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Thursday, November 7, 2019

Wyoming Economy Grows More Biased

The Revenue Committee of the Wyoming legislature wants to "diversify" the tax base. They want to do it by increasing taxes on the part of the economy that is stagnant or in decline. I am sure that is going to turn out very well.

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Before I get back to my series on Medicaid Expansion I need to report the latest figures on state GDP growth. Released just this morning by the Bureau of Economic Analysis, the numbers for the second quarter of 2019 show an interesting concentration of economic growth to the American heartland, where we find eight of the top-ten growth states:

Table 1
Source of raw data: Bureau of Economic Analysis

Top Growth States
TX 4.47%
NM 3.93%
WA 3.84%
WY 3.77%
UT 3.60%
AZ 3.45%
CO 3.41%
NV 3.25%
SC 3.18%
AK 2.98%

Most of the nation's economic growth is taking place in the western half of the country. Texas, which accounts for 9.4 percent of the economy, accounted for 18 percent of the nation's growth. These top ten states produce less than 20 percent of the total U.S. GDP, but account for more than one third of the nation's economic growth. 

It is not surprising that Texas leads the country - the Lone Star State has earned a solid reputation for being business friendly, and on November 5 three quarters of the state's voters voted in favor of a measure that makes it even harder to introduce an income tax. This will help the state solidify its position as a low-tax state; the latest figures on the true cost of government ranks Texas as the 12th cheapest state to live in. 

Washington is another state with strong growth and no income tax. However, not all states make this list because of prudent tax policy - some of them end up in the top ten thanks to high demand for minerals. Alaska, New Mexico and Wyoming fall into this category; even though Alaska and Wyoming have no income tax, they do have costly governments. Alaska currently ranks highest in terms of what taxpayers have to dole out in taxes, fees and other charges, out of their total personal income. Wyoming ranks fifth in the country, down from second a year earlier.

The drop in the Cowboy State's ranking is not due to some spectacular economic performance. From 2016 to 2017, which the true government-cost numbers represent, the reason was almost entirely that other states flew past Wyoming in increasing the cost of their governments. In the first quarter of 2015 the Wyoming economy grew by 5.9 percent; from the third quarter of 2015 through 2017 Wyoming had, on average, a GDP growth of -1.02 percent per year.

Plain and simple, the economy shrunk.

This year, Wyoming has seen strong growth, with 3.2 percent in the first quarter and 3.8 percent in the second. However, this growth is entirely due to its minerals industry. The second-quarter numbers, broken down by industry, are as follows, with the first column reporting the industry share of the Wyoming economy and the second column reporting its share of GDP growth in Q2 0f 2019:

Table 2
Source of raw data: Bureau of Economic Analysis

GDP share Growth share
Agriculture 2.6% 5.3%
Mining 27.8% 86.3%
Utilities 2.5% 0.8%
Construction 4.5% 12.3%
Manufacturing 5.8% 2.2%
Wholesale 3.6% 2.8%
Retail 5.4% 5.3%
Transportation 7.3% -3.3%
Information 1.8% -0.3%
Finance 2.1% 0.9%
Real estate 9.8% 5.0%
Prof svcs 3.0% 4.7%
Business mgmt 0.3% -0.3%
Admin svcs 1.3% -0.4%
Private educ. 0.3% 0.0%
Health care 4.1% 0.9%
Arts, entert. 0.6% -1.2%
Accommodation 3.1% 2.0%
Other 1.3% 0.5%

In other words, more than 86 cents of every dollar in GDP growth in Wyoming came from minerals. A full 72 percent of the economy, in other words the non-minerals private sector, produce less than 14 percent of the growth. 

Ten of the 19 industries in the BEA accounts grew at less than one percent, with half of them actually shrinking. 

These numbers confirm strongly and solidly that Wyoming is in desperate need of better fiscal policy. In particular, it is a bad idea to raise taxes on an economy that depends entirely on one industry to even move forward. The virtual standstill in the rest of the economy is an enduring trend that leaves the Wyoming economy weak and vulnerable:

  • From 2008 to 2018, the total output of the private sector in Wyoming declined by ten percent in real terms - meaning that when adjusted for inflation, the state's tax base was smaller in 2018 than it was in 2008;
  • From 2015 to 2017 Wyoming lost more than 17,000 private-sector jobs;
  • By the summer of this year the state's private employers had recovered half of the lost jobs, a trend supported by the growth numbers reported here;
  • However, the mere talk about a corporate income tax appears to have already brought that jobs recovery to a halt.

The legislative Revenue Committee is hard at work trying to raise taxes, with a seven-percent corporate income tax as the herald of their efforts. One of their arguments for new and higher taxes is a need for tax-base diversification: they simply don't want the state to depend as much on the minerals industry.

It is always a good principle in tax policy to try to bring in government revenue with as little impact as possible on the economy. This means both low taxes and as few distortions as possible (in other words, as few choices of winners and losers as possible), but this is not the lead motive for the Revenue Committee. Their goal is to diversify the tax base while also raising as much revenue as possible. 

However, even if they were not out to take in more from taxpayers, it still be inadvisable to try to diversify the state's tax base. By necessity, diversification of the tax base means raising taxes on sectors or industries that are deemed to be more leniently taxed. In Wyoming, this would mean industries outside of minerals, i.e., the ones that exhibit zero-to-weak growth.

When the businesses in an industry are struggling to grow or losing output, even the smallest tax hike can be the straw that breaks the camel's back. 

With these growth numbers, Wyoming legislators would be well advised to shift focus from tax hikes to spending reforms. Items to consider are: school choice, Medicaid vouchers and interstate insurance purchases, welfare reform based on charity compacts, across-the-board zero-based budgeting, and a toll on I-80 to move that highway out of the state budget.

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