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Sunday, May 31, 2020

And Here Come the Tax Hikers Again

Here we go again... the debate is already starting about tax hikes here in Wyoming. 


And we are all very surprised that the Casper Star Tribune fires the opening salvo:
It’s a conversation that has been happening in varying forms in Wyoming for decades. But no matter what the state has gone through over the years, it’s seemed to be the right time to do tax reform.
Presumably, the paper meant to say "it's never seemed to be the right time". Anyway. The term "tax reform" is fancy-speak for tax hikes.

The Tribune continues:
Since the release two decades ago of Tax Reform 2000 – a veritable manifesto to shift the state’s economy off its reliance on minerals – state lawmakers have kicked the tires on dozens of proposals for new forms of revenue, all with little success. Through multiple booms and busts, lawmakers have categorically rejected everything from small fuel and tobacco tax increases to conceptual income taxes on the state’s wealthiest individuals, only considering smaller reforms and lodging taxes when times seemed to be at their most desperate.
Did you notice the expression "shift the state's economy off its reliance on minerals"? This gives away the entire story here. The purpose of "tax reform", again, is to raise taxes. The talk about "the state's economy" in the context of tax hikes is really all about tax revenue. In short: the real meaning is "make sure tax revenue doesn't rise and fall so much with minerals".

Nobody who discusses the Wyoming economy within striking distance of tax revenue has any concern for the actual economy that pays the taxes. More on this in a moment. First, let's listen to the Tribune a bit more:
But this time, members of the Legislature’s Joint Committee on Revenue acknowledged in two days of meetings this week, is different. A perfect storm of economic crises for the state’s biggest industries has collided to put Wyoming in an estimated $1.5 billion hole over the next two years, lawmakers learned Tuesday, with the brightest spots of the state’s revenues – tourism and investment income – expected to lag at unprecedentedly low levels.
Nonsense. As I have explained in previous articles - try this one for example where I report Bureau of Labor Statistics data through April for Wyoming and Colorado - the entire downturn in the Wyoming economy is related to the coronavirus epidemic and the shutdown of businesses. It is not that hard, really, to understand: if you ban businesses from doing business, they will pull in no revenue; if they pull in no revenue, they will pay no taxes.

Of the jobs we lost in April, only 1,600 of 21,100 were in minerals.

A far more appropriate approach to understanding the state government's tax base is to look at the composition of current-price GDP. The state's Gross Domestic Product is the broadest possible tax base a government has; to avoid the unnecessary "double count" that is government, Figure 1 reports the minerals sector as share of private-sector GDP. Here, we do see a decline in recent years:

Figure 1
Source of raw data: Bureau of Economic Analysis

Some pundits will use a picture like this for precisely the purpose that the Casper Star Tribune is after, namely to make the case that we need to broaden the state government's tax base. The problem with that argument is that it assumes that the rest of the Wyoming economy has been growing - in other words, that the potential "non-minerals" tax base is in good shape.

It is not. Figure 2 reports the annual growth rate in current-price GDP for the non-minerals part of the Wyoming economy:

Figure 2
Source of raw data: Bureau of Economic Analysis

The red function reports four-year average growth rates. In the period 2006-2010 the current-price growth rate was almost 7.6 percent per year, on average; in the next period, through 2014, the average stood at 4.4 percent; through 2018 it fell to just over 1.2 percent.

In other words, if the state government had relied on non-minerals industries for its tax base, their revenue trajectory would not have looked much different.

With one exception, of course: the higher taxes on health services, construction, infrastructure, business services, finance and insurance, lawyers, manufacturers and others, would have depressed activity in those industries. The red function would probably have looked much the same as it does now - a descending staircase - but the average growth rates would have been lower.

None of this, of course, is part of the Tribune story. They keep confusing government with the state economy. The loss of revenue from minerals, they say,
has set the state up for an even slower recovery. The mechanism used to fund numerous functions of government – sales tax – is tied closely to the energy sector and rife with exemptions, designed in such a way that any detrimental impacts to minerals will have an equally negative effect on everything from funding government to keeping up with the cost of the state’s K-12 education system.
First of all, under the most generous estimates available, only about one third of the state's sales-tax revenue originate with the minerals industry. Secondly, an exemption is not a problem for the economy. Why? Because people get to keep that part of their own money. They can then decide to spend it elsewhere in their local economies.

It is time for the Tribune and their writers to actually learn the difference between government and the private sector. They could start with their own business, which - as far as I know - is not owned by the state government.

In fact, to make good on their yearning for higher taxes, the Tribune could start making voluntary tax payments to the state government. How about seven percent of their gross revenue? That would match some of the iterations of a corporate income tax that have been floating around our state in the past four years.

It is also time to once again note that Wyoming does not have low taxes. On the contrary, we are one of the highest-taxed states in the country; a common mistake people make is that they disregard fees and charges, which are nothing more than concealed taxation. Furthermore, now that the campaign is on again for higher taxes - including an income tax - we might want to remember that a corporate income tax does not stabilize government revenue. Quite the contrary: it is one of the most unstable sources of revenue a government can find.

Fortunately, it looks like resistance to tax hikes remains strong in some key parts of our legislature. The Tribune again, reporting on the just-held Joint Revenue Committee meeting:
Rep. Cyrus Western, a first-term Republican lawmaker from Sheridan, argued the optics of committee members responding to an economic crisis with tax increases sent “the wrong message,” and that the Legislature has an obligation to make as many reductions in spending as possible to avoid significant impacts on their constituents. Others like Sen. Bo Biteman, R-Ranchester – a staunch fiscal conservative generally opposed to most tax increases – advocated for deep cuts as well as a revenue-neutral broadening of the state’s tax structure, offering up a suggestion to raise sales tax rates in exchange for the repeal of a business property tax opposed by a number of industry figures in oil and gas.
I know Senator Biteman. He is indeed a reliable fiscal conservative, a man who will stand up for taxpayers any day. I am not going to interpret what the Tribune claims that he said, but if I were to make a guess, it goes something like this: if we are going to go down that bad, destructive road of raising some taxes, we need to make sure that the state doesn't increase the tax burden on the economy as a whole.

The quote from the Tribune is not apparent on this; any reference to "revenue neutrality" is inherently ambiguous. I am sure Senator Biteman knows what the term means to him, and what point he was making; my suspicion is that the reporter who quoted him is sorely unaware of the multi-layered nature of the term. As an example, consider this article on Utah.

We might also want to keep in mind that no tax reform matters if your spending levels are too high.

There were some other ideas discussed at the Revenue Committee meeting, ideas that we will have opportunities to return to in the future. For now, let us once again - for the umpteenth time in the past four years - declare that the Wyoming economy under no circumstances can afford higher taxes.

Period. End of story.

1 comment:

  1. While I am against raising taxes and believe spending should be cut to make-up shortfalls. But your attempts to minimize job losses in the energy sector are way off base. When the totallity of the job loss in the industry is taken as a whole it is quite devastating. I don't want taxes raised but I can also recognize there is a huge loss in tax revenues. But honesty in the debate is necessary.