There’s a long-recognized but often ignored catch-22 at the heart of Wyoming’s economic-diversification efforts: Unless we also diversify our tax structure, attracting new non-mineral industries and their workers would actually worsen the state’s already dire fiscal situation.
Now, the work-from-home movement spawned by the coronavirus pandemic is putting that once theoretical threat to the test.
First, a quick review of the fundamental challenge first described in this column in 2019. Analysts using a Regional Economic Model, Inc. model are able to plug in Wyoming’s unique economic parameters — such as tax rates, prevailing wages and the costs of public services — to determine the net fiscal result of economic growth within various industries. Specifically they modeled what would happen if Wyoming was able to expand its agricultural, food-manufacturing, chemical-manufacturing, public-utilities and minerals industries.
The results demonstrated that growth in any or all of the non-mineral sectors produced long-run fiscal deficits for the state. That is, the increased tax revenue generated by the new businesses and their employees fell far short of the increased cost associated with providing public services — e.g schools, police protection, courts, road maintenance, sewers, department of health services etc. — to the new households and businesses.
In contrast, the model found that growth in the mineral industry produced substantial positive fiscal benefits in Wyoming. That’s the only way we’ve thus far been able to afford what’s been moderate expansion in non-mineral sectors. But now that excess revenue from the mineral industry has dried up.
The model also looked at how similar economic growth would play out under the unique tax structures found in North Dakota, Utah and Kentucky. In each of these states, expansions in the examined industries produced net-positive fiscal gains, in direct contrast to Wyoming. In other words, other states generally tailor their tax structure in such a way that as their economies expand and diversify, new fiscal revenues keep pace with the added cost of providing public services.
Three years ago, when this study was performed, no one could know just how pertinent it would be to today’s economic circumstances.
As a result of the COVID pandemic, workers all over the country and in a broad swath of industries began working at home. Management figured out pretty quickly that remote work actually functions pretty well for many roles. Various accounts now suggest that generally productivity has not fallen and, not surprisingly, employees have welcomed the opportunity to work from home. Many business entities have now adopted a work-from-home model for most of their employees.
As a logical progression, many employees no longer need to reside anywhere near their company location. Their employer may be based in Atlanta, Seattle, Dallas or New York, but they can now live and do their job from wherever they choose.
Quick question, would you rather live in Sacramento or Sheridan? Yeah, me too.
Not surprisingly, Wyoming along with many other states in the Rocky Mountain region are feeling the impact of this qualitative change from workers employed by out-of-state companies. Some Wyoming economic development associations now appear to welcome this new trend.
There are a multitude of reasons why this new residential pattern is likely to become more and more popular. First, employees soon discover, as they consider a move farther from their company location, an opportunity to purchase quality housing at far lower prices than their home location. This is particularly true for those relocating from California and other urban areas of the country. Second, another economic boost awaits them when they discover a far lower tax environment than what they were accustomed to before their move.
The companies that employ these transplanted workers are amenable to alternative residential locations if worker productivity remains satisfactory. In fact, over time it probably allows them to offer lower salaries to employees because of lower living costs.
It is also possible that the state and local governments from areas these employees and their families leave see a positive impact because the trend alleviates pressures on overcrowded schools and residential subdivisions.
If you’re keeping score at home, that’s three economic winners so far: workers, employers and the workers’ former governments. Guess who loses.
If this residential pattern continues, Wyoming stands to take an even bigger hit than was demonstrated by the REMI model three years ago. A migration of employees working in companies located in other states is analytically the same in the model except for the fact that the company, and the taxes it pays, remain in its existing location. In other words, it’s a double whammy for Wyoming. We still incur the costs of providing services to the incoming worker but any taxes paid by the employer go into a different state’s coffers.
Therefore, the fiscal losses are equivalent to the cost of the services that each of these new Wyoming households are entitled to, minus the state and local taxes those households pay. Because the companies themselves do not relocate, these losses are augmented by the lack of business taxes that would have been paid.
The Wyoming Taxpayers Association, government agencies and other organizations suggest that an average Wyoming household receives about $27,000 in services each year but only pays about $3,000 to $3,500 in primarily property and sales and use taxes. Again, the difference used to be made up by the taxes that commercial and industrial businesses and in particular the mineral industry pay.
This means that each new household relocating to Wyoming and working from home for an out-of-state employer on average costs the state at least $23,500 more in services than it contributes. Some households receive annual services costing far more than this. For example each public school student from these new households costs about $17,000 alone.
Assuming Wyoming’s net cost per household of services is $23,500, each 100 work-at-home households results in new uncompensated costs to Wyoming State and local government of $2.35 million. Likewise, each 1,000 of these incoming households adds $23.5 million to our budget deficit.
In past years, mineral taxes paid up to 70% of education costs as well as many other government programs. Thus, there were ample revenues generated in that industry to cover revenue deficits such as this. But, with the current challenges in this industry, those days are behind us.
A new way of dealing with these structural shortfalls is perhaps overdue.