Tuesday, September 26, 2017

Work-Based Income Keeps Falling

For natural reasons, people often compare Wyoming to Alaska. Our dependency on minerals is comparable, both in terms of the overall economy and government dependency on minerals-based tax revenue. There are, of course, geographic differences that make economic life easier in Wyoming, but from an overall fiscal policy viewpoint, Alaska is a good object of comparison for us here in the Cowboy State. 

Therefore, I have repeatedly pointed to the similarities and differences between us and the Last Frontier, but more than that I have drawn attention to the fiscal policy mistakes that Alaska state legislators - and their governor - have made. Those mistakes serve as a warning sign for us to take seriously. 

The biggest mistake they have made up in Juneau was to not start scaling back government in time. Over the past couple of years, therefore, Alaska politicians have been trying to outrun their fiscal crisis by throwing increasingly creative one-time funds over their shoulders. That is no longer working, but rather than manning up and taking responsibility, they resort to the exact same politics of denial that is so prevalent here in Wyoming. On September 22, the Juneau Empire reported:
To help solve Alaska’s multibillion-dollar annual deficit, Gov. Bill Walker is calling for a 1.5 percent payroll tax on everyone working in Alaska. The proposal, which will be considered by the Alaska Legislature during a special session in Juneau, was formally announced Friday afternoon. Reporters received advance notice of the proposal Friday morning in a briefing from revenue commissioner Sheldon Fisher. “The revenue bill will be a modified head tax. It’s structured to raise $300 million to $325 million a year,” he said. Under the proposal, anyone who collects a paycheck in Alaska would have 1.5 percent of that check withheld by the state, just as unemployment taxes and Social Security taxes are withheld. There’s a break for the rich, however: The maximum tax payment will be twice the amount of the previous year’s Permanent Fund Dividend. This year’s dividend, $1,100, would mean a tax cap of $2,200, the amount paid by someone paid $147,000 per year.
Sounds innocuous, does it not? I mean, who can't spare 1.5 percent of his pre-tax income...? This kind of argument has been used to motivate practically every tax increase mankind has ever invented. All the state and local tax increases being proposed here in Wyoming, right now, are being served on this very same platter. For example, proponents of the 0.25 percent sales-tax increase in Campbell County do not miss one opportunity to tell the world that this tax is only $27 on a $45,000 income (the exact numbers vary). Yet for some reason, the tax base from which they expect to derive this tax, equals $41,000 for every man, woman and child in Campbell County; no tax proponent has ever been able to explain where they got their numbers from. 

More on that on Thursday. For now, it is important to repeat that a single tax increase is never a major problem in itself - it is the cumulative effect, in space (consider state tax hikes on top of local tax hikes) and over time (a tax never goes up just once), that does the trick. 

But there are also individual taxes that have a make-or-break effect, even if they seem relatively small. The Alaska income tax is a good example, and so is the Gross Receipts Tax that some of our lawmakers here in Wyoming are desperately trying to create. A new tax of either kind is particularly harmful to weak economies, of which both Alaska and Wyoming are examples. Consider this analysis from Jonathan King of Northern Economics in Alaska. Back in January he explained that Alaska's recession
will continue for three more years and [he] foresees no real recovery, just decline and then a future with a smaller economy. Jonathan King, vice president of Northern Economics, said he feels like he is riding a down-bound train, able to see hard times for his business a year ahead but unable to do anything about it. ... "This is our great recession. By the time this is over, we expect to lose 6 percent of our jobs," King told the committee. A recession is unfolding of similar severity to what the nation endured after the 2008 financial crisis, but with a critical difference, King said. The U.S. economy recovered. He expects Alaska's economy to shrink long term to a smaller base. The projections show job losses bottoming out in 2018 to 2020, but no bounce-back through 2026. 
I have been saying the exact same thing about Wyoming: we are out of a serious downturn but we have no reason to expect anything other than a "new normal" - a permanently poorer state, to use Jonathan King's words.

This analysis is reinforced by the Bureau of Economic Analysis in their release of state personal income data for the second quarter of 2017. A first review of these numbers, which the BEA released last week, show that:

1. Our state's total personal income grew by 1.2 percent from the second quarter of last year to the same quarter this year; but
2. When we look more closely at where that increase came from, it turns out that it was not from work-based income;
3. In fact, wages and salaries declined by 0.5 percent, marking the ninth quarter in a row with current-price decline in wages and salaries earned in our state;
4. The component of personal income that increased the most was dividends, interest and rent, i.e., income from investments, which were up by 3.8 percent;
5. In addition, personal current transfer receipts - entitlements including but not limited to Social Security, Medicare and Medicaid - increased by 1.8 percent. 

In other words, the only reason why personal income increased here in the Cowboy State is that people earned more on their investments - in part, we can thank the stock market for that - and that they had the right to more tax-paid entitlements. 

I have pointed to this compositional shift in personal income on at least two occasions previously. It is a matter I will look into in more detail, with an interstate comparison; if we are, as I suspect, unusual in this shift away from work-based earnings, it is a matter of great concern to the future of our state.  

With all that in mind, not everything in the BEA's new numbers is depressing. One silver lining: the decline in our state's population has leveled out. Or that is, at least, what the BEA estimate says: 

Figure 1
Source: Bureau of Economic Analysis

What matters now is to make sure that those who decide to stay - and move back - do so because we have an attractive economic climate to go with our state's awesome natural beauty. I don't like pointing out the obvious, but higher taxes do not make our state more economically attractive. 

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