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Wednesday, October 30, 2019

Bad Tax Revenue Forecast for Wyoming


The threat of Taxmageddon is hanging like the Sword of Damocles over the Wyoming economy. Now the state's own revenue forecast predicts bad times ahead. Will the Revenue Committee add insult to injury?

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When waking up on October 29, some Wyoming legislators got a cold shower. As the members of the Appropriations Committee convened for a two-day meeting, Don Richards from the state’s tax-revenue forecast unit, CREG, presented the October report on state tax revenue. There, the Appropriations members could read that they should expect a 20-percent decline in General Fund revenue. 

From 2019 to 2020 the General Fund would fall from $1.4 billion $1.2 billion, and then to just over $1.1 billion in 2021.

It gets worse: according to CREG, total General Fund revenue will stay virtually flat for the next five years. In fairness to CREG, this is usually what their forecasts look like, but since I began criticizing their complete lack of forecasting prowess in the past - comparing their predictions to actual revenue  - they have made an effort to do a better job. Therefore, this forecast of flat revenue is worth taking seriously.

Two of the state’s three main revenue sources are also expected to decline – and become more volatile. Severance taxes will be down 42 percent in 2021 compared to 2019, in large part due to the decline in coal sales.

Another large revenue source is the state’s significant Minerals Trust Fund, a portfolio of investments built up with severance tax revenue. In 2019 the MTF contributed one quarter of every dollar in General Fund revenue; going forward that share is going to be less than 18 percent.

The CREG presentation specifically warned of lower capital gains in general. This is more bad news for a state that for years now has filled part of its structural deficit with windfall revenue from investments.

But it doesn’t stop there. The Appropriations Committee was also told that severance-tax revenue has grown more volatile in recent years. The reason is a shift in tax base, from coal to oil, with the former being more stable and predictable and the latter prone to fluctuations.

There are two take-away points from the CREG report. First, it is time for the Wyoming lawmakers to acknowledge that they have built a government that is bigger than what its taxpayers can afford. Over the past 15 years, the state of Wyoming has lived lavishly on severance-tax and MTF money. They have built a large, well-paid payroll, both in state agencies and in local governments, who get 37 percent of their revenue from the state.

It is common sense that you cannot fund permanent spending with temporary, volatile revenue. This CREG report is a big wake-up call for the Appropriations Committee to set their eyes on spending reductions.

If they don’t, their job is only going to get more difficult. Which brings us to the second take-away point: the dangers of raising taxes.

Going forward, Wyoming will become increasingly dependent on revenue from sales and use taxes. In 2021 these taxes will account for 49 percent of General Fund revenue, a share that will continue to increase in the next few years.

It is not unusual for states to rely heavily on this tax category. According to 2016 Census Bureau state revenue data, nine states got more than half their total revenue from sales and gross receipts taxes. However, there is a big difference between those states and Wyoming: they all have economies that grow more than the Cowboy State.

For the past ten years Wyoming has had the slowest-growing economy of all the 50 states.

The base for sales, gross receipts and use taxes varies very closely with economic growth. Anything a legislature does that depresses growth will come back like a boomerang in the form of lower sales-tax revenue.

There is no more sure-footed way to depress growth than to raise taxes. The Wyoming state Revenue Committee has already voted to support a corporate income tax and to allow local governments to raise sales taxes. Their agenda for the November 11-12 meeting in Cheyenne is a veritable wish list for tax hikers

It is predictable that Revenue will use the CREG report differently than they should: as a pretext to raise taxes. At the Appropriations Committee meeting, Senator Eli Bebout, co-chair of the committee, actually set his Revenue colleagues up for precisely that argument, saying that
Wyoming cannot rely on traditional sources of income for our revenue streams
If the Revenue Committee gets all its tax hikes - and its dedication to getting them is stronger than I have ever seen - it will cripple the private sector, stall growth and eventually lead to economic decline in Wyoming. Even a part of this tax package would cement Wyoming as the state with the weakest economy in the country.

Rather than using the latest CREG report as a reason to raise taxes, the Cowboy State legislature should shift focus to spending reforms. It would be a great show of commitment to Wyoming’s future if the lawmakers could make this tectonic shift in the 2020 session.

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