Friday, January 5, 2018

The Tax Hiker's Guide to the Galaxy

If you get a raise, what is your first thought?

a) I can put more money into my savings;
b) I can trade in that old car that is costing a fortune in repairs; or
c) I can finally pay a lot more in taxes.

The real question, of course, is how many of Wyoming's families and small business owners have received any pay raise in the last couple of years. 


Now that we are in the Year of the Lord 2018, with the most important legislative session in many years, we can expect the tax hikers to double down on their efforts. Their rhetoric is going to get increasingly aggressive, with some reaching all the way into the mud and gutters of the public discourse.

There is only one way to counter the tax hikers, and that is to ignore their verbal sewage and stay focused on the issues. 

So far, the sewage part of their demagoguery has not been put on full display. So far, they remain civilized if uninformed. Arno Rosenfeld of the Casper Star Tribune is a good example. His long lament two days ago about the lack of tax hikes here in Wyoming is a good example of what tax hikers sound like when they still think they have a serious shot at affecting public policy:
In 2017, the Wyoming Legislature didn’t implement a corporate or personal income tax, nor did it raise the state sales or property tax to be in line with national averages or close the state’s budget deficit. Lawmakers also did not lay the groundwork necessary for a move away from heavy reliance on the mineral industry. Instead, legislators contented themselves with nibbling around the edges of Wyoming’s revenue question, moving forward on a few small so-called sin tax increases while deferring decisions on larger tax questions until the new year. 
I wonder what Rosenfeld's answer would be to the question at the opening of this article. Or... do I have to wonder? While he scrambles for his checkbook to write State Treasurer Mark Gordon a big check for voluntary tax payments, let us continue to listen to him subtly complain about the lack of tax hikes:
The state remains dependent on energy companies for roughly 70 percent of public revenue and still has some of the lowest tax rates for individuals and non-extractive industry companies in the country. 
OK, so this myth again. As I have explained earlier, and as Key Policy Data have demonstrated, Wyoming has the 13th highest sales tax burden in the country. Our property taxes are the 11th highest.

Given what Rosenfeld just said, how are these numbers possible? 

Simple. Rosenfeld and other tax hikers look at taxes compared to other states but ignore the tax base. Key Policy Data adjust for the tax base, i.e., the income out of which taxes are paid. This puts Wyoming in a totally different perspective, simply because not that many jobs in Wyoming pay very well. As I have shown on numerous occasions, the non-minerals private sector does not pay very well: in 2017 the average compensation was $37,000 per year. 

At that income level, even a half-percent higher sales tax makes a big difference.

Back to Rosenfeld:
The Joint Interim Revenue Committee looked at a host of tax proposals over several meetings, though they did not consider any bills that would dramatically remake the tax system in Wyoming. 
This is technically correct, but if Rosenfeld had been at the JRC meeting in Saratoga in the spring, he could have listened to a good debate over our state's tax structure. By only focusing on the bills - or lack of bills - he makes his own work a bit too easy.

Then, he continues,
Committee members also ended up postponing a vote on the most significant changes that they did consider — namely raising the sales tax and possibly the property tax as well — until later in January. The committee was tasked with generating three revenue plans, one that would raise $100 million, another that would raise $200 million and a third that would raise $300 million. Committee co-chair Rep. Mike Madden, R-Buffalo, has said that those were guidelines but that the final product might be a single plan somewhere between $100 million and $300 million or simply a few recommended bills that would each raise a set amount of money. 
Again, Rosenfeld has not done his homework. The total fiscal value of the tax hikes still on the Revenue Committee agenda run as high as $475 million; the tax hikes they scrapped took about $1.8 million off their original list.

One of the effects of this tax-hike package is to raise the cost of the state share of industrial-property taxes by up to 18 percent. If the state share is one quarter of the total property-tax bill, this represents a 4.5-percent increase in ownership costs. 

