September 2000

President proposes a sales tax
that's not a plain, old sales tax
In a recent editorial (Sept. 6, 2000), the Missoulian questioned the wisdom, even the sanity, of anyone who proposes a sales tax in Montana, for whatever worthy purpose. The editorial focused specifically upon a suggestion I made in the annual "State of the University" address. I outlined some goals for the next five years and stated our need for additional funds in order to achieve those goals. The editorial accepted the goals as worthwhile and "doable" and also noted that support for education at all levels has eroded in Montana during recent years but rejected my suggestion about the means to reverse the damage. The summary of the editorial put the criticism as follows: "Sales-tax talk could overshadow worthy goals at UM."

I write specifically to correct a misimpression conveyed by the editorial. In my comments, I did suggest "a well-crafted sales tax" as a possible solution to the challenge before us in Montana. Many people, not just those in higher education, believe that the state cannot change its intolerable position as third from last in a listing of states ranked by average annual per capita income unless it invests in human resources and economic development. The states that have invested in their higher education systems and held them accountable have prospered. North Carolina and Georgia provide examples of the value and benefit of such a strategy. My suggested means of securing the funds for investment grew out of recognition that the state must find a way to respond to the challenge that has plagued us for a decade.

State support for higher education in Montana ranks nationally at a comparable level with the average annual per capita income: dead last. Montana provides the lowest support per student in higher education of any system in the country, and dedicates the lowest portion of every thousand dollars of that low average annual per capita income to higher education of all the states, roughly $7.50. These rankings make the issue very clear. Not only does the state invest much less than other states, including those in the region, it also dedicates a much smaller portion of every thousand dollars of average income. I submit that we should not be surprised when we find that the average annual per capita income matches the investment level.

How can we respond to this challenge? Policy makers have only two ways of finding funds to invest in higher education. They can either reallocate the existing pool, thereby diverting funds from their current uses and depriving other critical programs of needed support; or they can identify new sources of revenue, which typically means adopt new taxes or increase existing ones. In my view, the pool of available funds will not stretch far enough to support current service levels in critical programs in the state. Thus, reallocation will not solve the problem and if implemented will exacerbate it. That leaves the second alternative, and everyone knows that most people demand tax relief, not more taxes. So how can we solve the problem?

I suggested a sales tax that includes a rebate to Montana residents in their property and income tax bills for the sales tax they pay, thus holding them harmless, with actual refunds to those residents who pay no income or property taxes. As another alternative, residents simply will not pay the tax. But, since as usual the devil is in the details, many people will want to know how such a tax works. Several approaches come to mind. As one approach, the state can assist stores and businesses to implement the sales tax by charging it only to non-residents. The cost of the technology for the seller to check the residency of the purchaser is minimal and can come from the proceeds of the tax. As an alternative, residents can take a percentage of their income and claim it when they file their tax returns; or if they pay no tax, can claim a refund. Certainly other possibilities exist to reach the desired objective. Most important, I believe Montana residents will need to know the procedures to hold them harmless before any such tax is implemented. Some also have inquired about the amount of revenue potentially available. As many people know, the voters approved a constitutional amendment that limits a sales tax to 4 percent. The estimates I have seen of currently untaxed non-resident expenditures in the state -- i.e., excluding gasoline sales and the cost of hotel and motel rooms -- produces an estimated revenue stream of at least $40 million. When the number of visitors to the state grows, as it clearly will in response to the Lewis and Clark Bicentennial, so will the revenue. Why not claim a portion of it for investment in the state's future?

Thus, while I suggested a sales tax, the kind of tax I have in mind will not impact Montana residents. Several other states have used a similar approach, in each case because of the relatively large number of visitors to those states and the sense that the visitors should have the opportunity to help support the critical infrastructure of the states. In that regard, we need to remember that non-residents who attend public colleges and universities in Montana pay the full cost of instruction; they receive no state support. It seems only fair to allow other non-resident visitors to pay their way as well. As you can see, I have not advocated a traditional sales tax, but a variation on one that has some potential to assist us in responding to the challenge.

Let me add that the challenge we face in Montana differs only in magnitude, not in kind, from that all states must confront. In fact, national figures reveal that state and student-family contributions to support higher education have fallen in recent years, while the level of federal support -- essentially through student financial aid -- has remained stable. From about 1950 to 1980, state support rose from 35 to 55 percent of the total, while student-family contributions declined from about 50 to 35 percent. From 1980 to 1999 the reverse occurred: The state contribution fell from 55 to 43 percent, while the student-family contribution rose from 35 to 48 percent. Most recently, between 1993 and 1998, higher education's share of the national GDP (Gross Domestic Product) fell from 1.83 to 1.71 percent, a loss of $10.2 billion, because of a reduction in the state and student-family contributions. Failure to redress that trend will inevitably result in a decline in the competitive position of the United States.

The same page that featured the editorial I mentioned also had a piece by Robert E. Hall of the Hoover Institution titled "The remarkable prosperity of college graduates." Hall noted that college graduates "have really cleaned up" in income growth during the last ten years. Why? "The industries that hire large numbers of college graduates are technology users." Even though he anticipates that the economy will cool in the months ahead, Hall concluded: "But the message is durable that college matters. College graduates are the architects of the new economy, and they have been amply rewarded for that role." Unfortunately, Montana has not realized that benefit and will not unless and until it makes new investments in its higher education system. Those who dislike my suggested means of making those investments have the responsibility to propose alternatives.

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