What is federal deductibility and how would capping it ($5,000 single / $10,000 joint) help reduce Montanas high income tax rates?
“Federal deductibility” refers to the deduction on our state income tax returns for federal income taxes paid. For example, if a taxpayer has income of $80,000 and pays $7,000 of federal income taxes, he or she could deduct the $7,000 from the $80,000 leaving a difference of $73,000 on which to pay Montana income tax. If federal deductibility were capped, most taxpayers would continue to fully deduct their federal income taxes. For the remaining taxpayers, capping federal deductibility alone would increase the amount of income tax they would pay if that were all that was done. However, the income tax rates will be significantly reduced so that taxpayers would pay the same amount of tax that they would have paid if federal deductibility was not capped. Tax rates would be reduced a further 10% so that less tax would be paid at all income levels under the proposal than under current law.
