montana’s economy with in-depth reporting. This work is supported in part by a grant from the Greater Montana Foundation, which encourages communication on issues, trends, and values of importance to Montanans. Discuss MTFP’s Long Streets work with Lead Reporter Eric Dietrich at edietrich@montanafreepress.org.
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