Monday, January 16, 2017

HB134: A Business Property Tax Credit

Good news: a few aspiring lights are beginning to defy the fiscal darkness imposed upon us by the governor's "bare bones" budget and quest for a "broader, more comprehensive tax structure". One of those fledgling flames is HB134, sponsored by Representative Scott Clem from Campbell County, six other representatives and two senators. This bill wants to create a property-tax rebate for new manufacturing businesses moving into Wyoming. Here is the key point of the bill, with the new measure highlighted in red:
"Taxable value" means a percent of the fair market value of property in a particular class as follows: Property used for industrial purposes, eleven and one-half percent (11.5%), provided that, for the purpose of economic incentive, property used for industrial purposes for the first three (3) years of use, five and three-quarters percent (5.75%), and for the fourth year of use, nine and one-half percent (9.5%)

The reason why this bill focuses on manufacturing is that some economic research shows that this particular industry has stronger accelerator effects on its local economy than most other industries. I have not read that research, but I trust those who refer to it as having done their due diligence. 

This makes sense, though, since manufacturers need suppliers of parts, which can advantageously be produced nearby to cut supply costs. Furthermore, modern manufacturing is often a just-in-time operation, where inputs remain inside the assembly facility for as short a time as possible before they go out the door as the final product. This is highly cost effective, but it also means that the process is sensitive to supply disruptions. Having your suppliers nearby greatly helps in minimizing such risks. 

Furthermore, the shipping of products creates a great deal of jobs, as do the needs for infrastructure, utility services and other support functions. 

All in all, the idea of attracting manufacturing to Wyoming is not bad at all. 

Before I get to the other positive sides, let me raise a couple of issues with this bill. 

First, the bill focuses on a temporary tax rebate with a firmly set expiration date. Normally, this is not good for the durability of the new business endeavor. Theoretically, a selective tax rebate comes with the same problem as time-capped subsidies, namely that the advantages that attracted the business in the first place will go away and thus indirectly motivate the business in question to leave. 

In practice, those problems tend to be associated primarily with subsidies and other forms of government handouts - commonly known as corporate welfare - rather than tax rebates. Therefore, if we are going to try any kind of government-produced incentive to increase business investments in Wyoming, a tax rebate is preferable to corporate welfare. 

There is another reason to prefer a tax rebate. In economies that otherwise do well, a tax rebate can fall flat to the ground as businesses can make good money without them - in other words, other factors are more important in determining the location of business investments. However, in Wyoming, with our currently disastrous macroeconomic outlook, a tax rebate can prove to be the single deciding factor. 

Furthermore, our state's economy is doing so poorly that any measures with a reasonable chance of success in attracting new businesses should be given a serious chance. Again, a tax rebate falls into that category; corporate welfare does not. 

My second issue with this bill is about infrastructure. We have good highways, but population centers are few and far between. From this viewpoint, some parts of our state are more suitable for manufacturing than others: the corridor from the north east corner of the state down through Natrona County to Laramie County has both interstates and railroads well suited for heavy freight. The same applies to the I-80 corridor. It is probably more difficult for manufacturing businesses to locate to the inner parts of the state, from Powell and Cody down toward Riverton-Lander.

In other words, the concentration on manufacturing in this bill puts a geographic limit on where it can make a difference. This means less bang for the buck for the whole state. 

One way to address this concern is to begin with a tax rebate for manufacturing and later expand it to other industries as well. In other words, HB134 could be viewed as an ice breaker for a new set of measures to turn our state's economy around. 

As mentioned, there are also some nice, positive things to say about this bill. First and foremost, it does target one of the problems that our state runs into in business-climate studies, namely property taxes. Together with onerous unemployment insurance rules and difficulties with venture capital, property taxes have been mentioned in those studies. Here is how Wyoming scored in the 2016 CNBC Business Climate study:

2016 Rank
2015 Rank
Cost of Doing Business2092120
Quality of Life2211117 (Tie)
Technology & Innovation564849
Business Friendliness832119 (Tie)
Cost of Living332918
Access to Capital15050

Before we return to HB134, let me again stress that we are worst in the nation when it comes to access to capital. as for Technology & Innovation, that is the one area where Governor Mead is currently working to improve conditions in our state. He deserves a nod of respect for that.

The score for our economy is baffling, even by their own definition. The only explanation why our state's economic score is as high as it is, would be that the study emphasizes the state government's credit score a great deal, and that they look more at unemployment than other macroeconomic variables. 

Here is how they define and measure the cost of doing business:
Cost is a major consideration when a company chooses where to do business. We look at the competitiveness of each state's tax climate, as well as state-sponsored incentives that can lower the cost of doing business. Utility costs can add up to a huge expense for business, and they vary widely by state. We also consider the cost of wages, as well as rental costs for office and industrial space
It is interesting to note that CNBC ranks Wyoming 21st in cost-of-business, where the tax climate is included. The Tax Foundation's business tax climate study consistently suggests that our state ranks the highest; given the poor macroeconomic performance of our state, their study is entirely meaningless. The CNBC study appears to be using a more empirically valid methodology in that regard. 

The idea of HB134 to give new businesses a tax rebate would have a limited but nevertheless much-needed positive effect on the cost of doing business in Wyoming. 

Overall, HB134 is a welcome contribution from Representative Clem et al. I would just suggest two minor modifications. First, the term "industrial" is used instead of "manufacturing". There may be a specific legal definition of that term that motivates its use in the bill; in economics parlance the term "industry" means a distinct production sector of the economy, for example "banking industry" or "service industry". Unless there are specific legal reasons to keep the current term, I would suggest they replace "industrial" with "manufacturing", since that is the industry targeted by the bill. 

Secondly, despite what has been said above, there are risks with having a tax rebate that expires abruptly (though predictably). A better idea would be to give businesses a chance to perpetuate the lowest tax rate, for example by means of an "invest in Wyoming" credit where a business that continues to operate and invest in future operations in the same plant, or new plants in the state, can deduct those investments from their property tax. The deduction would cap out at the difference between the regular property tax rate and the lower rate that applies to the first three years. This encourages businesses to stay on, not just for the duration of the tax rebate. An "invest in Wyoming" credit could then gradually expand to apply to all businesses in the state. 

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