I am working on an article to demonstrate the strong positive effects that would follow if our legislators, and our governor, chose to open A New Chapter for Wyoming. I meant to publish this blog today, but I got some questions after yesterday's article that I would like to address. They actually work nicely as a segway into the article about the macroeconomic effects of structural spending reforms.
The questions I got pertained to personal income, inquiring primarily about how the earnings of Wyoming households have developed in the past couple of years. While we have no comprehensive data for 2017, we do have a fair amount of details on 2016. Unsurprisingly, it is not a pretty picture. As Table 1 shows, total personal income in Wyoming dropped by 1.7 percent in 2016:
|Personal income ($bn)||$30.09||$30.21||$31.89||$32.87||$32.33|
|Personal taxes ($bn)||$3.37||$3.45||$3.69||$3.71||$3.40|
|Disposable income ($bn)||$26.72||$26.76||$28.19||$29.16||$28.93|
|Per-capita disposable income||$46,317||$45,884||$48,264||$49,755||$49,404|
There are a couple of interesting numbers in this table. First, the decline in personal taxes paid by Wyomingites was almost five times higher than the decline in personal income. This tells us that the jobs we have lost over the past two years were comparatively well paid, consistent with the large initial decline in minerals jobs. That said, in 2016 less than half the private-sector jobs we lost were in minerals. Therefore, it is fair to assume that the job losses outside of minerals also paid relatively well. (The Bureau of Labor Statistics publishes raw data that, with some labor, can corroborate this; when time permits I will take a look at it.)
If the deduced conclusion about non-mineral job losses is correct (see reference later in the article), it means that we are suffering somewhat of a brain drain here in Wyoming. To make matters even a bit worse - and here is the second interesting statistic - we might be on the cusp of losing high-net worth residents. Current numbers for personal income do not suggest an exodus, not at all. However, we could be seeing the very first signs of one: in 2016, total income from dividends, interest and rent (traditional income sources for wealthy individuals) grew at only 0.7 percent here in Wyoming, compared to 1.86 percent in the country as a whole.
At the per-capita level, wealth-derived income is traditionally larger in Wyoming than nationally. In 2016 it amounted to $16,602 here, compared to the U.S. average of $9,168. Normally, wealth-derived income in Wyoming outgrows the U.S. average, but in the past two years the nation as a whole has outpaced us. Again, this is no dramatic shift, but it should be noted that it coincides with a decline in the Wyoming economy as a whole, and with increasingly loud whispers in legislative circles about massive tax hikes.
To pile on the bad news... and here is a real warning signal for our tax-and-spend friends in the legislature. Income from wages and salaries dropped by 5.1 percent in 2016. That is the second year in a row that work-based income has declined, and it is the largest drop since that fateful year of 2009. In fact, it is the second-largest annual decline since the Bureau of Economic Analysis began publishing this level of data in 1998.
It is logical that this decline is accompanied by a surge in transfer payments: in 2015 and 2016, the part of personal income that comes from transfer payments (entitlements, including but not limited to Social Security and Medicare) increased by, respectively, 6.0 and 4.1 percent. These are not quite increases at the same level as during the Great Recession, but but bear in mind that in 2009 and 2010, transfer payments increased by 8.1 and 7.9 percent, respectively. We are, in other words, uncomfortably close to those levels again.
With all this bad news in mind, the question is: how would our state benefit from structural spending reforms? In order to answer that question, we first need to examine what current policy ideas would do to our state's economy. This will provide a useful contrast between the welfare-statist policy strategy and its alternative, based on sound macroeconomic analysis and the principles of economic freedom and limited government.
As mentioned, the latter scenario will be rolled out in a separate article, which is on its way. Today, let us look at what the tax hikers would do to our state's economy if they got what they want. There are two possible scenarios:
a) $200 million in higher taxes, entirely on personal income (meaning increases in, for example, sales taxes, property taxes, excise taxes, licenses and fees such as those on motor vehicles); or
b) $500 million in higher taxes, split 40/60 between individuals and corporations (which essentially means introducing a Gross Receipts Tax or expanding the Gross Products Tax to all businesses).
