Thursday, January 12, 2017

Subliminal Mead Hints of Higher Taxes

In his State of the State speech, Governor Matt Mead made three points about the state's budget crisis:

1. His budget is "bare bones";
2. The budget deficit is a deficit in education funding: and
2. Wyoming needs a "broader, more comprehensive tax structure".

Taken together, these points tell us a great deal about what we can expect from the legislative session - and it is not good news for us the taxpayers.

Let us start with the "bare bones" budget. Yes, the General Fund budget, including spending from the Legislative Stabilization Reserve Account, is down 5.3 percent from the previous biennium. However, calling that a reduction to a "bare bones" budget is a little bit like complaining that you have to trade in your Mercedes for a Cadillac. 

We still have a generously proportioned government: let me repeat, again, that if we had a state government that was the same size relative the private sector as it is in Nebraska, then we could reduce our state government payroll by 5,800 employees. 

Yes: if our state government was the same size relative the private sector as it is in Nebraska, we would be able to reduce its cost to taxpayers by the equivalent of 5,800 state government employees. In payroll numbers, this is equal to $422.5 million.

The same reductions at the local government level would cut costs to taxpayers by 18,500 local-government jobs, allowing gross savings of $1.2 billion. We then have to adjust these numbers for federal funds and state funding of local governments; net savings end up in the vicinity of $1.5 billion to Wyoming taxpayers. 

If our state budget is as "bare bones" as Governor Mead suggests, then would he please explain to all of us how our neighbors in the Cornhusker State get by with a government that is comparatively much smaller?

The second point in the governor's State of the State speech, about education funding, remains one of the most deceptive political ideas I have seen in recent years. I regret that I have to say this, because I like Governor Mead both as a person - I have had the pleasure of meeting him several times - and as a capable chief executive. He is honest, humble and dedicated to serving his voters. His problem is that he either does not care enough about the budget, or that he listens to the wrong kind of information. Regardless, it is unbecoming of him to participate in this kind of political trickstery. 

Our state budget crisis is, superficially, a crisis of tax revenue. If we accept that as the one and only way to explain the budget deficit, then we also have to accept that it is a general revenue crisis. The reason is that the crisis has hit almost every corner of our state's economy: eleven industries, including minerals, have now been declining for four quarters in a row (measured through Q2 of 2016). Two other industries have contracted over three of the past four quarters (over the same quarter a year earlier):

Average contraction over four quarters
Agriculture, forestry, fishing, and hunting -27.8%
Management of companies and enterprises -15.9%
Finance and insurance -11.5%
Mining -11.1%
Real estate and rental and leasing -7.7%
Durable goods manufacturing -7.2%
Construction -5.7%
Wholesale trade -5.5%
Transportation, warehousing -5.3%
Educational services -4.3%

Every one of these industries consist of private businesses that pay property, sales and other taxes. Furthermore, more than half of all jobs lost in the private sector are lost in non-minerals industries. Since each lost job means a loss of sales, property, use and excise tax revenue (when the laid-off person goes from being paid to work to being paid much less to be unemployed), the general loss of tax revenue is reinforced by the economy-wide contraction. 

By defining the state's revenue problem as being an education-funding problem, Governor Mead and leading legislators disregard the bad shape of the rest of the economy in Wyoming. They set themselves up to pass legislation that will, seemingly, solve the education funding problem but will have serious repercussions on other parts of the economy.

In reality, our state's budget crisis is not a revenue crisis. It is a spending crisis. The false narrative that this is an education funding crisis further distances the conversation from badly needed solutions on the spending side of the state budget.

Which brings us to the third part of the governor's State of the State speech: the idea that we need a "broader, more comprehensive tax structure". If we combine the governor's "bare bones" remark with this statement about the tax structure, which he made toward the end of his speech, we get a pretty good idea of what kind of legislation he is, and is not, willing to sign during this legislative session. No bill will pass his veto pen that cuts any more money out of the budget; on the contrary, I suspect that he will gladly sign any bill that increases the burden of taxes on the shoulders of Wyoming's families and businesses.

The threat of new taxes is real: it is almost a done deal that we will see increases in sales and property taxes. But more disturbing is the fact that buried in the governor's State of the State speech were hints of a corporate income tax.  It was almost like an experiment with subliminal messaging. 

At no point did Governor Mead explicitly say that he supports a corporate income tax, but there were enough hints of it in his speech that we can: a) expect a bill, most likely for the 2018 legislative session, proposing a corporate income tax; and b) that a corporate income tax is going to work as a red carpet for a personal income tax.

If I am completely wrong on the governor's intentions here, he is more than welcome to write a rebuttal for my blog. At the very least, though, he should come out officially and say that under no circumstances will he sign any bill that creates any kind of income tax in Wyoming. It would, of course, be best if he also made clear that he does not want any tax increases whatsoever - and instead support meaningful structural spending reforms - but I honestly think that would be asking too much...

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