Economist Writing Every Day

SPOILER ALERT if you are watching the TV Series Yellowstone: at the start of Season 5, John Dutton (played by Kevin Costner) is sworn in as Governor of Montana. One of his first proposals in his inaugural address is that the state legislature “double property taxes for non-residents” who have been buying up vacation homes in the state, and contributing to the increase in property values in the state (a fact which drives many plotlines throughout the series). This episode aired in November 2022.

This week, the real governor of Montana signed a pair of bills which effectively did what the fictional governor John Dutton proposed: significantly increasing property taxes on non-residents. Starting in tax year 2026, the property taxes for non-primary residences (which will include non-Montana residents and Montanans who own vacation homes) will be based on 1.9% of market value, while Montana residents will pay a graduated rate structure for their primary residence: 0.76% for property up to the state median (currently about $340,000), 0.9% up to two times the state median, 1.1% for the value between 2 and 4 times the state median, and 1.9% (the same as non-residents) for the value of homes above 4 times the state median ($1.36 million currently). Currently residential property is taxed at 1.35% of market value, meaning that while the rate hasn’t fully doubled for non-residents, most non-residents will be paying twice or more in property taxes than Montana residents.

I was a non-resident member of the Montana Property Tax Task Force, and served on the “Tax Fairness” subcommittee where the plan for HB 231 originated, so I have somewhat of a unique perspective on these changes to property tax rates. I will offer a few thoughts, some of which are critical, but let me first say that it was a great honor to be asked to serve on the Task Force by Montana’s Governor. Also, everyone on the Task Force was very friendly and receptive to ideas from outsiders (I was one of three non-Montanans on the Task Force), and so my comments here are not critical of the Task Force process nor anyone on it. As I did when I served on the Task Force, my goal in this post is to try, as best as I can, to objectively analyze how this proposal (now law) will impact Montana.

There are two separate, interesting changes to residential property taxes in Montana (the law makes many other changes, but I will focus on this area). The first interesting change is that Montana is creating an explicitly progressive property tax, which is separate from the primary vs. non-primary residence question. And it is quite progressive, with highly-valued property paying a rate this is 150% greater than low-valued property at the margin. While many states implicitly have a progressive property tax rate structure, such as due to homestead exemptions of a certain amount of value, I’m not aware of any state that explicitly imposes a graduated property tax rate system. This seems to be an under discussed aspect of the property tax changes in Montana.

The second interesting change is the creation of a unique treatment of homestead properties, or primary residences. Providing some benefit to primary residences, often called a homestead exemption, is not unique to Montana. For my subcommittee, I put together a list of 25 states that provide general homestead property tax exemptions (even more states have targeted exemptions, such as for seniors or veterans, but I focused on the generally available exemptions). But these homestead exemptions are usually in the form of a certain amount of property value that is exempt from the tax (e.g., Florida exempts the first $25,000 of value) or a credit against your property tax bill (e.g., Arizona provides a $600 credit). The only two states which have a similar exemption to Montana are two other states in the same region, Utah and Idaho, which exempt a certain percent of the value from taxation (45% in Utah and 50% in Idaho), effectively creating a much higher tax rate for non-homesteads. But Montana has gone a step beyond and explicitly stated in law a higher tax rate for non-homestead residential property

What will be the effects of these changes? One thing will be quite clear: property taxes will go down significantly for most Montana residents in their primary home, but will increase for non-residents, vacation homes owned by Montana residents, and highly valuable primary residences as well (note: there are similar changes made to property taxes for long-term rental properties vs. short-term rental properties, but I won’t go into those details here).

A few examples. For the median-value home in Montana (about $340,000) in a city with a tax rate of 700 mills (a typical rate for cities in Montana), they will get a roughly $1,400 property tax cut relative to current law, provided that it is a primary residence. If it is not a primary residence, a home with that same value will get an almost $1,300 increase relative to current law. That’s a $2,700 difference (0.8% of the home’s value) in how two homes of the same value will be treated in Montana under the new property tax rules. (NOTE: I originally did these calculations assuming 1,000 mills, but Robert Story of the Montana Taxpayers Association kindly informed me that that’s quite a bit high than most cities in Montana — thank you for the correction, Bob!)

Now consider a very highly-valued home, worth $2 million. If it is a primary residence, it will actually get a slight tax cut, even though it is paying a higher rate at the margin for the value above $1.36 million. Taxes for this home would be $18,900 under current law (again, assuming 700 mills), but would fall about $1,200 (about 6%) under the new, graduated rates (the “break even” home would be worth $2.312 million, paying the same amount under both systems). However, if this is not a primary residence, the $2 million vacation home will see a 41% increase in property taxes, or almost $9,000 more. The table below summarizes these examples and a few others:

How will these differential rates affect behavior? For some owners of $2 million vacation homes, another $9,000 per year probably won’t break them. If you are rich enough to afford that home, surely you can afford a few thousand dollars more? But certainly not all will. Some out-of-state owners may sell their homes, either choosing to not have a vacation home, or to purchase one in another state. This will have the effect of reducing property values and demand for vacation homes in the state decreases. Some Montanans may cheer this, as it will reduce home values overall, the source of the problem in the first place: rising home values meant rising property taxes. But what this will mean in the long-run equilibrium is that more of the property tax burden will have to be shifted back to Montana residents.

In the end, the decrease in demand for vacation homes will probably not be significant enough to fully shift the same amount of tax burden back to Montana residents, so maybe this seems like a long-run win for Montana residents. But going forward it is more important that taxpayers are protected from future large increases in property taxes A big part of the impetus behind the Task Force was that in 2023 residential properties in Montana saw a 21% increase in the median property tax bill, thanks to a 40% increase in property values.

There were two changes to Montana taxes which may provide some on-going tax relief beyond these headline reforms (thanks to Kendall Cotton of the Frontier Institute for pointing these out to me). These came out of two proposals in the final report of the Task Force, including one to have property taxes proposed in dollars rather than mills, and another proposal to modify existing levy limits (which limit how much total spending can increase, rather than capping individual properties).

Whether these changes will be enough to limit property tax increases is not clear yet, but thankfully Montana has made other non-tax changes to law which will help. There is an interesting irony in all these details about taxes, which is that Montana had a separate task force on housing affordability that preceded that task force I served on. The irony is that the recommendations from the housing task force may actually do more to limit future property tax increases than the tax task force. Many of the housing task force’s recommendations were implemented in both the 2023 and 2025 legislative sessions in Montana, addressing issues as wide ranging as zoning, parking minimums, accessory dwelling units, and single-stair residential buildings, all policy goals of the broader “YIMBY movement.” If these reforms are successful in slowing down the growth rate of housing costs in Montana, they will be the real heroes of lower long-run property taxes.