Another effect of this tax-hike package is that sales taxes will go up, something that Rosenfeld appears to be looking forward to. While the tax on existing sales-tax burdened products would go up by one half percent, the new service tax would take the tax rate from zero to 4.5 percent across the board. Let me repeat the list of services on which there will be a sales tax, should the Revenue Committee and Arno Rosenfeld get what they want:

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.

Since I do not have the exact national-accounts codes that the Revenue Committee has in mind, I can only give an approximate estimate of the economic activity that would be affected by the services sales tax. With that qualification in mind, we are talking about up to $8 billion in economic activity, and just over 32,000 jobs. With a 4.5-percent sales tax on the final services sold, how many of these jobs will be affected? 

Under "Business Services" alone, based on Bureau of Labor Statistics numbers, $164.4 million worth of annual wages and salaries are affected. If we assume that the businesses selling the services eat half of the sales tax in the form of lower net earnings, and if we assume that half of that, in turn, affects employees, we are looking at a loss of as much as 12 percent of total employee earnings. 

Until we have the exact NAICS codes, this is a hypothetical number. Nevertheless, it gives us a preliminary idea of what kind of macroeconomic fire the Revenue Committee is playing with. 

Add to this calculation the increase in the state share of the property tax that these businesses - or their landlords - will have to pay. 

However, none of this matters to Hike, Tax and Rosenfeld, who continue to present their case for more government revenue (without as much as a whisper about spending cuts):
[The Revenue Committee] killed a few bills at the December meeting — including one that would have allowed local governments to independently pass taxes more easily — and passed two, one to raise the cigarette tax by $1 per pack and a second to raise the sales tax on alcohol by a few percentage points.Those bills will now be considered by the full Legislature. But there’s evidence to suggest that the Legislature will be reluctant to pass even the measures that the revenue committee sponsors. 
Rosenfeld then moves on to two hurdles to tax increases. The first is the Senate, represented by Senator Kinskey. Does Rosenfeld believe that Kinskey's resistance to higher taxes will hurt the good Senator in the future? 

The second hurdle, as Rosenfeld sees it, has to do with revised CREG reports. Explains Rosenfeld:
revised revenue estimates released in October projected that the deficit for the upcoming two-year budget cycle are about $200 million less than previously predicted. A further update to those numbers in January may trim the budget gap even more. That relatively good economic news has also dampened enthusiasm among some lawmakers who had previously agreed that the state might be forced to raise taxes. “Whatever appetite that was out there — if any — is somewhat diminished,” Gov. Matt Mead said in early December. Even the so-called “tourism tax” is now in jeopardy.
Imagine that. A tax in jeopardy. Let me play a sad song on the world's tiniest violin.

One recurring theme in the tax hiker's guide to the galaxy of big government is that our taxes here in Wyoming are below the national average. As I explained earlier, that is not true, but let us accept their false analysis for a moment. When was the last time you heard one of them mention that our government spending should also be aligned with the national average?

For one, our Government Employment Ratio is the highest in the country. Not only that: in the past ten years it has increased more than in almost every other state (see figures 3 and 4 in this article). Is Mr. Rosenfeld on board with reducing our government employment to the national average?

Not only do we have a large government workforce relative other states, but our government employees also make quite a bit more money than private employees. In fact, our Government Compensation Ratio is the second highest in the country, substantially higher than the national average. 

Are our tax hikers willing to downsize government pay until it is at the national average, relative private earnings?

Our government sector has the third lowest productivity in the country. What are the tax hikers willing to do to raise that productivity to the national average?

I don't think we will be surprised by the answers to these questions...

Again, beware of the statists as they set course for galactic tax hikes. Since they are unable to conduct logical analysis, they will present more of the same rhetoric as Rosenfeld does here. However, that will not be all. As they realize that they are on the losing end; as proposal after proposal for higher taxes fall flat to the legislative ground; we can expect the tax hikers to try to pull the debate down in the mud and gutters. It is always their last resort: ad hominem and general verbal sewage is the last of their scare tactics.

It won't work, but if we are ready for it, we will be much better prepared to ignore it and stay focused on the facts.

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