Saturday, August 26, 2017

Revenue Committee Needs to be Honest

Many years ago, an old friend who was on a good career track in politics decided to call it quits. When I asked him why, his simple answer was: "lies, more lies, politics". 

This is a misstatement of what politics is about, at least in general. Here in Wyoming, for example, we have many good, honest, dedicated politicians who selflessly serve their communities. However, there are occasions when I am reminded of my friend's words, even here in the Cowboy State. Thursday's article about taxes in the Casper Star Tribune is a good example:
The Wyoming Legislature is taking baby steps toward considering new taxes in a state known for heavily relying on the boom and bust energy industry for revenue. The Joint Revenue Committee generated five proposals for new revenue bills at its meeting earlier this month, all of which would raise existing taxes, and will consider a sixth at its September meeting. Committee co-chairman Rep. Mike Madden, R-Buffalo, said the following options will be considered before the Legislature’s budget session early next year
Before we get to the proposals themselves, it is worth remembering that Representative Tax-Madden won the 2017 Cowboy State's Most Prolific Tax Hiker's Award for sponsoring more tax-increasing bills in the 2018 session than any other legislator.

In fairness to the esteemed representative, as the co-chairman of the Joint Revenue Committee it is his duty to keep an eye on the state's tax system. That, however, does not mean he should sponsor eight tax-hiking bills in one session, nor does it mean that he should be deceptive about what his committee is actually up to.

More on that in a moment. First, we return to the Casper Star Tribune article and Representative Tax-Madden's current proposals for higher taxes:
Broadening the sales tax to include services
Raising the property tax
Adding a temporary half-percent sales tax
Increasing the tax on wine and spirits
Increasing the beer tax
Finding a new way to tax tourism 
Any combination of these proposals is supposed to raise up to $300 million in new revenue per year. Even if tax increases actually could solve a budget problem as intended, a package aiming for this amount of tax hikes would still be insufficient. The deficit that the legislature is trying to close is bigger than that: in my previous forecasts I put the 2018 annual deficit at $400 million and the 2020 deficit at $700 million. These forecasts were later verified by others, both the $400-million number and the $700-million figure

At one point a prominent legislator suggested that the deficit could reach $1 billion in 2022, a number I have never taken seriously. On the contrary, given the stabilization of the Wyoming economy, I would now move the $400-million deficit out to 2019 and scale back my 2020 forecast to somewhere in the $500-million range. This is a better outlook (which I will update with a detailed forecast in early September) but it is still a negative trajectory. The blunt message in these numbers is that anyone foolish enough to support $300 million in higher taxes in the 2018 legislative session would soon find him- or herself facing another deficit. 

The problem is that tax increases never work as intended. They stifle economic activity, discourage investments, kill jobs and drive both workforce and capital out of the state. But even before we get to that part of the tax story, there is the element of deception from the Revenue Committee - or at least its co-chairman - that gets in the way of an honest conversation about the future of taxation here in Wyoming.

Representative Tax-Madden's deception starts with the following statement, reported in the Casper Star Tribune article, with reference to the Revenue Committee's meeting in Thermopolis earlier this month:
The right-leaning Tax Foundation gave a presentation at the meeting about the pitfalls of a gross receipts tax. A gross receipts tax levies a fee every time a product changes hands — such as moving from a manufacturer to a distributor — rather than solely charging sales tax to the final consumer. Madden said that while the Legislature will not consider such a tax this session, it will ask the secretary of state’s office to begin tracking gross sales, which will allow lawmakers to know what the financial impact of a receipts tax would be. 
This is not an outright lie. However, it is precisely the brand of politics that my old friend referred to as "lies, more lies, politics", and it branches out in two parts. The first part has to do with the Gross Products Tax that the committee has placed on its agenda for its September meeting in Buffalo. Today, the filing requirements for the gross products tax restrict its application to operators of oil and gas producing properties. However, in lieu of a Gross Receipts Tax, an expansion of the Gross Products Tax to other producers - goods as well as services - is a convenient way to achieve practically the same expansion of the state's tax base as a Gross Receipts Tax would.

In other words, if the Revenue Committee follows the definitions of economic activity that are laid out in our national accounts system, it would be easy for them to simply let the Gross Products Tax become a re-branded version of the Gross Receipts Tax.

If defined according to national accounts standards - as many taxes are - a Gross Products Tax can be applied to various stages of a product. The cow raised on a ranch is one product; the beef that the butcher carves out of that cow is another product; the sale of that beef in wholesale and retail are also products. Not to mention the trucking service moving the cow and the beef around.

In theory, the Gross Products Tax could be applied in all these instances. In practice, it would probably be easier for the Revenue Committee to broaden their tax collections through an all-encompassing sales tax. 

Which brings us to the second part of Representative Tax-Madden's deception. By broadening the sales tax to services, which the committee is seriously considering, they can again get past the Gross Receipts Tax and tax every end-use of any product in the state. Again following the national-accounts system and its definition of "service", a broader sales tax would force a whole new range of businesses to collect sales taxes for the state: auto repair shops, trucking companies, hotels, hairdressers, movie theaters, apartment-leasing landlords, car rental companies, plumbers, taxi cab companies, to martial arts studios, concert and other event organizers... Guitar instructors, car washes, dog walkers, lawn mowers... They would all have to charge a sales tax on top of their bills, do the paperwork and make sure the money is deposited into the state's tax collection account on time.

From a strict technical viewpoint, and to some degree from the perspective of economics, a sales tax on services is not the same a gross receipts tax. It is not quite as onerous and does not hit every stage of a product's transition from raw material (or import into the state) to final user. However, when the rubber hits the road and consumers have to dole out more cash just for being alive, a sales tax reaching every corner of the economy can be almost as economically harmful as the gross receipts tax.

Here is where co-chairman Tax-Madden becomes outright deceptive. There is no doubt that the Revenue Committee is out to create a new tax base, one that is as broad as it can possibly be. They do not dare say "income tax", but they are looking for every possible - and impossible - way to impose an income tax without actually imposing an income tax. But by presenting the Revenue Committee's tax policy strategy as fragmented, he conceals their real strategy - to find the best possible way to mimic the revenue from an income tax - and makes it a lot harder for the tax-paying public to understand what the committee is really up to.

I will leave it to others to decide if this is a deliberate strategy on behalf of Co-Chairman Tax-Madden. But there is no doubt that it would be decent of the leaders of the Joint Revenue Committee would speak frankly and honestly about their ambitions. The point with the debate about taxes is not to throw around technical terms and fragmenting definitions. The point is to be fair, open and transparent about your policy goals, your long-term visions, what you expect of your voters - and what they can expect of you.

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