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Friday, November 18, 2016

Wyoming Needs A One-Year Sales Tax Holiday

As I have explained in several different blogs and elsewhere (are you keeping up with my monthly KGAB AM650 appearances?), the Wyoming economy is in bad shape. We have lost jobs uninterruptedly for almost a year and a half now; state GDP has been weakening for a year; 17 of our state's counties have lost private-sector wages in the last year; etc.  

In addition to the growing economic pains at the ground level, the state budget is in the red with no end in sight.

The long-term solution to this problem is a series of structural spending reforms:

-A full-fledged voucher system in K-12 education with complete freedom for parents, entrepreneurs, churches and others to start and run schools (the Education Savings Account model is a good start);
-An equally full-fledged voucher system in Medicaid where enrollees can buy insurance plans across state lines;
-A Charity Compact solution for all our poverty-relief programs, such as SNAP, WIC, TANF and LIHEAP;
-A Toll on Interstate 80.

All these solutions are necessary, but they are also long-term both in nature and in implementation. Our state is losing jobs fast: since the post-Great Recession peak in jobs creation, in August 2014, we have lost 25 private-sector jobs every day, seven days a week, 365 days per year. The total private-sector job loss now stands at 19,100 since August 2014 - enough to wipe out a city the size of Rock Springs.

Whenever I present these and other numbers showing in what bad shape our state's economy is, I get the same instinctive response: yes, but that's minerals. Normally, I would agree and point to the need for industrial diversification (kudos to Governor Mead for having caught on to that idea). But we are now losing jobs at such a rate, and with such a steady trend, that it is time to look for short-term measures that can turn around the negative trend in jobs and economic activity.

Let me offer one example: a one-year sales tax holiday. The legislature suspends all, or parts of, the sales tax for one year, allowing the private sector to keep that money. The private sector then has more money to spend; households increase their spending, especially of goods where the sales tax has been temporarily suspended, which creates a need for more employees in retail and transportation.

More jobs in retail and transportation create more jobs in utilities, motor fuel sales, and down the road there will be more small construction projects, etc.

If large enough, a one-year sales-tax holiday could create thousands of new jobs. Here is a numerical example; the numbers used are approximate to real-life conditions but rounded off to facilitate the calculation of the example.

Suppose, for Fiscal Year 2018, that the state legislature gave Wyoming taxpayers a one-year sales tax holiday equal to the entire sales-tax revenue going into the General Fund. Let us, for the sake of a numerical example, approximate that number to $450 million. This is money that would then stay in private-sector pockets, and most of it would find its way into local communities.

Suppose that two thirds, or $300 million, of the holiday'd sales tax revenue would add to the bottom line of Wyoming family budgets. This increases their disposable income which, in turn, allows them to increase their consumption. As they spend more, a multiplier effect kicks in, spreading the increase in economic activity to other industries.

The size of the multiplier effect depends on the actual economic conditions under which people live. In times of uncertainty, such as the difficult economic times that many families are experiencing in Wyoming today, people tend to save more of every dollar than they otherwise would. This reduces the multiplier, compared to more "normal" economic conditions.

At the same time, many families in Wyoming live with tight household budgets. They have had to lower the standards of their regular purchases and postpone or downgrade discretionary consumption such as more expensive clothes, appliances, home electronics, home repair, furniture, even cars. With more padding at the bottom line, after savings and paying down debt, they concentrate what is left to improving the standards of their basic consumption.

Many families who live from paycheck to paycheck will pass the extra cash straight through their budgets; a moderately optimistic assumption about the propensity to consume for a temporary sales-tax holiday is 0.75, i.e., that consumers spend three quarters of every dollar they get to keep.

This also becomes the value that goes into the so called consumption multiplier. Given the $300-million increase in household disposable income, this multiplier suggests that over a period of 18-24 months we would see an increase in economic activity in Wyoming by $1.2 billion.

Assuming that we maintain the same proportions between GDP and private consumption for this sales-tax holiday effect on GDP, as we see normally in the Wyoming economy, we could expect an increase in private consumption by $670 million. Of that, in turn, some $238 million would be spent on items that (normally) are burdened with a sales tax. (This share would likely be higher, for reasons given above, but let's keep this example a bit tempered for now.)

The increase in GDP of $1.2 billion would be equivalent to almost 9,000 new jobs. That number is likely going to be smaller: employers know that the sales-tax holiday is temporary and therefore do not expect all of the increased sales to last as the holiday ends; and many businesses are scrambling for bigger margins and may choose to let existing staff work longer hours before they take on new employees. But even if the addition of new jobs would stop at 6,000 it would still be a significant change for the better compared to the current, unrelenting trend of lost jobs in much more industries than just minerals.

One last point: the sales-tax holiday would add to the deficit during one year, and that particular addition would be neutralized by means of a savings drawdown. Normally, I would not recommend the use of savings to cover a budget deficit. It tends to take legislators' focus off the pursuit of solutions and give them a sense of comfort when their attention needs to be concentrated to anti-deficit spending reforms. However, in this particular case the savings drawdown would be used for an offensive, strategic fiscal-policy measure with the aim to break a destructive, downward trend in economic activity. If saved money is used for that purpose, it is well spent. 

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