Gov. Steve Bullock's proposals to temporarily raise taxes to help close a $227 million budget hole got decidedly mixed reviews on the opening day of a special legislative session in Helena.

A $30 million tax proposal, financed by a 3 percent charge on some funds invested by the quasi-state-run workers’ compensation insurer, was widely criticized by those who testified, while pitches to increase the tax charged on accommodations and rental cars fared better.

No votes were taken in several joint committees that met Monday, though by Tuesday morning action should show if the governor’s measures will advance further or be shot down by a Republican-controlled Legislature.

The budget is not balanced because revenues came in lower than the Legislature projected at the end of the last session in April and the state spent $75 million fighting the summer's wildfires.

Bullock, a Democrat, has proposed addressing the budget imbalance by dividing it into thirds, with $76 million coming from cuts he’ll make to state agencies, $75 million from fund transfers and another $75 million from tax increases.

The biggest chunk of the tax increase portion — $30 million — would come from the fee Bullock's office proposed charging the Montana State Fund on investments of over $1 billion made with the state Board of Investments.

“It’s just plain wrong,” said Bob Biskupiak, deputy insurance commissioner under Republican Commissioner Matt Rosendale. “I ask you where this money came from. It came from the policyholders and it should stay with the policyholders.

In Montana, most employers are required to carry workers compensation insurance. Montana State Fund must take all companies, no matter their size or risk prospects.

Some who testified on Senate Bill 4 representing industries such as contractors and loggers called the bill discriminatory because it does not apply to larger insurers.

Ali Bovingdon, deputy chief of staff for Bullock, said that criticism was misplaced because the fee is charged on portfolios managed by the Board of Investments, not insurers.

Kevin Braun, general counsel for Montana State Fund, said charging the management fee reminded him of past legislative actions that pulled money out of the state fund at amounts great enough to trigger insolvency in the early 2000s, creating a situation where the state had to create and backfill an Old Fund to handle older claims.

“This is the type of thing that really led to the Old Fund,” Braun said. “When the Legislature taps a funding source, they repeatedly tap that funding source. … Once (the Old Fund) was tapped by the Legislature it was tapped until now we all know it was bust.”

Braun also raised legal concerns about tapping the State Fund investments. But Bovingdon said state Supreme Court opinions and the Legislature's ability to change laws alleviate those concerns.

Support for the bill, carried by Sen. Ed Buttrey, a Republican from Great Falls, came from the governor’s office, the Montana AFL-CIO and AARP, which said it would rather see the fee than more cuts to state government. All of Bullock's revenue increases heard Monday were carried by Republicans in an effort to build bipartisan support.

The bill specifies that the cost of charging the management fee cannot be passed on to policyholders, and Buttrey argued the fee will not tap reserves, only reduce the amount paid into reserves going forward. The bill would sunset in 2019.

Bullock’s other two tax proposals, raising the rates charged on rental car taxes from 4 percent to 10 percent and upping the amount of money the general fund gets from the accommodation tax from 3 percent ot 6 percent, received a warmer welcome. Most who testified in support focused not on the changes the bill would bring, but how it would stave off deeper cuts Bullock would have to make in lieu of more revenue coming in.

Supporters said doubling the lodging tax to 6 percent and increasing the car rental tax from 4 percent to 10 percent to help pay for Montana's unexpected fire season, would target mostly tourists and would prevent other cuts that would harm people in need of home health care and other services.

As proposed, Senate Bill 6 would bring in $12.7 million this fiscal year and $32.6 million the following, and sunset in 2019. Bullock made a move Monday, however, to expand the bill to also apply the tax to short-term rentals offered through websites such as Airbnb. That change is expected to be debated Tuesday.

Tim Burton, executive director of the Montana League of Cities and Towns, said his organization supported the increased taxes because “the combination of cuts, transfers and perhaps some new revenues would mitigate the severity of the cuts.”

But the proposal was not without opposition. Riley Johnson, who represents the car rental company Enterprise, said the tax placed the burden too much on his industry.

“We feel this is totally unfair.” He also pointed out the tax would not only target tourists, as proponents said, but would target Montanans, as well. The state, he noted, is his company's largest customer. The state would be exempt from paying the tax.

Steve Wahrlich, who owns the Best Western Clocktower Inn in Billings, told the committee it was unfair to target businesses like his before taxing short-term rentals like Airbnb the same. He also questioned how many Montanans would end up paying the tax.

Department of Revenue director Mike Kadas told the committee he had information from a University of Montana research institute that about 70 percent of the bed tax was paid by out-of-state residents, though those on the Joint House Taxation and Senate Taxation Standing Committees said they had information from the same institute that said otherwise.

The Institute for Tourism and Recreation Research did not return a request for clarification.

Transfers and other changes

A handful of other proposals in another of the thirds solution presented by Bullock fared well Monday. Most are also temporary changes that would expire in about two years.

A proposal to switch the system for awarding state liquor licenses from the current lottery to an auction system, Senate Bill 5, received support, as did a bill to suspend contributions to the judge retirement system and implement a two-month state employer contribution holiday. The judge’s retirement fund is overfunded at 167 percent and the bill would save the state $2.9 million over an 18-month period. That bill is Senate Bill 1.

Senate Bill 2 to eliminate about $12 million in block grants to schools received support from the state’s educational groups with the stipulation the reductions will still be painful for some districts. The grant proposed for elimination is the primary way schools fund transportation services, such as morning and afternoon bus routes.

The bill requires districts to shift to reserve funds instead of raising property taxes, but there’s concern taking from reserves could jeopardize school funding in future years. Budget Director Dan Villa said the $12 million reduction is minimal to the nearly $1.6 billion in general fund dollars schools receive each biennium.

Other proposals that are expected to play a major role in this special session are a $30 million offer from the company that runs the private prison in Shelby in exchange for the state extending its contract, which is set to expire in 2019. Republicans, who hold a majority in the House and Senate, have said accepting the money will be key if a budget deal is to be struck, while Democrats have opposed it, calling it blackmail.

Reporter Erin Loranger from the Helena Independent Record contributed information for this story.

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