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Now the Legislature must examine tax landscape

Wyoming is facing fiscal challenges today that are totally foreign to what it has witnessed for at least the last 12 years and perhaps even longer. We have enjoyed, for a decade or more, a generally favorable environment for coal, natural gas and crude oil — until the events of last year. Any dips that occurred in one of these top three minerals was masked by relative health in one or two of the others. Rarely have we ever seen all three tank at the same time.

Pete-Simpson_480x260In earlier years, when typical market fluctuations were witnessed in oil or gas, coal was always the bedrock, stabilizing influence muffling to a considerable degree the fiscal stress of the state.

Economic experts in the energy markets are increasingly suggesting a structural change within and between these industries that point to the possibility of a ‘new normal’ when it comes to reliance on mineral markets. This renders as unsustainable a Wyoming fiscal and tax structure that has relied on about 70 percent of the state and local revenue coming directly or indirectly from minerals.

The Governor and Legislature have taken wise and prudent measures to cut budgets in departments that depend largely upon general funds — carefully excluding schools. A brief description of the chronology of these cuts are as follows. Once the October report of the state’s Consensus Revenue Estimating Group was submitted to the Governor, he made appropriate cuts from the standard and exception budgets that were financed by general funds.

A second CREG report in January concluded that the October report was too optimistic, requiring further cuts by the Legislature coupled by using some funds from the “rainy day account” (the Legislative Reserve Stabilization Account). A third CREG report in late spring 2016 concluded that the January CREG report was again too rosy, causing the Governor to make another $248 cut in general fund budgets. Just at the end of August, the Governor announced that even more cuts will have to be made to finish the FY17-18 Biennium.

We haven’t even started talking about schools

All of this doesn’t even consider the future condition of the school foundation program, the funding mechanism for Wyoming’s schools.

In sum, the total cuts called for over this entire process have roughly involved a reduction of general fund biennium spending from a little over $3.5 billion to a little over $2.5 billion in an eight-month window of time.

Rep. Mike Madden of Buffalo is chairman of the Wyoming House Revenue Committee where all tax legislation must originate. (courtesy Mike Madden)

Rep. Mike Madden of Buffalo is chairman of the Wyoming House Revenue Committee where all tax legislation must originate. (courtesy Mike Madden)

We cannot cut ourselves into fiscal prosperity.

The question is, if this is the new normal, is it logical that we still maintain the fiscal imbalance where one industry supplies 70 percent of the funding for the cost of services for 100 percent of the populace?

The Joint Revenue Committee has a responsibility to react in a learned, judicious fashion and perhaps begin rethinking our tax structure along with monitoring spending patterns that have developed over the past decade or so. Much of the latter has been dealt with since we are now down to or below FY ’03-’04 spending in inflation-adjusted terms.

The first thing wisely requested by the Management Council was that the Revenue Committee look at tax exemptions. Tax exemptions have developed over the years purportedly to provide economic incentives to certain industries and businesses. From an economic perspective they are really tax appropriations. That is, exemptions work the same way as taxing an industry and subsequently appropriating the money necessary to pay the industry back an amount equal to the original tax.

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Related to this is the possibility of broadening the sales tax to include services that would result in our excise tax system looking more like those of surrounding states. These possibilities do not require changing the sales and use tax rate.  Better yet, action in these two arenas alone would close, by far, the majority of our structural fiscal deficit.

Other logical areas to consider involve taxes that do not automatically rise with inflation such as cigarette taxes. Taxes on these items are levied on a per-pack basis. The taxes on cigarettes have not been changed in 10 or 15 years. Yet prices have gone up for the product itself. A similar argument can be made for taxes on alcohol, fuel and a variety of other commodities.

Finally, the Revenue Committee will review the refined results of a study that suggests that the wind resource in Wyoming is taxed less than other electric power resources such as oil and natural gas. It is important to assure our citizens that the state of Wyoming is not picking favorites when it comes to energy resources.  

Many of these revenue issues as well as others will be debated by upcoming Revenue Committee meetings. An income tax, on the other hand, is one in which I have perceived no interest among committee members nor among constituents for that matter. Such a tax would mean an entire new tax structure with new administrative personnel when a broadened sales tax might gather nearly the same amount of revenue without the added expense. Nonetheless, serious discussions will occur at the Joint Revenue Committee meeting to be held in Buffalo on Sept. 22 and 23.

(Read former Sen. John Hines’s Pete Simpson Forum piece on this revenue topic.)

