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Tuesday, October 3, 2017

A Lesson on the Income Tax

Nobody wants an income tax in Wyoming. Right? 

If you ask our legislators directly, almost all of them will state clearly that they will never vote for an income tax. Some of them are honest to the core in their answer; others will play on the semantics of the question: so long as you ask about an income tax proper, they think they can be honest with you and still get away with voting for an income tax.


So long as the income tax has another name, of course. Such as "Gross Receipts Tax", "General Revenue Tax" or "Gross Property Tax". Or, for that matter, "Business Activity Tax" or "IDIUT (Ingenuously Disguised Income Usurpation Tax)".

Beware, dear taxpayer, because the income tax is coming, in one form or another. As we all know by now, the legislature's Joint Revenue Committee is after a Gross Receipts Tax, while the Wyoming Association of Municipalities wants a General Revenue Tax. For two reasons, this is no coincidence:

a) The prevailing wisdom among our legislative leadership - and elected officials at the local level - is that cutting spending is the greatest sin of them all; and
b) Anyone who whispers "income tax" and is not a card-carrying Bernie Sanders fan is afraid of getting primaried in the next election cycle.

Therefore, they have decided to toss out various synonyms to "income tax" and see which one is best at flying under voters' radar.   

Well, that did not work. We all know by now that there is an income-tax-ind-disguise coming. What remains now is to relentlessly make the arguments against an income tax - and present the alternative in the form of well-structured, thoughtful spending reforms

As for the income tax, Wyoming is not the first state to consider a reintroduction. Alaska is already in the process of doing so, but there are other examples that can teach us a lesson about relentlessly pursuing higher taxes.

In the 1980s, Connecticut attracted a lot of wealthy families and businesses. The absence of an income tax motivated lots of high-earning New Yorkers to turn sleepy towns like Stamford and Greenwich into bedroom communities for well-heeled Manhattanites.

In 1991, though, The Constitution State's legislators voted to introduce an income tax. It was signed into law by then-Governor Weicker and went into effect on September 1 that year. The state income tax was sold as a budget saver for the state. On August 23, 1991, the New York Times quoted the governor:
"When I sign this budget Connecticut will be closing the book on its past and it'll be facing toward the future," Mr. Weicker said at a signing ceremony.
Did the 4.5-percent income tax solve the state's budget problems? Well, by 1993 the state income tax collected $2.2 billion, representing 17.7 percent of total state revenue. It had already climbed to become the second largest revenue source, only surpassed by $2.3 billion in federal funds. By 2000, when the income tax was on its tenth year, revenue was almost $4 billion; at 22 percent, it handily stood out as the largest revenue source for the state of Connecticut.

From 1993 through 2000, collections from the income tax increased by an average of 8.6 percent per year. After having plugged the hole in the state budget in 1994 - contributing to a surplus of 7.1 percent of total revenue - the tax became just another motivator for state spending. By 1998, the Connecticut state government spent 13.8 percent more than it took in. 

Things have not turned for the better since then. On the contrary, in May last year Forbes Magazine columnist Rex Sinquefield explained:
Just last week, the state’s General Assembly passed another budget that cuts services while continuing to spend more money. (The budget is so ill-conceived that it prompted credit downgrades from Fitch and Standard & Poor’s.) Anyone with a passing knowledge of Connecticut’s fiscal woes knows this is just the latest in a long line of bad decisions made by the state’s leadership. Connecticut’s irresponsible spending makes it an unappealing place for many families and businesses, and high taxes prompt alarming levels of outward migration. According to an analysis by The Yankee Institute for Public Policy, Connecticut’s outmigration causes the state to lose $60 of income every single second.
Wyoming is already losing population. If it wasn't for Colorado commuters moving to Laramie County, our demographic balance would be even worse. How many of those commuters are going to stay in the state if we start raising taxes like our state and local governments want?

The lesson from Connecticut is clear and should wake up every responsible lawmaker: the income tax, or any version of it disguised as general revenue, gross receipts or business activities taxes, will not fix any budget problem.

Only structural reductions to government spending can do that.

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