With significant tax increases defeated once again this session, prominent House lawmakers are pushing a conditional sales tax increase to confront a looming fiscal cliff.
Though the House Appropriations Committee sponsored the bill, it is largely the brainchild of House Speaker Pro Tempore Albert Sommers (R-Pinedale).
Sommers’ proposal would direct a number of revenue streams to public school funding, which is driving the state’s structural funding deficit. To counter against a fiscal “armageddon,” as Sommers called it, the bill also includes a conditional 1% sales tax increase that would be implemented once the state’s principle savings account drops below a certain level.
The tax is a backstop, proponents of House Bill 186 – K-12 and local government structural deficit repair act, said.
“It’s our only plan that’s out there to save education and to save what we know to be a fiscal cliff that’s coming,” House Appropriations Committee Chairman Bob Nicholas (R-Cheyenne) said. His committee heard and approved the bill on Monday evening, sending it back to the House where it received a 42-17 vote for introduction despite the tax increase it contains.
For Sommers, the math is fairly simple, he said in an interview with WyoFile. The state’s revenue estimators predict Wyoming will run down the Legislative Stabilization Reserve Account, better known as the “rainy day fund” over the next four years. The account holds nearly $1.6 billion right now. The budget bill lawmakers will debate entered the session spending the account down to $1.3 billion.
The vast majority of the drain on that savings account is from education funding. Fiscal analysts predict a deficit of around $586 million by the 2023-2024 budget period. Of that, $575 million is education funding, Sommers said.
The conditional tax is one element of the bill. Sommers also seeks to divert revenues to education in the near term, continuing the House’s years-long effort to tweak revenue streams and investment earnings to protect schools.
To understand how the bill redistributes revenues, it’s necessary to understand two separate state revenue streams.
The first is the state’s 7% severance tax on mineral extraction. Of the millions these taxes generate, 1.5% percent is constitutionally allocated to the state’s Permanent Wyoming Mineral Trust Fund. By law, the balance of the PWMTF can’t be spent, but it generates considerable revenue for Wyoming through interest and investment earnings which can be plugged into budgets. Set percentages of the severance tax flows into a number of other accounts too — general government, water development projects, local governments, etc.
The Legislature moves around another 1% of the tax, worth around $90 million a year, as it sees fit. For a long time lawmakers directed that money, too, into the mineral trust fund. But in 2016, when the state’s budget plunged, they started using it to cover gaps in general government funding. The Legislature has since largely stabilized that side of the budget.
Now Sommers wants to direct more of that discretionary 1% into schools. His bill would split the $90 million into thirds, and put $30 million into schools, $30 million into the rainy day fund and the last $30 million into a different reserve account. Over the two-year budget period, the change would knock $60 million off education’s predicted $575 million deficit.
The other revenue source Sommers is tinkering with is investment earnings from the permanent mineral trust fund. These earnings go up and down year by year and are not profiled by the state’s fiscal analysts. When they do come in, the Legislature channels them into the rainy day fund or an account called Strategic Investments and Projects. Both accounts are essentially discretionary funds for the Legislature — it can spend them on whatever it chooses, though the projects account is often used for new buildings and the rainy day fund has been covering deficits.
Sommers wants to direct a portion of those investment earnings, during good investment years, to schools as well. The rainy day fund money will go to pay for education anyways, he said.
“Let’s just recognize where our long-term deficit is,” Sommers said. It’s difficult to predict how much money this shift could generate for schools, and Sommers declined to try. Recent years have seen substantial investment earnings, however. In 2018, for example, the permanent mineral trust fund hauled in $268 million in capital gains. That was a good year for the stock market nationally, and subsequently for Wyoming’s accounts.
Sommers’ bill, if in place that year, would have sent 22.5% of that $268 million to schools — $60.3 million, according to WyoFile’s calculation.
To spin that analysis out further, consider if in both years of the biennium the trust fund earned the same amount as in 2018. Sommers’ bill would then direct $120 million in earnings, paired with the $60 million in state severance taxes, to education.
Even with two good investment years like 2018, and with the 1% severance tax money, Sommers’ bill wouldn’t plug education’s $575 million budget deficit. The Legislature would still draw down its savings account, barring changes like new taxes or steep cuts to education.
Given those estimates, the defining feature of the bill is likely the conditional sales tax increase.
Under the bill, if the Legislature spent the rainy day fund down to where it held less than $500 million, the state’s sales tax would increase from 4% to 5%.
The Legislative Service Office predicts a 1% sales tax increase would bring in around $206 million a year — which equals roughly $412 million a biennium. The bill directs 69% of the new 1% sales tax money to schools. Once that starts to add up with the two revenue streams Sommers is trying to divert, the bill begins to cover the education funding deficit, the lawmaker said.
“This really plugs the hole,” he said.
The rest of the sales tax money would go to local governments, which are also hurting for funding, Sommers said.
The bill is now back before the full House, where it will need to pass three votes before moving to the Senate. It will need a two-thirds vote to be introduced there. Prominent senators have criticized the House’s funding reallocations, which House leaders like Sommers and Speaker of the House Steve Harshman (R-Casper) like to call “modernizing” revenue streams.
“Modernizing is another word for smoke and mirrors,” Senate Vice President Ogden Driskill (R-Devil’s Tower) told WyoFile in an interview before the session began.
“I really am frustrated about the fact that there’s certain elements of the legislature that feel like we’ve created new funds by changing percentages or changing tips or pots,” he said.
Revenue diversions aside, the tax increase gives the Legislature a parachute, Sommers said. The Legislature could prevent the tax from ever being implemented if it solves the structural deficit problems.
If nothing is done, “when this cliff hits, it looks like armageddon,” he said. “We need something in place to buoy the system until we can react.”