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Friday, November 15, 2019

Wyoming Government Finances: State Revenue

What does Wyoming government revenue really look like? And how much does the minerals industry actually contribute?


When we discuss tax policy in Wyoming, it is important to get the facts straight. There are two dimensions at work here, one being analytical. Tax policy cannot be viewed as a simple numerical exercise - it is a matter of understanding the economy as a system of interactive parts. Bluntly: we cannot just splash a tax down into the economy and think there are not going to be any consequences of it.

As an example of why this is important, some analysts and commentators suggest that taxes can be "economically neutral". This is not the case, of course, a point that I made when I asked the Tax Foundation three questions about their proposal for a value-added tax in Wyoming.

The other dimension of getting facts straight is - yes - getting your facts straight. Even when people want to do well, they often stumble and fall short of the finishing line simply because they do not use original sources for their facts. On November 15, the Wyoming Liberty Group gave us a good example of that. In an article on electricity taxes they curiously claimed that in 2017 the state of Wyoming relied on minerals for 52 percent of its revenue. As a source, they link to a December 1, 2018, article in the Casper Star Tribune, reporting:
Wyoming hasn’t edged near a 70 percent reliance on minerals in more than 10 years. In 2017, about 52 percent of revenue came from minerals — that’s $2.2 billion of $4.2 billion in revenue, according to a report from the Wyoming Taxpayers Association, an organization that advocates for fair, efficient and transparent tax policies. A report provided to the Joint Revenue Committee recently placed that percentage higher, at about 62 percent.
In other words, Wyoming Liberty Group chose the lower of two numbers (without explaining its choice) but did not mention that they reported a third-hand source.

Third hand is hearsay.

Since the state government's dependency on minerals is often used in the tax-policy debate, let us take a look at where its revenue actually comes from. For this exercise we turn to the Census Bureau's 2017 data on state and local government spending and revenue.

For starters, total non-federal government revenue in Wyoming was $11.75 billion which is divided into:

  • $6,785,541,000 in state revenue, and
  • $4,962,509,000 in local government revenue.

We are not talking spending here, but just for reference, the 2017 spending numbers are:

  • $8,205,984,000 for the state government, and
  • $5,085,659,000 in local government outlays,

adding up to $13.3 billion in total.

Before we move to more details, let us just note that the combined budget deficit for state and local governments in the Cowboy State was 11.6 percent of total spending.

Concentrating on revenue (saving spending for the next article) we find the following.

In-state revenue account for 63.8 percent of the revenue that the state of Wyoming collected in 2017, leaving 36.2 percent as coming from the federal government. This number seems high, but it is deceptive. It includes severance taxes collected by the federal government from minerals extraction in Wyoming, then paid out to the state.

This reporting method is used by the federal government - all federal statistics agencies uses the same definition. The state, on the other hand, defines the severance taxes collected by the federal government as state revenue; when the state of Wyoming reports its revenue data to the National Association of State Budget Officers, it only reports as federal funds what is regularly referred to as "Federal Aid to States", i.e., funds for Medicaid, K-12 education, transportation, etc.

The difference in reporting method is ostensibly the result of different definitions of proprietorship of federal lands or the sub-surface rights on those lands.

Using the NASBO data, we find that in 2017 - the latest year for which we have Census numbers - the state of Wyoming reported the federal-funds share of total state government revenue to be $927 million. This would leave just over $1.5 billion in severance-tax revenue collected by the federal government, or 22 percent of total state revenue.

In addition to the severance-tax revenue hidden in the federal-funds number, the Census Bureau reports a post called "Other taxes", which amounts to $541.3 million. It is reasonable to assume that this is predominantly severance-tax revenue; adding this to the $927 million, we get a total of almost $2.07 billion, or 30.5 percent of total state revenue.

In other words, a far cry from the two numbers that the Casper Star Tribune reported, and one of which the Wyoming Liberty Group suggested.