Republican Rep. Michael Madden of Buffalo is chairman of the Revenue Committee of the Wyoming House of Representatives, where all tax legislation must originate. As such, he is also co-chairman of the Legislature’s Joint Revenue Committee. He holds a PhD in Economics from Iowa State University and has served in the Wyoming House since 2007. As chairman of the House Revenue Committee he has sponsored and managed legislation dealing with fuel taxes, property taxation, revenue volatility and funding for local governments — Ed.

 

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4 Responses to Now the Legislature must examine tax landscape

  1. Dewey Vanderhoff September 13, 2016 at 8:34 am #

    It ‘s abject fantasy to think that the right-tilting residents of Wyoming boresighting thru their über-conservative citizen Legislators will in our lifetimes approve sweeping tax reform , because those reforms can only move in one direction: Tax Increases.

    Your median Wyoming resident voter will stand in a fallow field at the end of a busted up asphalt road outside a tumbled down doublewide totally bereft of any government services of infrastructure, and howl at the noonday Sun ” we got the lowest tax burden of any state “.

    Wyoming has for five generations been brainwashed that all taxes are poisonous ; government is a parasite; and we rugged individualist freedom loving gun toting Neo-Cowboy rough stock rednecked rowdy Republican roustabouts are completely self-sufficient and don’t need no Gubbamint or taxes.

    All of which is spectacularly wrong or extremely myopic. But how do you even begin deprogramming five succeeding generations of Sagebrush Anarchy when your state’s entire culture is based on a faux Cowboy Code of the West mythology and a very real feudal Old World landed aristocracy ? Even Zane Grey never wrote down that Code of the West in his book by the same name, yet we live by it as though it were on divinely carved on stone tablets and carried down off the Grand Teton by that bearded prophet Jim Bridger on or about 1869.

    By historical induction, the state of Wyoming should not even exist. But here we are—a near vaccuum inside an arbitrary rectangle drawn between other states with much more diverse cultures and economies. Wyoming let itself get utterly hornswaggled into thinking that the federal government and the big energy and mineral companies and a railroad or two would always have our backs and provide cash flow to keep the lights on and the shelves stocked , freeing us to play-act the Myths. All those Booms and Busts were just part of riding for the brand.

    Except this time around, circa 2020 ( like a vision test ), the Fossil Fuel robber barons are leaving Wyoming for good and they are not coming back. The world has no more need of our coal , and we cannot give away our natural gas let alone sell it . Wyoming Agriculture survives only because of federal support and a slough of subsidies but has never paid the utility bills or fixed many potholes. Tourism is pimpery. We never have manufactured much here. When your best salary and wage jobs are government payrolls and Wal-Mart is the state’s largest private sector employer , where do we turn ? The Tech Revolution passed Wyoming by …TWICE… we didn’t get aboard the Tech Train in the mid-90’s or this past decade. Too busy trying to perfect the alchemy of turning dirty coal into gold , or bring dead horses back to life by kicking them.

    So, yes, Wyoming, our tax code is in need of some definite reformation , for starters. Has that No Corporate Tax or low Estate Tax really done you any favors ? Why do four of the top ten billionaires in America live in Teton County Wyoming ( three named Walton ) . Oh…must be the private fiber optic link to the Cayman Islands or that house in Cheyenne where 2800 shell corporations lived in individual letter-size mailboxes , for tax purposes.

    Yup. I’d could go on , and on , but you get the point So cowboy up…we got some real reformation to do around here… time to move on from the 19th century I believe.

    Cody, Wyoming

    • P.Schroeder September 13, 2016 at 10:32 am #

      Thank you . From all of us elderly poor who were hurt so badly in the last slash and burn tactics that took away so much of the help we get .Bit it never hurt anyone else. They took away our sales tax rebate , portions of Medicaid and funds to places like our Senior centers, food banks, and libraries. We are hurting so badly and no one cares. And where is that rainy day fund exactly. Is it even there?

