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Monday, December 4, 2017

Half A Billion Dollars in Higher Taxes

Friends,

This is it. This is do or die for the Wyoming economy. As we speak, the Joint Revenue Committee is meeting here in Cheyenne, with tax increases on their agenda that, if they all go through, will raise our taxes by $477 million. 

This is only the beginning. As a member of the legislature explained in a comment on the open Facebook group Wyoming Prosperity, the number discussed among legislators is $700 million. (If you haven't joined Wyoming Prosperity yet, please do so. We are going to need this group now more than ever.)
With this number, the $477 million is not going to cut it - even if we disregard its negative macroeconomic effects. 

Eighteen months ago, when I started the fiscal policy project Wyoming Prosperity, I presented a deficit estimate to the Revenue and Appropriations committees that predicted a budget deficit of $700 million by 2020. My only mistake in my own calculations was the trend line: I was correct on the direction our state's economy was heading, but I was too conservative in how fast we were going to get there. 

I still believe that the deficit trend will be somewhat mitigated by the fact that we are now in a "new normal." This is a new state of stability where our economy is operating at a lower level of activity, with fewer jobs, lower average incomes and a more depressed outlook on the future. 

However, this new state of stability is of no help when the tax hikers go to work. 

To begin with, the $477 million tax package is in itself so bad that it can hurl us into a new, deep economic downslope. I am working on a macroeconomic estimate of its effects, an estimate that takes some time; until then, keep in mind that this tax hike alone is equal to $891 per year for every man, woman and child in this state. Then tally up how much this means, on average, for your family. Again, this is an average number, but somehow, somewhere, someone is going to have to pay these taxes, whether it is your employer who will pass them on to you, or every business you frequent during a week; they will all try to pass the tax on to you.

Remember: the sales tax will go up to 4.5 percent, and there will be a sales tax on services. Assuming that the sales-tax rate will be flat across the board (except for those who have courted special exemptions), which means that service businesses will not have to add 4.5 percent to the prices they charge. 

Here is a list of the services that will be hit by this new sales tax, probably at a 4.5-percent rate:

a. Agricultural services, including but not limited to veterinarians (except services for livestock), landscaping businesses, lawn and garden services;
b. Personal services, including but not limited to beauty parlors, barber shops, tax preparation services (though funeral homes are exempt - so technically we still won't have a death tax here in Wyoming);
c. Business services, including but not limited to commercial art and graphic design, court reporting services, disinfecting and pest control services, building maintenance, computer programming and data processing (except those who have courted a tax-exempt favor with the governor);
d. Amusement and recreation services, including but not limited to dance studios, dance schools, dance halls, bowling centers, physical fitness centers, public golf courses and member sports clubs;
e. Legal services;
f. Engineering and management services, including but not limited to engineering consultants, architects, land surveyors, accountants, auditors, bookkeepers, commercial research, testing laboratories, management and consulting, facilities support, and real estate agents and management;
g. Communication services including but not limited to cable TV.

In other words: if it moves, they will tax it. If the tax rate is 4.5 percent, the underlying sales that they are going after are worth just over $1.8 billion annually. However, the industries they mention produce economic value of more than $8 billion per year (their contribution to state GDP), so the tax base is potentially going to be larger than these estimates suggest. 

Add to this the fact that every business that falls under the "industrial" property assessment value will have to pay taxes on 13.5 percent of the assessed value, up from 11.5 percent. That means, plainly, that for every $100 a business pays in state property tax today, it will have to pay $117.39 after July 1 next year. Remember: this is on the state side of the property tax; it does not affect the entire property tax bill. 

As a hypothetical example, if one quarter of the property tax bill a business pays, goes to the state, then its total property tax bill (under industrial assessment) would rise by almost 4.4 percent. However, do keep in mind that that local property taxes may go up as well, as local governments try to piggy-back on the state's tax hike.

There is another reason why our new economic stability is not going to shield us from the massive $477-million tax attack. It is, namely, only the first strike. Given that the actual deficit number is $700 million, a $477-million tax hike in 2018 will not suffice. The legislature is going to have to add more - which points squarely at the Gross Receipts Tax (GRT). They will probably start with a mandate for all businesses to begin reporting gross receipts to the Department of Revenue during 2018, with the tax itself going into effect in 2019, possibly 2020 (though the earlier date is more likely under a larger deficit scenario). 

A tax on gross receipts would have largely the same effect on our state's economy as an income tax. At a rate of 2-2.5 percent, it would be added to the cost of doing business as the very first bill a business owner would have to pay, before he pays any other bill. All other taxes; utility bills; bills for purchase of inputs and merchandise; garbage collection bills; employee benefits and wages; all of that would have to wait until the GRT has been paid.

Let me make clear that as of today, to the best of my knowledge, there is no formal proposal for a GRT here in Wyoming. However, the Revenue Committee has been discussing it for the better part of this year, and they have even invited a Tax Foundation expert to help them craft a workable GRT. I have predicted before that they would start with "smaller" tax items, such as higher sales and property taxes, and the expansion of the sales tax to services, before they get around to the GRT, and so far this seems to be exactly what the Revenue Committee is doing. For this reason, and given the surprisingly large package of tax hikes on their table right now, it would be foolish to dismiss the threat of a GRT.

A GRT on top of the $477-million tax-hike package would take us north of $700 million in higher taxes. Then we have to add the ENDOW-related taxes, should the legislature approve of the governor's "economic development" plan. I have ballparked the ENDOW taxes at $150 million per year.

In my nine years here in Wyoming I have never seen such a madhouse-style effort to raise taxes. Even if we disregard ENDOW and the GRT (which we shouldn't, but just as a thought experiment), the $477 million, of which more than $400 million would go into effect next summer, is enough to cripple the Wyoming economy for the foreseeable future. 

The only glimmer of hope is President Trump's tax cuts. However, given its distribution profile there is not much to hope for on the household side. Once Congress has a reconciled version, it is worth looking at whatever it might do for our state. But from what I have seen so far, there is not much to hope for, other than some alleviation.

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