There are occasionally reports that attribute some of the revenue from sales and property taxes collected in Wyoming to the minerals industry. One of those reports - the most credible - is the sales-tax collections report from the Economic Analysis Division. It is the only source that actually breaks down sales-tax collections by industry. For 2017, this report attributes $57.4 million in four-percent sales tax revenue to the minerals industry. If we add this to the $2.07 billion, we are now just shy of $2.13 billion in minerals-based tax revenue. The needle now points at 31.3 percent of total state revenue.

We now add $15.6 million in use-tax revenue (again under the four-percent category), taking us up to 31.6 percent.

Even if we let the minerals industry send every sales- and use-tax penny they pay, straight into the state coffers, we come nowhere close to that industry providing half the state's revenue. For the sake of the argument, let us also make the silly assumption that the minerals industry paid all the $274 million the state collected in property taxes in 2017.

We still have only reached 36 percent of total state revenue.

The only path to a point where minerals pay half the state's revenue would run through a creative exercise where we define industries supplying goods and services to minerals, as "minerals generated" economic activity. If we then assume that all the taxes that those industries pay are "minerals generated", we could start seeing a number closer to the 52 percent (after, of course, we re-assign property tax revenue to where they properly belong).

The problem with this exercise is that it is entirely arbitrary. It is based on a carefully laid out input-output analysis of the Wyoming economy. As much as I like Vassily Leontief, the father of this methodology (and I would like to have his input-output matrix as a painting on the wall in my office...), it does not lend itself to this kind of conclusions. Every input-output transaction has a "mirror" where, if we wanted to, we could attribute the origin of the activity to the other party.

Consider, for example, a bank that provides financial services to a mining company. Is the service produced by the bank generated by the minerals industry, or is the minerals industry generated by the financial industry? Without banks there would hardly be any minerals companies, right?

Is the oil industry ancillary to the auto industry? Is the producer of plastic products ancillary to the oil industry? Is a buyer always ancillary to the seller? Without buyer, there is no seller. Without seller, there is no buyer.

Saving the Keynes' Law vs. Say's Law debate for another time, the point here, of course, is that just as well as we could say that industries doing business with minerals companies are "generated" by the minerals industry, we could turn the analysis around and say the exact opposite. In other words, any attempt to find "ancillary" economic activity to add to the minerals industry is ultimately going to be arbitrary.

That is not the same as saying that the minerals industry generates its own economic activity - and nothing else depends on it. Not at all: there are multiplier and accelerator effects in the economy that reflect the interactivity between industries. Think of these effects as being changes in the input and output between industries. We must, however, be very careful in defining any industry or economic activity as the "origin" of economic activity; the economy is a highly complex, sophisticated interactive system where billions of moving parts create multiplicative and accelerative effects, large and small, in a pattern of never-ending causes and effects.

A far better approach than to try to separate "origin" from "ancillary" is to stick to traditional industrial classifications and - for our current purpose - find the direct sources of tax revenue. If we do that, again, we stop short of one third. This is short of an industry breakdown of property-tax revenue, which, as I just explained, is a moot point with reference to the "majority of revenue" argument.

With that noted, let us round off the review of state government revenue. Property taxes generated $274 million in 2017; sales taxes broke down as follows:

  • General sales tax: $588.9 million;
  • Motor fuel: $114.1 million;
  • Alcoholic beverages: $1.9 million;
  • Tobacco products: $22.7 million;
  • Public utilities: $4 million;
  • Other selective: $31 million.

We then add just over $71.6 million in motor vehicle license revenue, and we are done with taxes (the "other taxes" item having been accounted for earlier). Over now to "charges and miscellaneous revenue", which brought in a total of $1.3 billion. This number was dominated by the following items:

  • Educational institutions: $117.9 million
  • Natural resources: $15.2 million
  • Highways: $5.8 million
  • Other charges: $75.7 million

Another big category is "miscellaneous general revenue", where interest earnings brought in $695 million, $111 million in liquor-store revenue and "other general revenue" clocked $340.3 million.

The last category is "insurance trust revenue" where $1.15 billion broke down into:

  • Employee retirement contributions, $735.3 million;
  • Workers' compensation, $349.5 million;
  • Unemployment compensation, $70 million.

For the next article, on state spending, click here.

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