Saturday, May 20, 2017

When You Try to Tax Away a Deficit

With my apologies to the German poet Martin Niemöller...:

First, they taxed the billionaires. I was not a billionaire, so I did not protest.

the billionaires left, so they taxed the millionaires. I was not a millionaire, so I did not protest.

Then the millionaires left, so they taxed the rich. I was not rich, so I did not protest.

Then the rich left, so they taxed the middle class. I was not middle class, so I did not protest.

And when the middle class left, they came to tax me. And I could not afford to leave.

As we get closer to the pivotal meeting of the Joint Revenue and the Education Recalibration Committees in Riverton on June 12 (here is their agenda) it is increasingly important that we have a thorough and candid conversation about what kind of state we want Wyoming to be.

On the one hand, we have the options awarded us by reforms that will open up monopolies currently protected by government, primarily but not only in education; we have the opportunities that come with privatization, deregulation and with liberating our state from its stifling dependency on federal funds for Medicaid, Transportation and other programs.

On the other hand, we have the inevitable decline into industrial poverty that comes with higher taxes and a government that long ago outgrew the tax base that the private sector can provide.

There is no middle ground between these two strategies. Any increase in the tax burden on our state's economy will harm any efforts at strategically growing the private sector by means of structural spending cuts - and we need every penny of improvement to our private sector that we can get.

Not only do we need every penny, but we need them soon. As I mentioned two weeks ago, Wyoming has now suffered an embarrassing credit downgrade thanks to the delay in dealing with our fiscal and economic crisis. We cannot wait any longer with the right kind of spending reforms. Until we hear, firmly and unequivocally, that our legislators have settled for structural reforms to spending and regulation, we have to assume that they may choose to raise taxes instead. That means, we have to continuously make the case against new and higher taxes.

It is easy to make that case in theory, but real-world examples also help a great deal. Therefore, let us take a trip to Connecticut, where they have tried to tax themselves out of their budget problems since at least 1990. 

In its May 20-21 print Weekend Edition, the Wall Street Journal reported on the unending fiscal problems that the legislators and the governor in Hartford are struggling with:
The wealthiest state in the U.S. is having trouble collecting enough money to pay its bills, and the Democratic governor doesn't think taxing the rich is the answer anymore. After two decades of robust growth, Connecticut forecasts it will come in $400 million short in income-tax collections this fiscal year, worsening a budget crisis that has prompted all three major ratings agencies recently to downgrade the state's credit rating. Connecticut's budget office estimates that income-tax collections will fall in fiscal 2017 for the first time since the recession. 
Half of the revenue loss originated with the state's 100 highest-earning taxpayers. Keep this factoid in mind for a moment as we go back to the Wall Street Journal article:
Gov. Dannel Malloy has twice before bet that taxing the wealthy would help solve the state's fiscal problems. But neither increase resulted in sustained revenue growth, according to his administration, which says it would be a mistake to do it a third time. ... 'You can't go back to that well again,' said Kevin Sullivan, commissioner of the Department of Revenue Services. 
The personal income tax in Connecticut consists of seven brackets, from three to 6.99 percent. The highest bracket, which kicks in at $500,000 for individuals and $1 million for married filing jointly, brings in the largest amount of revenue. This is not surprising, given the seven-bracket tax scale; according to IRS federal income tax data for 2014, tax filers earning $500,000 or more accounted for 37.5 percent of the taxable income in the state. 

As mentioned above, this income tax has made the Connecticut state government disproportionately dependent on its high-income residents. When tax revenue from those households declines because... 

  • their earnings drop (many hedge fund managers live in Connecticut) or 
  • wealthy families simply leave the state (the Wall Street Journal mentions that the Constitution State has lost residents since at least 2010), 

the state is quickly hurled back to the fiscal problems it was wrestling with before it introduced, and then twice raised, its income tax. 

Now, let us get back to the point about half of the $400-million revenue loss originating with 100 taxpayers. One of the arguments here in Wyoming for introducing a gross receipts tax is that we need to diversify our tax base. The problem is that gross receipts taxes suffer from fluctuation problems similar to those of, say, a flat income tax. Taxpayers with a lot of revenue (income) pay a proportionately large share of the tax. 

Connecticut tried to diversify its tax base in 1990 when they introduced an income tax, a decision that now seems rather silly, given how its revenue stability stands and falls with a few hundred wealthy taxpayers. By the same token, a gross receipts tax here in Wyoming would suffer from similar problems - not exactly the same, as the gross receipts tax would presumably be flat, but there would nevertheless be a heavy dependency on high-revenue taxpayers.

The $31-billion elephant in the legislative chamber in Hartford is, of course, the state's unwavering commitment to spending money. With an average of more than five percent growth in spending per year since 2014, it is clear that lawmakers in Connecticut still have not even begun understanding the nature of their fiscal crisis. 

At least, we have opened that conversation here in Wyoming. Let us now hope that examples from other states, such as Connecticut, can discourage our own legislators from doing anything on the tax side of our state budget - raising or diversifying - before they have done something substantial about spending. 

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