Wyoming and income tax – the right solution to a questionable question?
During this year’s legislative session much conversation focused on corporate and personal income taxes. Terms like “diversified revenue stream” and “recapturing of tax revenue” were used regularly by legislators promoting the session’s tax bills. But when the upbeat terminology is dissected, one can quickly agree with the statement often vocalized throughout the state that “Wyoming doesn’t have a revenue problem, we have a spending problem.”
The Wyoming Republican Platform, passed by an overwhelming majority of delegates at the 2018 Wyoming Republican Convention by 600 representatives from all 23 counties, states the following regarding taxes, “All taxes collected must be used for the constitutional purposes of government. It is irresponsible to run up debts that are passed on to our children and grandchildren. Taxes should never be more than necessary”.
Governor Mark Gordon echoed this sentiment on his campaign website. “Ensuring Wyoming has a balanced budget and that our government is living within its means is absolutely essential. This means prioritizing needs versus wants … We must rein in our spending today to ensure fiscal stability tomorrow”.
As we dig into the discussion of income taxes as a revenue stream, we first need to ask what the proper, or ‘necessary’, role of government is in our lives. The Wyoming Republican Party supports a limited role of government, and that government exists to protect our individual rights, to defend us against our enemies, and to administer essential services within the confines of what we the people allow and in accordance with our State Constitution. The federal government’s role, laid out in the preamble of the U.S. Constitution, is to “…establish justice, ensure domestic tranquility, provide for the common defense promote the general welfare and ensure the blessings of liberty to ourselves and our posterity”.
The Wyoming Republican Party emphasizes the need for an accountable government. An article from last year reported what many of us have known for too long, only a “handful” of people understand Wyoming’s budget. And, history has taught us that a government which does the things it should not do often abuses its powers, like the power to tax, or assess fees and fines, or confiscate income or assets. When the majority are in the dark, a small minority can manipulate these dollars, be it in terms of millions, billions or trillions, with the simple turn of a dial.
Let’s explore some basic issues.
1. What revenue do we have? Wyoming’s revenue stream relies heavily on mineral severance taxes and sales and use taxes. Thanks to our lucrative energy industry Wyoming has grown to become known as one of the most financially secure states in the nation. But it’s difficult to understand what’s coming in through minerals or interest on investments, or what we’re holding in reserves, because of our complex reporting processes.
We know that Wyoming’s money is in “silos” or “coffee cans”. It is not uncommon for one fund to be short of money and a legislator, particularly interested in the project, will announce that that the exact amount of money needed has been found in another, sometimes unrelated, account.
Causing even more confusion is a continual trend in Wyoming which allows agencies to collect fees without funneling the money through or even reporting this stream of income to the legislature, the intended “holders of the purse strings”.
2. How much revenue do we need? Often the ‘need’ isn’t clear, but we do know that in recent years the revenue stream in has been outpaced by the state spending stream out. According to an article published at the end of last year’s budget session, “The total appropriation for the 2019-2020 biennium is $8.63 billion…”. What many headlines didn’t relay was that the state of Wyoming ended the 2018 budget session with a $1.15 billion dollar structural deficit. Our legislators seemed to cross their fingers in hopes that this deficit would be made up by revenue such as capital gains interest on investment accounts and a rebound in mineral severance tax collections.
3. Is income tax the revenue solution? During the 2019 Legislative Session, legislators reported that HB220 The National Retail Fairness Act, and “revenue” darling of this year’s session, would garner an estimated $30 million after spending $15 million on administration and other costs. This is only 0.3% of the current budget, or 2.7% of the current structural deficit in the budget.
During floor debates, media interviews and conversations with constituents, no one could answer questions like: How much income does Wyoming make each year? How much do we spend? What impact would this “new money” have? In reality, those answers probably wouldn’t even matter since the number of dollars such a tax may bring in is all estimation, and vague estimation at that. It should be duly noted that this bill was only a few words shy of a state-wide income tax. It should also be noted that other states with income taxes get the most from individual incomes, not corporate.
The corporate income tax as proposed in HB220 raises other questions about legality and effectiveness.
1. Is it legal? An HB220 type corporate income tax in Wyoming is simply unfeasible based on laws in the Wyoming Constitution. According to Article 15 Section 18 of the Wyoming Constitution, titled: Full Tax Credit Allowed Against Any Liability Arising from a Tax on Income “No tax shall be imposed upon income without allowing full credit against such tax liability for all sales, use, and ad valorem taxes paid in the taxable year by the same taxpayer to any taxing authority in Wyoming.”
If such a tax were imposed, constitutionally each dollar that came in would only be replacing a tax that could no longer be imposed. We must ask, “What then would we gain by enforcing such a tax?”
Some may argue that this is a matter of semantics. An organized effort to amend the Constitution could change this language to fit the goals at hand.
2. How effective would this be in increasing revenues? Some legislators stated that the $30 million estimated is likely a high estimate. IF $30 million came in, that would cover only 2.6% of the structural deficit.
3. What is the real cost and impact of such a tax? One expense would be the creation of a Wyoming Internal Revenue Service to evaluate, assess and collect taxes, punish those who do not pay them, and ensure that the taxes are distributed to the appropriate accounts. We’ve seen the initial cost, $15 million, in the footnote to HB220. No one can say what the ongoing costs would be.
We’ve already established that a corporate income tax, like HB220, won’t raise the needed money. We also know that legislators are considering all options, including individual income taxing. So let’s consider the potential impact such a tax would have on each of us, and our friends, and our neighbors.
According to the U.S. Census Bureau, Wyoming has 577,737 residents. Statistics suggest that state income tax rates range from 1-12%. For this model we will choose 6% as the tax rate, and apply it to $30,000, the average personal income in Wyoming. Every person would be liable for $1800 in income tax. Of course, income tax wouldn’t be placed on every man, woman and child, so let’s assume that the actual number of payers is 25% of the population, or roughly 144,000. Applying the 6% rate on $30,000 per taxpaying entity (person or household), the state would take in a little over $259 million. Our total current spending budget is $8,119 million (a little over 8 billion dollars). That income tax would cover only 3% of the budget. So what if we wanted to cover the deficit, which looks to be annual? Each taxpaying entity would have to pay $8000 each year. That’s about $670 a month.
At the conclusion of the scenario laid out above, we would have no “new monies” in the state’s coffers, we would have added to our expenses by creating a new agency, and we’d see the death of Wyoming’s reputation as a tax-friendly state, a cornerstone of our recruitment promotions for economic development, with a plummeting Wyoming economy driving away residents instead of attracting them.
Wyoming’s U.S. Senator Mike Enzi recently proposed the reform of the national budget process, noting the increase in mandatory spending and a failure of Congress to ignore the budgets it sets. Those issues are certainly present in Wyoming. Before we take a steep dive into income taxing let’s tackle real budget reform.