Montana's Tax Cuts Grew the Economy and Raised Revenue

Conventional wisdom often suggests that cutting income tax rates inevitably reduces government revenue. Montana's experience tells a different story. After steadily lowering its top individual income tax rate from 11.0 percent in the 1980s to 5.4 percent today, the state has experienced substantial growth in income tax collections. Rather than shrinking the tax base, Montana's reforms appear to have strengthened it by encouraging greater economic activity.

Lower Rates, Higher Collections

According to an analysis by the Mountain States Policy Center using Montana Department of Revenue data, individual income tax collections increased from $1.06 billion in fiscal year 2014 to $2.24 billion in fiscal year 2024, an increase of 111.1 percent. Even after adjusting for inflation, collections increased by approximately 59 percent, demonstrating that revenue growth substantially outpaced rising prices.

During the same period, Montana continued simplifying its tax code while reducing marginal tax rates. The state also experienced strong economic and population growth, broadening the number of taxpayers and the amount of taxable income.

These results demonstrate that lower tax rates do not necessarily translate into lower tax revenue. The size of the tax base matters just as much as the tax rate applied to it.

The Economics Behind the Results

Economist Art Laffer popularized this principle in the 1970s through what became known as the Laffer Curve. The concept recognizes that tax policy influences economic behavior. Higher marginal tax rates reduce the incentive to work, save, invest, and start businesses, while lower rates increase the reward for productive activity.

Those incentives are particularly important in state tax policy. Capital can move across state lines with relative ease, and businesses and households increasingly choose where to locate based in part on a state's tax climate. Lower tax rates make a state more competitive by encouraging investment, attracting new residents, and creating stronger incentives for work and entrepreneurship.

As economic activity expands, so does the amount of income subject to taxation. Even with lower tax rates, a larger tax base can generate higher overall revenue.

Tax Competition Rewards Pro-Growth Policies

Montana's reforms illustrate the benefits of tax competition. By lowering marginal income tax rates, the state became more attractive for businesses, investors, and working families while allowing taxpayers to keep more of what they earn.

This does not mean every tax reduction will fully offset its cost under every circumstance. Revenue outcomes depend on economic conditions, the structure of the tax system, and the magnitude of the rate change. However, Montana's experience demonstrates that policymakers should not assume lower tax rates automatically lead to lower revenues. Stronger incentives can promote economic growth that expands the tax base over time.

CFE Takeaway

Montana's experience reinforces a core principle of sound tax policy: lower marginal tax rates encourage work, savings, investment, and entrepreneurship. As people and businesses respond to those incentives, economic growth can expand the tax base and support higher revenues even with lower tax rates. States seeking long-term prosperity should focus on creating competitive tax systems that reward economic activity rather than relying on higher tax rates to generate revenue.