Thursday, June 7, 2018

Revenue Committee Got What It Asked For

As part of its June meeting, the Joint Revenue Committee has heard a presentation on tax reform in Wyoming. The official reason is that the Committee wants to explore a more "diverse" tax base; the real reason is that they are looking for scholarly backup for a tax overhaul that would close the deficit without forcing any significant concessions on the spending side.

In plain English: tax away the budget gap. And they got exactly what they asked for. In fact, the study was so heavily conditioned by the terms set by the Revenue Committee that they could not reach any other conclusion that exactly what the Revenue Committee wanted. 

Under Wyoming’s current tax structure, economic diversification will worsen the state’s fiscal woes, not solve them, an economic study conducted for the Wyoming Legislature’s Joint Revenue Committee found. Testimony from a Ph.D economist with the economic forecasting firm REMI to the committee yesterday in Riverton painted a striking picture of a tax code that is unable to capture the benefits of diversification beyond the energy industry. 
There is only one reason for this, and that is the big role that severance taxes play in the state budget. However, we have to keep two things in mind as we discuss taxes in Wyoming. 

First, their role, and the role of the minerals industry, is smaller than if often suggested. We have to keep in mind that the state in total spends north of $7 billion per fiscal year, including federal funds, other funds and the general fund. As the name suggests, federal funds are just that - money from the federal government - while the funding of Other Funds involves licenses and fees that are normally not considered in debates over the tax structure. In other words, our revenue base is more diverse than is often recognized in the public conversation.

Secondly, revenue is only a problem so long as there is government spending. Why has not the legislature appointed a committee to study structural spending reform? Why do they only have a committee working on structural tax reform?

Back to WyoFile and the presentation by an economist who is doing exactly what he is getting paid for, namely delivering an entirely government-centered report:
The disincentive to grow new industries is so strong, in fact, that economist Peter Evangelakis said Wyoming’s best bet for diversifying the economy without draining the state’s coffers would be to create “highly productive but low-paying jobs.” High paying jobs, he said, will draw too many people to the state and require government services — roads, public education, law enforcement — that Wyoming won’t be able to pay for. Because of Wyoming’s lack of a corporate or personal income tax, and its relatively low sales tax, the cost of services would outpace new revenues, Evangelakis said. 
We have to stop the tape here. First of all, the comment about "highly productive but low-paying jobs" reveals what the Revenue Committee has commissioned, namely a study that can squeeze more tax revenue out of Wyoming taxpayers without spending cuts. To accomplish that, Evangelakis and his firm REMI have produced a dirt-simple equation: 

  • higher productivity in the private sector means more taxable economic value, less
  • government spending that remains constant, equals
  • more tax revenue for government. 

The Revenue Committee got exactly what it asked for. 

But why low-paying jobs? The answer is given away in the next part of Evangelakis's comment, namely that high-paying jobs "will draw too many people to the state and require government services". In other words, the Revenue Committee has asked for a study of the Wyoming economy where we compete for jobs (essentially keep them from migrating to other states) by means of low wages. These low-wage jobs, in turn, are manned by people with rapid legs and fast arms, who can produce a lot so their overlords in Cheyenne can draw as much tax revenue as possible from them.

Yes, it is this brutally plain and simple.

Before we go back to the WyoFile report, I have to correct one point, namely that about our "relatively low sales tax". I have demonstrated repeatedly that our taxes are not low, but don't take my word for it. Key Policy Data, Scott Moody's nice little state economic data outfit, has shown that Wyoming overall has the 17th highest taxes in the country. By their assessments for 2015, our sales taxes are the 13th highest, with property taxes coming in 11th among the 50 states.

Based on newer data, Art Laffer's excellent Rich States, Poor States report ranks Wyoming sales taxes 11th highest in the country. Like me and Key Policy Data, the Rich States publication relates sales taxes to personal income - the only useful metric to find out how much taxes people can actually afford to pay.

With the low-tax myth dispelled one more time, let us get back to the WyoFile article:
Evangelakis modeled what would happen to state government revenue and expenditures if 100 new jobs were added to four industries: oil and gas, chemical manufacturing, the utility industry and food manufacturing, namely agricultural products. Costs associated with new workers in every field other than oil and gas would outstrip the tax revenue generated within a few years, the study found. 
This is very likely a finding under conditions of so-called ceteris paribus, in other words all other things equal. Regulations are assumed to be the same, as is access to workforce skills, venture capital, etc. As a result, the growth potential in these non-minerals industries remain the same as they are today.

From a policy making viewpoint, this is very important. It is likely that the Revenue Committee will dismiss the potential for growth in non-minerals industry because they have now been told that it is a feeble attempt. But one of the underlying problems in the Wyoming economy - there are many - is that we have an industrial monoculture of sorts. Too many parts of the state depend too heavily on minerals for survival (and even more depend too heavily on government). This lack of industrial diversity is a problem precisely because of government policies: regulations stifle industrial development and entrepreneurship; artificially inflated government payrolls crowd out private businesses who can neither pay the wages nor provide the benefits that government can by means of coercive revenue.

In other words, the state legislature has created the very problems they are now trying to solve, and when they ask for expert help in trying to find a solution, they get a solution presented to them that does not require them to solve the problem they created. They do not need to deregulate, they do not need to reform our unemployment insurance program, they do not need to bring down property and sales taxes; all they have to do is shrug their shoulders and say "for unknown reasons, we cannot rely on non-minerals industries to grow us out of this mess - so we have to reform the tax system instead". 

Evangelakis, the REMI economist, also presented some slides where he explained what it would look like to put other states' tax structure to work in Wyoming. There is no report from REMI available for analysis, so we cannot know exactly how this was done methodologically; I would have major reservations against such an institutional simulation unless it is done on specific terms and with great care. All we have is the powerpoint presentation that Evangelakis apparently provided the Revenue Committee with. 

His conclusion is that Wyoming has a deficient tax structure because it does not provide enough revenue to pay for state government as it is. This conclusion is no fault of Evangelakis's - he had to draw that conclusion based on the premises that the Revenue Committee gave him for his study - but it once again demonstrates how lopsided the legislature is in its unrelenting pursuit of more tax revenue. By narrowly specifying the conditions of this study to finding out why we need new and higher taxes, the committee has now received expert testimony that we need new and higher taxes.

Now that we have once again wasted a big load of taxpayer money on outside experts that tell our legislators exactly what they want to hear, can we please get back to the real issues here? We need:

1. Transparency and accountability reform of every corner of every government office, and every dollar spent by government, in Wyoming;
2. Deregulation everywhere, intelligently rolled out to maximize economic growth and pave the way for...
3. Structural spending reform in K-12, Medicaid and transportation.

How about a legislative Joint Spending Reform Committee to take the lead here? Or do we have to wait until we have a governor willing to do the job?

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