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Wednesday, January 8, 2020

The Strategy Behind Higher Taxes

Do not be fooled by the tax hikers' short-term conjuring tricks. They are working according to a consistent long term plan. Only your determination to stay in this fight will secure the future of our state.

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There is growing support for a tax reform in Wyoming. We will probably see another bill suggesting a commission to review - and produce reform ideas for - our state's tax system. 

I am all for tax reform, provided that it meets three requirements:

1. An absolute, uncompromising no to any increase in any individual tax;
2. An equally uncompromising no to a higher overall tax burden; and
3. That taxpayers, not government, are better off as a result of the reform.

What I have heard so far about a possible tax reform does not make me comfortable. Whenever the idea is floated, the stated goal is to smoothen out tax revenue so our government does not have to go through the booms and busts that naturally cycle through the private sector. In other words: to put government before the taxpayer.

When a bill surfaces to propose a tax-review commission of some kind, expect the edge to be pointing at you, the taxpayer, not government. The official goal will be - again - to smoothen out tax revenue, but in reality it will all be a disguise for a heavier tax burden. After all, the purpose is to close the budget gap so government does not have to cut its spending.

A tax reform aiming to raise more revenue will also make the tax system more complex. The chase for more tax revenue always does this, as exemplified by the proposed corporate income tax. This tax drives a wedge right in to our business structure: it benefits companies with fewer than 100 shareholders by exempting them from the tax, while punishing companies that have 100 or more shareholders. 

Needless to say, there is an incentive in this to reduce the number of shareholders. But even as that happens, the threat looms that the threshold may be reduced in the future. Therefore, the next incentive is to dissolve your corporation and find another form, such as an LLC, to do business. 

That would not be good, either for businesses or for the Wyoming economy.

To make life even harder for our businesses, the corporate income tax would force corporations burdened by the tax to spend even more money on tax administration. Our state constitution allows for a deduction of sales and property taxes from any income tax; some corporations in Wyoming would have to spend more of their hard-earned money running some tax expenses against their liability for other tax expenses. 

Other businesses would have to do none of that.

In other words, the corporate income tax adds an unwanted burden to red tape to doing business in the Cowboy State. Yet those who pursue the tax disregard this burden, simply - and cynically - because their goal is not to make life easier for taxpayers. Unless the three points above were made into the explicit goal with a tax reform, the same government-first attitude would taint the entire effort at a tax-system overhaul.

To further emphasize what priorities the tax hikers have, consider the fact that the corporate income tax is a highly unstable revenue source. If your goal is to stabilize revenue, this is the last tax you should be looking at.

In other words, the corporate income tax tells us a great deal about what a future tax reform would look like. Those who want higher taxes will do whatever they think it takes to increase the burden on our shoulders. Their legislative strategy gives away how they would handle a system-wide reform of all our taxes: they already have a system-wide strategy in place. In addition to the income tax, they have been trying to raise our sales taxes, our property taxes and a slew of other taxes. Some of those are official Revenue Committee policy, while others are currently dormant. However, just because a tax is dormant does not mean it will not be resurrected at some - strategically significant - point in time. 

Strategy is hugely important here. The corporate income tax has been killed twice before, the first time as a "gross receipts tax". When that bill died two years ago, a leading senator told me that there would not be any proposals for an income tax ever again; "that ship has sailed". (Yes, I still have the email.) Last year the same idea came back from the dead, in the form of an explicit income tax. It died in the 2019 session - the ship sailed again - only to rise from its grave again and vote for Hillary Clinton.

Since shifting leadership after the 2018 election, the Revenue Committee has also shifted strategy. Instead of the all-out assault on taxpayers that Mike Madden spearheaded, the Zwonitzer-Case leadership has chosen a somewhat more convoluted strategy. They know that expanding the sales tax and raising property taxes are too much when added to the corporate income tax. They have strategically placed the income tax at the forefront, even though its revenue estimate is very modest by comparison.

The reason for this - and here is where we tie back to the idea for a system-wide tax reform - is to create the institutional structure for an income tax. Once a tax is in place, the legislature can raise the rate, broaden the base and remove exemptions in order to grab more revenue. The big fight is to create the tax, which in this case means not just a tax on corporate income: the last page of the bill proposing this tax defines the taxpayer by IRS tax filing status. All the legislature needs to do to create a personal income tax, is to add "1040" to the definition of the taxpayer.

From the tax hiker's viewpoint, this works very well. A combined personal and corporate income tax would - at least in theory - have a tax base of almost $40 billion. Even if only a limited part of that would actually be subject to taxes, it is a big prize for those who prefer to take more from taxpayers over reducing the size of government.

Once the corporate income tax is in place, an expanded sales tax will once again be on the agenda. The same will happen with the property tax hike: either the taxable value will go up or there will be more millings (the latest idea was to add nine of those). The technical form of the tax hike is of less importance than its economic impact: more millings or a higher taxable value is of no consequence once more dollars go out of our pocket.

The income, sales and property taxes are just three examples of what will be on the agenda, not only in this legislative session but also in any proposal for a system-wide tax reform. Again: it is all about the premise behind tax policy. Who do you put first: the taxpayer or government? 

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