Legislative fiscal staff warn Montanaof rising revenue volatility; recommend treating some income tax as "risky revenue"

Amy Carlson, legislative fiscal analyst, and Sam Schaeffer of the Legislative Fiscal Division told the House Finance Committee that Montanas revenue mix has become more income-tax dependent and therefore more volatile, and they presented simulations and policy options to reduce budget risk.

The analysts said the share of general revenues from individual and corporate income taxes has risen markedly over two decades, making year-to-year swings larger than in the past. "In 1 out of every 4 biennia or 1 out of every 8 years, you could expect a revenue shortfall in the vicinity of about $150,000,000," Schaeffer told the committee as he walked through simulations of historical declines converted to todays dollars. Carlson summarized the fiscal picture: "Montana right now is in a very strong financial position," but she and Schaeffer warned that the states risk is increasing.

Why it matters: the presenters said income-tax components that are most volatilenotably capital gains, partnership and business income, and certain dividend and interest receiptshave grown to make up a larger share of general revenue than in the early 2000s. Schaeffer showed that the combined share of individual and corporate income taxes rose from roughly 45% two decades ago to about 66% (and above 70% as recently as fiscal 2022), amplifying the budgetary effect of market swings.

Key figures and findings presented to the committee included: - Fiscal 2024 general revenues of about $3.8 billion were used as a baseline for simulations. Schaeffer showed scenarios that map past recession-era percentage declines onto todays revenue portfolio, producing illustrative shortfalls in the hundreds of millions of dollars depending on the scenario. - The analysts identified about $225 million in fiscal 2025 as the portion of individual income collections above an arbitrary threshold on their chart; they characterized that slice as a candidate for classification as "risky revenue" (they noted the threshold itself is discretionary and could be set higher or lower). - Converting earlier downturns to todays revenue mix could have produced aggregate two-year shortfalls in the $300$500 million range, depending on timing; a cumulative example using 200910 rates equated to a $533 million modern-dollar decline in one scenario.

Carlson and Schaeffer said the state already uses savings accounts and reserves but should consider policy refinements. Their central policy suggestion was that a portion of revenues identified as "risky" be treated as one-time or nonrecurring resources (for example: trust funds, one-time infrastructure or pension payments, or rebates) rather than as ongoing revenue supporting permanent spending. That approach aims to avoid structural budget gaps if volatile revenue does not recur.

They also presented comparisons between simulated needs and current reserves: one three-year simulation produced an accumulated exposure of about 43.4% of the general fund under the scenario they modeled, compared with a roughly 16% budget stabilization reserve rule the presenters referenced. The analysts said pairing risky-revenue rules with a set of expendable, "easy-to-reduce" spending items could materially reduce the needed reserve level in a mild recession scenario; in one example, cutting the targeted expendable category by 6% across three years reduced the simulated exposure from 43% to about 18%.

Beyond revenue composition, the presentation reviewed other fiscal pressures, including pension liabilities (the Pew Fiscal 50 comparison the analysts cited put Montanas pension liabilities at about 79.8% of the states own-source revenue in their most recent snapshot) and the states relatively high reliance on federal funding for programs such as Medicaid and transportation. The presenters flagged wildfire and infrastructure risks as additional budgetary uncertainties they are studying.

Committee members asked clarifying questions about which taxes and portions were included in the analysis. Sam Schaeffer clarified that the discussion of "general revenues" included state-collected property tax mills (the states 95 mills for school equalization, which Carlson said was about $450 million in fiscal 2024) and that one-time federal transfers (for example, ARPA) were not treated as ongoing general revenue in their analysis. Representative Vinton queried whether property tax was included; Schaeffer confirmed the state-collected portion was included.

The analysts told the committee the work is ongoing, with limitations acknowledged in the study: the simulations assume a static revenue portfolio and the arbitrary threshold for "risky" classification requires policymaker judgment. The finance committee last summer requested the additional work, and the presenters said their best recommendation at this stage is to pair a risky-revenue definition with mechanisms that shift that money to one-time purposes and to maintain or augment reserve and expenditure-reduction tools.

Looking ahead, the presenters said additional analysis of the newer parts of the economy and how they behave in downturns is needed before the Legislature adopts a formal rule or statutory change.

The committee did not take formal action on policy at the conclusion of the presentation; the session moved into executive action on separate legislation.