Compromise legislation cutting income taxes headed to governor’s desk

Tax breaks could soon be coming to Montanans, but not in the form of property tax relief — at least not yet. Instead, the Montana Legislature on Tuesday passed a bill cutting income taxes and increasing the earned income tax credit, sending the measure to the governor’s desk. 

House Bill 337, sponsored by Speaker of the House Rep. Brandon Ler, R-Savage, ended up as a compromise between the governor’s preferred plan for the largest tax cut in state history and a middle-class tax cut preferred by a more conservative wing of the GOP and some Democrats.

Under current Montana income tax laws, there are two tax brackets for regular income — a 4.7% bracket and a 5.9% bracket — which splits at $21,100 for single filers and $42,200 for joint filers. 

The new system would increase the threshold for the lower tax rate during the next two tax years so that single filers would pay the 4.7% rate on their first $47,500 in 2026, and $65,000 in 2027. For joint filers, they would pay 4.7% on their first $95,000 of income in 2026 and on the first $130,000 in 2027. 

Above those thresholds, taxpayers would pay a top tax rate of 5.65% in 2026 and 5.4% in 2027.

The increased income threshold would also apply to long-term capital gains income, which is taxed at 3.1% and 4% rates. 

“Montanans work hard for their money, and HB 337, ensures they keep more of it—now and in the future. HB 337 delivers real, meaningful income tax relief for working families across our state,” Ler said in a press release following the Senate vote. 

The bill also increases the Earned Income Tax Credit from 10% of the federal EITC to 20%. 

The Senate passed the bill without any amendments from the upper chamber on Friday to expedite its path to the governor’s desk. All Senate Republicans supported the bill, while all but two Democrats opposed it on the final vote due to the cost of lowering the top tax rate. 

Sen. Dave Fern, D-Whitefish, said he wants to see taxes as low as possible. However, while he was campaigning for office, he said he didn’t hear anyone asking for income tax cuts. 

With property tax relief still left to be hammered out by the Legislature — which Fern said he was expecting to be a costly endeavor — spending more money on income tax cuts is not the direction he wants the chambers to take. 

According to the bill’s fiscal note, the income tax breaks will decrease the state’s general fund collections by $20 million during the 2026 fiscal year; $190 million during 2027 and increasing to $277 million by 2029.

“$277 million is a little bit too much,” Fern said. “I’m going to oppose this bill because I think that it’s well meaning, but it’s just too expensive.” 

The compromise bill costs roughly $40 million per year less than the governor’s preferred plan starting in 2027. 

Gov. Greg Gianforte has long touted his plan to bring about the largest income tax cut in state history by cutting the top income rate — which most Montanans are subject to — by a full percentage point over the biennium, and pairing that with an increase of the EITC to 15% to target lower-income residents. 

However, his plan met resistance in the Legislature. 

A plan backed by Senate President Matt Regier, R-Kalispell, and more conservative Republicans in the Senate, would have kept the top rate in place, but greatly expand the threshold where the top rate would kick in — by more than twice what Ler’s bill did. 

Another bill, introduced by Democrats, would have created an income-based tax credit targeting exclusively the lower and middle-income taxpayers. 

Both bills were tabled in the House Taxation Committee earlier this month. 

Sen. Greg Hertz, chairman of the Senate Taxation Committee, previously criticized the governor’s plan because it “started at the top.” But he called HB 337, as a compromise, “a good bill for everyone.” 

The final income tax package seems to appease all factions in the government — by reducing the top rate and increasing the EITC as the governor wanted, while targeting middle-class Montanans, as was the target of Democrats and conservative Republicans. 

But the governor, who has spoken extensively about the desire to deliver a larger tax cut for Montanans, still has the final say.   

“I still believe our income tax cut is the most conservative proposal before the Legislature, reducing the tax that most Montanans pay, benefiting Montanans at every single income level,” Gianforte said at a press conference last Thursday, before HB 337 had passed the Senate. “While I know there’s a lot of different ideas out there, we must keep this principle at the top of our minds. The money belongs to the people of Montana and not the government.”

The governor’s office did not respond to questions about whether Gianforte supports the compromise bill or will sign it.