Lawmakers send second-home tax to governor

Following months of debate, Montana lawmakers have cast the final votes to send a landmark property tax relief measure to the desk of Gov. Greg Gianforte, aiming to reduce taxes on homeowners and landlords by, in part, raising taxes on second homes and Airbnb-style short term rentals.

Gianforte, a Republican, is likely to sign the package, which was developed by his property tax task force and served as a centerpiece of his reelection campaign last year.

The two bills enacting the tax package, House Bill 231 and Senate Bill 542, passed the Legislature with bipartisan votes that split both Republican and Democratic caucuses.

Supporters argued that the measure, while admittedly imperfect, will rebalance Montana’s complex property tax system to provide substantial residential property tax relief while working around the lack of a statewide sales tax and Gianforte’s opposition to a long-term fix that pays for property tax reductions with income tax dollars.

Opponents worried that the measure will shift higher taxes onto business properties and resident-owned second homes. The measure’s critics also expressed frustration over a messy legislative process that ultimately split implementation of Gianforte’s policy across multiple bills subjected to major amendments in the final days of the session, suggesting those changes might expose the bills to litigation.

Gianforte had initially pushed lawmakers to pass the tax package early in the session, saying that timing was necessary for the state Department of Revenue to implement the second-home tax this year. As debate over tax relief stretched into the session’s closing days, however, supporters added interim tax rates and a $400 rebate intended to tide over taxpayers until the full package takes effect next year.

The package’s architect, Conrad Republican Rep. Llew Jones, said on the House floor Wednesday that the measure will produce a “significant” tax reduction for owner-occupied homes and long-term rental properties, saying a $360,000 house will, on average, pay $719 less in taxes next year as a result of the package.

The exact impact on individual homeowners will depend on a variety of factors, including the value of their specific property, the composition of their local tax bases, and how the cities, counties and school districts they reside in are setting budgets. Residential properties that the department doesn’t qualify as primary homes or long-term rentals are likely to see substantial tax increases.

The tax relief measure works by adjusting the rates that convert each property’s market value to the taxable values used to calculate tax bills — essentially determining how much of a home’s value is subject to taxation. Dialing those rates up or down gives lawmakers a way to shift more or less tax burden onto different classes of property. However, because of how most local taxes are calculated, reducing rates on one type of property raises taxes on other types instead of reducing overall collections.

As a result, lawmakers had to contend with the reality that any effort to offer meaningful tax cuts to residential properties, which saw taxes rise 21% on median between 2022 and 2023, will push higher taxes onto agricultural properties and businesses unless tax relief measures pull in separate revenue from outside the property tax system.

“At the state level, we don’t have much control over the vast majority of property tax. So we are trying to deliver to our constituents out of a pie that we can’t shrink,” Sen. Wylie Galt, R-Matinsdale, said during debate on the senate floor Tuesday.

Once implemented, the second-home tax approach will divide residential properties into two tiers, applying higher rates to second homes and short-term rental properties in an effort to backfill residential cuts and minimizing spillover onto business properties. The package also includes several rate tiers that lean the tax system harder on high-value homes in an effort to focus more relief on lower-value properties.

The package also tweaks rates for agricultural and commercial properties, dialing down rates on lower-value commercial properties in an effort to shield small businesses from the tax shift.

Homeowners and landlords who rent their properties will have to apply for a “homestead” exemption qualifying them for the lower rates starting in 2026. The legislation specifies that qualification will be automatic for homeowners who claim rebates this year. Homeowners who receive higher tax bills after failing to apply will be able to qualify via an appeals process.

Even with the backing of a Republican governor in a Republican-majority Legislature, the second-home tax ran into legislative headwinds, facing particular opposition from hardline Republicans who balked at the notion of raising taxes on some types of property to lower them on others.

“Unfortunately, all we did was just rearrange who is paying property taxes in Montana,” Senate Taxation Committee Chair Greg Hertz, R-Polson, said at a post-session press conference Wednesday.

Some business taxpayers, including major industrial sectors that lobbied against the package, have seen their taxes decrease in recent years as rising home values have pulled more tax burden onto residential properties. NorthWestern Energy, for example, saw its property tax bill drop by about 20%, or $36 million, between 2022 and 2023.

At multiple points in the process, including the final votes, Democratic support was necessary to keep the bills from stalling.

In a joint statement emailed Wednesday, Senate Minority Leader Pat Flowers, D-Belgrade, and House House Minority Leader Katie Sullivan, D-Missoula, noted that their caucus had negotiated several amendments that shifted the bills to focus more relief on lower-value properties.

“We fought every step of the way to make these bills provide more relief and more affordability for everyday Montanans,” Flowers and Sullivan wrote.

The tax package also ran into opposition from Montana’s largest city, Billings, where officials have argued their city charter will prevent their tax collections from adjusting like most other jurisdictions. Supporters added provisions intended to address those concerns, but failed to reassure several Billings-area lawmakers who ultimately opposed one or both implementation bills.

“I really wish I could vote yes on some property tax reform. But for my community, the risks are too big,” said Sen. Emma Kerr-Carpenter, D-Billings. She was the only Senate Democrat to oppose the package.

Gianforte applauded the measures’ passage on social media Wednesday, writing “I’d like to thank the hardworking members of the Montana State Legislature who voted for meaningful and permanent property tax relief this session.”