Budget Balancing and School Funding

Budget Balancing and School Funding

Friends,

Legislative Update: Budget Balancing and School Funding

I spent Tuesday and Wednesday in Helena for two of the four committees I serve on: the Education Interim Budget Committee and the Legislative Finance Committee. Here's what we covered and why it matters to you heading into the 2027 session.

We’ve Cut Taxes over the past several sessions and balanced the budget.

The headline from this week's 2029 Biennium Outlook: Montana is projected to be structurally balanced heading into the next budget cycle – the money coming in covers the money going out for what we're already committed to fund. Ongoing revenues are projected at about $7.1 billion over the biennium.

We got there while cutting taxes three sessions in a row. With responsible spending, we have reduced income taxes while maintaining a balanced state budget. We have also paid off all the State's bonded debt and set aside funds in the Growth and Opportunity Trust to catch up on deferred infrastructure maintenance, like rural bridges and water storage, knowing that the economy will inevitably experience periods of economic downturns.

Here's the tax relief we've delivered:

Income taxes – lower rates, three sessions running. Montana has steadily brought the top income tax rate down and simplified the system. In 2021 we collapsed seven brackets down to two. In 2023 we cut the top rate to 5.9%. And this past session, HB 337 lowers the top rate to 5.4% by 2027 and widens the lower bracket so more of your income is taxed at the lower 4.7% rate. It also doubled the Earned Income Tax Credit to provide targeted relief for working families. Most of these changes phase in through 2026 and 2027.

General Fund Revenues in Perspective, 2025

Business equipment tax. This directly impacts farmers, ranchers, and main street businesses. The business equipment tax is an annual tax on the tractors, combines, equipment, and tools people need just to run their operation. We raised the exemption from $300,000 to $1 million in 2023. In many cases, these changes have taken small businesses, farms, and ranches off of the business equipment tax rolls entirely.

The income tax reductions, combined with federal changes, flatten state revenue growth projections from now through around 2028. So, we are balanced, but with less cushion than we've had in recent years. That means next session we'll have to make real choices about what we can and can't afford.

School Funding

This is where some of the next session's hardest choices will land. The decennial study of the school funding formula wraps up by September 1, and it's driving the biggest numbers in the budget outlook.

By law, Montana adjusts school funding for inflation, but that adjustment is capped at 3% a year, a cap that's been on the books since 2013. In normal times that's fine. But over the past several years, actual costs ran well above 3%, so the cap left schools falling behind.

Where does School Funding come from in Carbon County?

How is School Funding spent in Carbon County?

Where Does School Funding Go in Carbon County Montana, 2025-1

A few reference points:

The cap vs. actual inflation. The formula held funding to 3% or less in years when the real inflation figure went over that and peaked at over 7% in 2022.
Wages, which are the biggest cost schools face, grew faster still. Montana wages have grown strongly since 2020, running around 5% a year in recent years according to state economic data, and are projected to keep outrunning the 3% cap (about 5.33% and 4.75% over the upcoming two years, per the state's forecasting firm). In fact, Montana is one of only two states where wage growth has outpaced inflation since 2020. That's great news for our economy, but it means schools, capped at 3%, can't keep up with what the labor market is paying.

Our economy and wages are strong, which is a good-news story but the 3% cap means school funding hasn't kept pace with that same growth, and the federal backfill that papered over it is gone. Some of our rural districts have seen qualified-teacher vacancy rates above 30%.

Property Taxes and the 95 Mills

Because of recent property tax changes, the Department of Revenue's certified values won't be available until August, so a lot of the school equalization math is still preliminary. Rising revenue into the state's equalization account is projected to fund a new mechanism this biennium that could increase support to school budgets without adding to local property taxes.

Other Items We Took Up

On the Education committee side, we heard quarterly financial reports from higher ed, the Historical Society, the School for the Deaf and Blind, the State Library, and others, plus an OPI update on the countywide BASE levy rollout.

On the Finance committee side, beyond the outlook we covered the FY 2026 financial report, an update from the Governor's budget director, statewide IT policy, and recommendations to the 2027 budget subcommittees.

What I'm Watching

Further out, the report flags another roughly $83 million a year off our income tax collections if federal H.R. 1 tax provisions are extended. This is an estimate, but the kind of exposure we plan around when we budget responsibly.

We have delivered income tax relief and kept the state structurally sound. Next session the margin is tighter, and the school funding decision will be one of the defining choices. I'll keep you posted as the commission's final report lands.

It is an honor to serve you.

Brad Barker
Representative
House District 55 (Carbon County)
brad@bradbarker.com
bradbarker.com
406-426-1034
facebook.com/Representative.Barker

Montana is the only state in the nation without an S&P bond rating because we paid off all of our bond debt in 2023. Watch the video of the S&P presentation here.

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Representative and Republican Candidate for House District 55

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