Today, we will only do the first scenario, which approximates the mid-range scenario currently under assessment by the Joint Revenue Committee.
The second scenario is based on the same idea, plus the effects of a continuously growing budget deficit (the inevitable consequence of higher taxes) and the creation of a state-run airline to the tune of up to $100 million in new, annual state spending. However, to make an analysis of this scenario meaningful, I need a bit more information on the state-run airline idea. Until such information is at hand, I will shelf the analysis of the half-billion dollar tax hike scenario.
If taxes, paid by individuals, went up by $200 million, it would - on average - require every man, woman and child in Wyoming to deliver $341.59 in more taxes per year to the state. A family of four would have to part with, again on average, an extra $1,366 per year (assuming no further decline in our state's population).
A better way to illustrate this number is to compare it to the current trend in disposable income. From 2015 to 2016, total disposable - after-tax - income earned by Wyomingites, declined by 0.8 percent. That correlated with a decline in private-sector employment by, on annual average, 11,600 jobs.
A $200-million tax grab would have similar effects, only this time the job losses would have more of a low-income profile. The 5,100 jobs lost in the minerals industry in 2016 paid, on average, $77,000 per year; the jobs lost in the non-minerals industry paid an average of $35,000 per year. While this number suggests that the brain-drain hypothesis above is false, it is important to keep in mind that the non-minerals jobs are spread all across the economy, from minimum-wage level jobs to high-end consulting gigs. As I have reported previously in several articles about employment and earnings here in Wyoming, we actually lost more high-end, non-minerals jobs before we started losing non-minerals jobs in the lower-wage end of the income spectrum.
Therefore, it is fair to assume that a new decline in disposable income would hit lower-end jobs more than higher-end ones; at the position where the average Wyoming consumer is today, there is not a great deal of "unnecessary" spending to cut away. Therefore, his adjustment of consumption to an increase in the taxes he has to pay, will have more direct, negative multiplier effects.
Suppose we had raised personal taxes by $200 million in Wyoming now, in 2017. This would have continued the downward trend in disposable income, reducing it by about the same amount as in 2016. Suppose that this decline will take place in the form of a drop in consumer spending (with a multiplier of 0.8 - a bit high, but realistic; I will be happy to explain in case there are questions) and that consumer-oriented businesses respond by absorbing 25 percent of the spending loss and accommodating 75 percent of the sales loss by laying off staff. With these assumptions, we are looking at an initial round of about 4,200 jobs lost.
Then the multiplier goes to work; with a stipulated propensity to consume of 0.8, we could be looking at twice as many jobs lost over a period of two years, as we lost in 2016 (which, as mentioned, amounted to 11,600).
Again, this number relies on some stringent assumptions about consumer behavior and business responses to changes in consumer spending. For one, it is assumed that a combined increase of property taxes, licenses, fees, sales taxes and excise taxes of $200 million would almost entirely come back as a rapid reduction in consumer spending.
While realistic, this assumption is a tad crude in its "targeting" consumer-oriented businesses. On the other hand, there is a counter-balancing assumption that businesses can absorb as much as $25 of every $100 in lost sales. Given how our state has been suffering under a depression-like decline in economic activity for two years now, this is assumption is unrealistically optimistic.
It is also worth noting that the more of the tax increase that hits the property tax, as opposed to consumption-based taxes, the less rapid the multiplier effect will be.
With these caveats in mind, it is not unrealistic to conclude that we could lose some 20,000 private-sector jobs over the period of 2-3 years, as a result of a $200-million permanent increase in taxes paid by individuals.
Now, on the upbeat side of town: on Thursday I will, finally, publish an article that discusses the positive effects of structural reforms to government spending. Thank you for your patience.