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Friday, July 14, 2017

The Mercatus Report: What It Actually Means

On occasion, out-of-state think tanks provide analysis of the Wyoming economy and, in particular, our state's finances. These reports are often misused by welfare statists here in our state. The most recent example is the annual Ranking of the States by Fiscal Condition report from The Mercatus Center at the George Mason University.

The headline for Wyoming in this year's report is that our state ranks 5th in the nation for fiscal solvency. Needless to say, the Wyoming Business Report quickly picked up on this fact, and we can safely expect other news outlets to do the same.

As an outsider's view of our state, the Mercatus report can be likened to the annual tax climate publications from the Tax Foundation.
Both are generously cited by those who want to defend our unsustainably big government, perhaps with the Tax Foundation's reports being the favored go-to reference in Governor Mead's annual State of the State speech. 

Nevertheless, the Mercatus report surely will make its round in state media and even the occasional legislative committee conversation. For this reason, it is imperative that we put this report in its proper context.

In a nutshell, the Mercatus report says that our state government has big money in the bank, that it can access a sufficient amount to pay bills on time, and that it has a relatively strong assets-to-liabilities ratio. 

This is the part that will make the news cycle. Another part has to do with the report's ranking of our budget solvency: in Table 5 of the report, Wyoming shows up in second place, ranked as having the second-best budget of all states.

We who follow our state's finances closely, over time, know that our state budget has been on a path from surplus to deficit since at least 2012. In fact, as I explained earlier this week, the runaway deficit in our state budget first showed up in 2010, with 2012, 2013 and 2014 as the beginning of the trend we are now living with. 

The 2015 budget data that the Mercatus Center reports on were skewed by one-time cash infusions and revenue from the state's vast investment portfolio. The state's actual ability to pay for its expenses was much weaker than what the Mercatus report suggests in its Table 5. 

A more correct picture of our state government's finances show up in Table 7, where they report on something called service-level solvency. This is a good metric, the best and most useful one in the report, because it ties state finances to the underlying, macroeconomic situation in the state. Over time, a government's finances are never better than what its taxpayers can afford. 

Our state legislators, and our esteemed governor, better take a close look at the service-level solvency metric. It is, the report explains, a measurement of
how much “fiscal slack” states have to raise taxes or increase spending by calculating the size of taxes, revenues, and expenses relative to state personal income. States with high levels of taxes, revenues, or expenditures relative to state personal income may have difficulty obtaining increased revenues in a sudden downturn, making it challenging to respond to increased demands on the budget
Furthermore,
States with low levels of taxes, revenues, and expenses as a percentage of personal income are ranked at the top for service-level solvency.
As the report's only tie between state government finances and the actual economy, this metric proves to provide a relatively accurate picture of where Wyoming is today. Our state ranks 42nd, with a service-level index of -2.03. 

The practical policy meaning of this score is in close proximity to what I have reported on numerous occasions, namely that the taxpayers in our state cannot afford to pay higher taxes. On the contrary, we are actually over-taxed as it is. The welfare statists in our legislature, and their punditry cohorts, can point to the Economic Analysis Division's "imbalance" chart all they want - you know, the chart that suggest we only pay for a fraction of the government services we get. (I carefully debunked that chart back in February.) The fact remains that there is no way our lawmakers will be able to close a $400-million budget deficit with higher taxes; an average family here in Wyoming, working 1.5-2 private-sector, non-minerals jobs paying $37,000 per year, simply cannot afford $800-$1000 per year in higher taxes.

The Mercatus report has its limitations, but its authors are careful to point to those limitations (unlike our friends over at the Tax Foundation, whose annual tax climate pamphlet will surely make a splash here in Wyoming again this fall). Their report also has some meaningful information, especially when put in a broader context. They have started to put out time-series data per state, so far with only three years, but this helps the reader understand what their report actually says about the performance of an individual state government.

When viewed in the context of its analytical focus, of time and, even more importantly, of Wyoming's macroeconomic situation, the Mercatus report actually becomes a useful piece of information. It would be great if all our legislators and the media and other pundits in our state would do just that, and not cherry-pick numbers and take them out of context.

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