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Monday, December 9, 2019

Governor Gordon Open to Higher Taxes

In his budget presentation, Governor Mark Gordon expressed support for a lodging tax and opened the door for a "comprehensive review" of our state's tax system. That does not bode well for taxpayers.

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Today Governor Mark Gordon presented his budget to the Joint Appropriations Committee. It is a budget I have commented on before:

--On November 18 I explained that the governor has caved on spending cuts and opened the door for tying mental-health spending to a corporate income tax;
--On November 20 I put the governor's budget in a broader perspective, pointing out that our state government spends money not like a conservative government, but like a liberal welfare state.

Today, the governor reinforced the impression that he likes to talk fiscal conservatism but really just acts like a competent administrator of a big-spending government. 

Before I move on, I should note that I like Governor Gordon. He really seems to take his job seriously - from his own vantage point - unlike some politicians who are just in the office for their own good. While I disagree with the governor's fiscal policy, I respect him for being more interested in the job than his own career. 

The ideal, of course, would be if Governor Gordon would pair his dedication to duty with dedication to fiscal conservatism. Having listened to the governor present his budget to Appropriations, my worries on this matter have been reinforced. Here are three points I took away from his presentation.

1. Governor Gordon wants a lodging tax. 

He made that clear in answering a question from Senator Gierau. This tax is being sold as a freebie for Wyoming, since - it is said - most of the revenue would come from interstate travelers. This is a moot point, however, for two reasons. 

First, people who live in Wyoming drive more than people in any other state, including traveling distances within our state and staying over night. A lodging tax is a tax on that travel. Secondly, this is a tax on an industry that offers a lot of people an entry into the labor market. Compensation is low compared to most other industries; a tax on this industry will not help workers get more hours or higher wages. On the contrary, it will make life tougher for those who get a paycheck from this heavily seasonal industry. 

Speaking of employment: it is worth noting that hospitality and leisure - the formal name for what is colloquially known as "tourism" - is not the biggest industry in Wyoming in terms of employment. That title goes to local government. 

There is growing support for a lodging tax across the legislature. Anyone who has the common sense to see what a lodging tax would do to Wyoming, should be on his feet voicing his concerns.

2. Governor Gordon wants a comprehensive review of our tax system.

In response to a question from Representative Schwartz, the governor pledged his support for an all-doors-open review of where our state government gets its revenue. This is an idea that many in the legislature have been floating (not just Democrats like Schwartz). Behind this idea is the desire to shield government from the ups and downs of the private-sector business cycle; for some reason many people seem to believe that: a) government ought to be immune to the economic challenges that we all face as part of our lives; and b) there is some magic tax out there that can provide more revenue when revenue from other taxes decline. 

This is a major misunderstanding that is now inching dangerously close to becoming a legislative agenda item. It has consequences so broad and so serious I will dedicate a separate article to them; for now, let me make clear that any "comprehensive review" of our state's tax system will result in higher taxes. The motive behind it is, namely, not just to shield government from the business cycle (a morally and economically bad idea in itself) but also to close the structural deficit in the state budget. 

Which means new and higher taxes. Do not rule out that the corporate income tax would be rolled into that "comprehensive review". 

Any fight against tax hikes will have to take into account what the terms would be for such a review.

3. Governor Gordon likes efficiency.

I was pleased to hear that the good governor wants a more efficient government. There are, however, a couple of problems with his idea for what it means to achieve and maintain efficiency.

First, his case for it is based on the Alvarez & Marsal report. The firm behind it has touted efficiency gains in Louisiana as part of its resume. I have gone through Louisiana state spending with a fine-tooth comb and I have not found any sign there of the $500m+ annual cost cuts they have claimed to have found. There is no way an independent review of Louisiana state finances can confirm those savings. 

We can debate the reasons for that: it could be that the state never did what A&M recommended; it could also be that the recommendations, once implemented, did not generate the efficiency gains that A&M suggested. I have not found a way to verify which is true. Either way, though: before Governor Gordon goes ahead with any more efficiency work in Wyoming, he needs to be absolutely certain that the money he spends on improving efficiency will indeed lead to more efficiency gains than the governor spends on improving efficiency. He should do so independently, and not just take an outside consultant's word for it. 

Furthermore, the efficiency gains purported in Wyoming - $200 million for one third of state government - have been used in extrapolations to suggest that complete efficiency reform throughout the state government would result in $600 million worth of cost cuts. This is a classic non-sequitur: the $200m figure is not based on a random selection of government entities, but a sample where efficiencies would be more likely to materialize.

For example, the part of government where the $200m efficiency gains are said to be attainable, excludes spending on cash and in-kind entitlements. How do you increase efficiency in cash handouts under welfare programs?

I like efficiency reform, but I am skeptical to costly outside consultants with a non-verifiable record coming in to tell us how to get it done. Furthermore, even if the savings materialized as some suggest, there is a great risk that those savings would be gobbled up by increased spending. 

Consider, e.g., this scenario. The state government ekes out $100 million in efficiency gains. At the same time, the legislature passes Medicaid Expansion. In a blatant application of common-core math, the Revenue Committee leadership has declared that Medicaid Expansion increases state revenue. But with the state saving lots of money on efficiency, it is now possible even for people who still use real arithmetic to say "we can now get behind Medicaid Expansion because it does not require a tax hike". 

To be clear, Governor Gordon did not tie efficiency gains to Medicaid Expansion. However, given the trajectory of his fiscal thinking so far, it is not beyond the realm of the possible that he would get behind Expansion if he thinks it does not mean higher taxes. After all, he has - as mentioned - already opened the door for a corporate income tax (without using those exact words) if it is tied to mental-health spending.   

The Appropriations Committee will spend the rest of this week, and next, dissecting the governor's budget. Most of it will be very technical, with little or no review of the actual fiscal policy behind the budget. That is unfortunate - it is precisely at moments like these that we need a structural review of the purpose and the functions of our state and local governments. Our government is unaffordable; we need to downsize it, significantly, structurally and permanently, in order to make it affordable to taxpayers. 

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