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Thursday, November 14, 2019

Tax Foundation Wants VAT in Wyoming


A think tank has proposed a value-added tax in Wyoming. I have three questions for them.

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When it comes to taxes, there is no compromising. This is especially true in Wyoming, a state with the largest government workforce, with one of the top-five costliest government sectors, and with the slowest GDP growth over the past ten years. Yet despite these indisputable facts there are those who will wobble and wiggle on the tax issue.

One of them is Jared Walczak from the Tax Foundation. In a series of tweets on November 14, Walczak reported his support for the analysis that the Wyoming legislative Revenue Committee has put forward, namely that the Cowboy State has a revenue problem - not a spending problem - and that it is a good idea to pursue new revenue sources:
Yesterday I had the privilege to speak on a panel at the @WYOBA Governor's Business Forum about #Wyoming revenue issues and tax considerations, including the possibility of a corporate income tax. A few quick notes. 
And then Walczak drops the bomb:
Wyoming has a genuine revenue problem. It's true that a few funds are up right now and thanks to strong investment returns, the rainy day fund is in good shape despite recent withdrawals and the likelihood of further diversions, but this is a bad time to be making withdrawals! 
No, no and no. Wyoming does not have a revenue problem. Wyoming has a spending problem. 

If Wyoming has a revenue problem, then the solution is to get more revenue. Apparently, Walczak and the Tax Foundation seem to believe so; they have, in other words, lined up behind higher taxes in Wyoming. 

For sure, Jared Walczak is not an economist, but you don't need to be an economist to realize that a state with the largest government workforce, a true cost of government that is higher than in 45 other states and a mostly stagnant private sector, has a government spending problem - not a revenue problem. Yet Walczak continues to discuss the revenue side of the fiscal equation:
Reserve funds are supposed to help handle recessions and maybe smooth volatility; they are ill-suited to handling a secular decline, and that's what we're seeing from energy markets, with real impacts on resource extraction-dependent states like WY, AK, ND, etc.
Minerals account for less than 28 percent of the Wyoming GDP and employ less than ten percent of the private-sector workforce. There is plenty of room for other industries to grow - if only government would deregulate and, above all, refrain from raising taxes.

However, right now things are going in the opposite direction. It would be nice if the Tax Foundation could join in the fight against those tax hikes instead of opining:
Wyoming is a low tax state for its residents, but not for its biggest industry, which faces heavy tax burdens and can't be saddled with more, especially in these market conditions. So policymakers have been exploring other tax options.
First of all - again: Wyoming is not a low-tax state. Secondly, this would be a perfect point in the monologue to steer away from tax hikes and onto spending reform. 

Instead of doing that, Walczak and the Tax Foundation get bogged down in a verbal quagmire trying to help the Wyoming legislature implement a corporate income tax:
A gross receipts tax was, thankfully, rejected, and a proposal for a corporate income tax just on select industries (large retailers, hotels, and restaurants) was abandoned. The proposal currently moving forward is a corporate income tax on companies with 100+ shareholders.
Walczak does acknowledge that there are
problems with this proposal. A tax should be as simple as possible, but no simpler. Early versions have been too simple, silent or unclear on the definition of taxable income, the unitary group for combined reporting ... and more. 
He then lists some "still outstanding" problems, such as the impact on retail business profits from a low-density population (an unproven problem, but be that as it may), the fact that the tax only applies to incorporated businesses with 100+ shareholders and the provision in the Wyoming constitution allowing for dollar-for-dollar deductions from property and sales taxes for any income taxes imposed on individuals or corporations.*

To top off his series of tweets, Walczak rolls out a series of proposals for other taxes that he thinks the Wyoming legislature should consider, First on his list:
a VAT could be intriguing, perhaps similar to the NH BET. Far more economically neutral. Doesn't require a credit under the state constitution. And potentially viable in a state that has gone its own way.
The neutrality point is - forgive the pun - pointless. Just because a tax is neutral in some way or another, it does not mean the tax is good. Perhaps Walczak could outline what exactly he means by "economically neutral". Does he mean revenue neutral? Does he mean that the tax will not affect economic activity? Or is it neutral in terms of the burden imposed on taxpayers?

For reference, a new tax like the one Walczak is proposing would not be neutral under any of these definitions.
Another possibility would be a statewide property tax. These aren't common anymore, but WY property taxes are very low, so there's capacity there, and statewide property taxes make way more sense in western states, where local prop taxes less viable due to land use variance.
About one quarter of the property taxes paid in Wyoming already go to the state. Also, the Revenue Committee has a bill in its roster to raise taxable property value from 9.5 to 11.5 percent on individually owned property (to the same rate that currently applies to commercial property). How much is Walczak proposing to add to this tax burden?

I have three questions for Jared Walczak:

1. The roughly 90 percent of all private-sector employees in Wyoming who do not work in the minerals industry make about $37,000 per year. How much more would they have to pay in taxes under Walczak's proposed VAT and/or increased property taxes? (Let's keep in mind that businesses pass their tax burdens on to employees by cutting wages and hours, and to customers by raising prices.)
2. Does the Tax Foundation really think that there is a good form of corporate income tax to be implemented in Wyoming? Walczak's reasoning appears to leave the tax as an option provided it is redesigned.
3.  Why, exactly, does Wyoming not have a spending problem?

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*) Walczak appears to misunderstand the sales and property tax deduction. He seems to believe that, e.g., Arkansas-based Walmart does not pay property taxes in Wyoming on the properties they own in the state.

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