      Lander, Wyoming

    • Richard O'Gara September 15, 2016 at 5:28 pm #

      Let me begin by thanking Mr. Simpson, Mr. Hines and Mr. Madden for their articles calling attention to, as Mr. Madden stated, the more or less permanent structural changes in Wyoming’s tax revenue streams and the need that the state is going to have to change its taxation thinking because we cannot cut spending sufficiently to bring ourselves into fiscal prosperity (Madden). It appears that sales tax exemptions maybe one viable area where revenues can be increased along with taxing some services currently exempt from sales taxes. As all three of those writers are aware, the lobbying pressure will be intense by those currently protected industries. My problem with increasing sales taxes, not the rate of taxation, is that sales taxes are by definition regressive, as Mr. Madden well knows, and thus there is going to be a greater burden placed on Wyoming’s low and middle income households. I am not speaking in opposition to going down this road, but I think leadership should be upfront on the issue. Whereas, an income tax can be easily structured to be non-regressive or progressive as Mr. Madden well knows. My understanding is that past studies on an income tax demonstrated not much revenue would be raised with this taxation tool, but that might be a false conclusion if the rates were not sufficiently high or progressive enough. Having discussed these potential revenue streams there are others, I would like to mention. My problem with these is that I do not have current data on them but would hope such will be made available as the overall discussion progresses in coming months and years.

      First, and this is one that will be sure to stir high controversy and agitation is the current revenues being injected into the Permanent Mineral Trust Fund. My understanding is that no matter what the fiscal economic conditions facing the state, there is always a diversion of tax revenues into the PMTF which is mandated by amendment to Wyoming’s constitution. During the past years of prosperity, more than 300 million dollars was injected annually into the fund. Now with the state’s fiscal condition bleak and getting darker by the month, we continue to divert tax revenues into the PMTF. My hunch is that even now, this annual diversion approaches and may even exceed 100 million annually. Possibly, some thought might be given to stopping all such income diversions to the PMTF. Yes, it will require amending the constitution, but the PMTF was created by amending the constitution and there is really no reason that it cannot be amended again, but this time the amendment allows for halting all in-bound tax revenues when economic times are harsh and allows for their injection when economic times are good. This is basic good and solid fiscal policy. During good times one saves money, during depressed times, one does not save simply because income is not available to save. The political issue with this proposal is that Wyoming’s leadership is so fiscally conservative that it is wedded to the idea that we must save money, build the corpus of the PMTF, no matter how dire the current and projected economic conditions. This proposal is a simple statement that will, by necessity, require more complex thinking if it receives serious consideration going forward. For instance, an amendment will require a trigger mechanism, that is, at what point should income be diverted away from building the corpus and at one point should revenues again be used to build the corpus. In addition, there will most likely be a number of alternatives to the development of a trigger such as lagged or staged triggers, etc.

      A second suggestion centers on Wyoming’s permanent trust funds. The last time I looked the state had approximately nineteen permanent trust funds that made up its sovereign wealth whose total was in excess of 20 billion dollars, not including state employee retirement funds. The question I have is how many of these funds, in any, currently have revenues being diverted into them for no other purpose that to build their corpus or phrased differently, for the sole purpose of saving for savings sake? It would seem relatively straightforward for the Treasurer to report in-bound revenue streams to all funds in his quarterly reports which list all of the above permanent trust funds. This is really nothing more than a call for greater transparency. As many long-term residents remember, there have been any number of past instances where the state found itself short of revenues, but then by miraculous circumstance, the Legislature and administration found millions of dollars hidden in previously undisclosed “coffee cans.” This does not imply the existence of such cans at this time, but rather raises the question of are we so addicted to saving that we are gutting our critical infra- structure and vital institutions just to satisfy our addiction?

      A third and final thought on revenues and one that has been floated by others, pertains to how the state invests its earning assets, that is, its sovereign wealth. The state is often times constrained by its constitution from investing in higher yield (higher risk) investments and is forced to place its funds in very low yield investments, thus costing it millions and millions of potential revenue. One only has to do a quick calculation to see the dollars that could be earned on just the 1.8 billion dollars in the “Rainy Day account” if those dollars were to earn, let’s say 4 percent annually ($72 million). The latter rate of return is not overly difficult to achieve and would not require excessive risk taking in today’s market conditions. I would hazard the opinion that the vast majority of professional money managers would agree. To walk this path would again require amending Wyoming’s constitution but given the long-term decline in real and nominal interest rates beginning in 1982 and current projections that this trend will be with us for the next 25 years or more, does the State have the luxury of not taking on greater risk with its investable monies.

      cheyenne, Wyoming

  2. Karen Jerger September 13, 2016 at 8:28 am #

    Thank you Mr. Madden for this concise update on funding issues that the Revenue Committee must consider. While I do think that a state income tax should be a serious consideration, I appreciate your assessment that there may be other, more reasonable steps that can be taken to garner the same revenue. Thank you for leadership in moving WY to a more stable financial position.

    Jackson, Wyoming

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