The legislature’s budget and fiscal staff recently prepared a very novel one-page document that merits the attention of every Wyoming lawmaker and citizen.
“Wyoming Estimated Tax Capacity” asks and answers a seemingly simple question: How much additional revenue could Wyoming raise if its tax rates equalled, on average, those of adjoining states?
The question may be straightforward enough, but calculating an answer required an extensive review of tax policies in neighboring states and an equally rigorous comparison with Wyoming’s. Sales and use taxes, property taxes and income taxes were all taken into account.
Not surprisingly, Wyoming currently has the lowest rates in each tax category among the states considered — Montana, North Dakota, South Dakota, Nebraska, Colorado, Utah and Idaho. This means (in the economic language used in the document) that we have “excess tax capacity” among all of these types of taxes.
To figure this out, investigators determined the tax rate for each type of tax in each of the comparison states, put them all together, found the median and compared that median to Wyoming’s current rate. For example, the median sales and use tax rate in these adjoining states was found to be 6.86%, when state and local rates were both accounted for. In contrast, Wyoming sales and use tax rate was found to be 5.34% or 1.52 percentage points below the median of all compared states.
This difference is what the analysis defines as tax capacity. It then calculates how much revenue is associated with this excess tax capacity. In fiscal year 2023, this added sales and use tax revenue would amount to $245 million for state and local taxing entities or about $169 million per year for the state alone.
To be clear, all of that additional government funding would come just from bringing the sales and use tax rate up to the regional median. The types of transactions to which such taxes apply is not accounted for in that figure.
Wyoming’s sales and use taxes are applied very narrowly thanks to a long list of exemptions. The Legislature attempted to broaden the sales and use tax in 2018 by ending some of those exemptions. Wyoming statutes currently shield numerous commodity sales, purchases of manufacturing and large data storage facility equipment and most services from taxation. Over the last four or five decades, consumer habits have slowly changed such that now, 60% of purchases consist of services and about 40% are goods. Four decades ago, these percentages were reversed. This means that the sales tax base, as applied to commodities, has significantly eroded over the decades.
The added revenue that would accrue to the state if the tax statutes mirrored the range of services taxed in South Dakota would equal $262 million compared to the $169 million without broadening.
The authors of the document performed a similar analysis for property taxes. It turns out that on average the Wyoming residential property tax rate is .68% of fair market value, while the regional median is about .95% — a difference of .27 percentage points.
If Wyoming’s residential sales taxes were at the median of neighboring states, it would produce an estimated $178 million in additional revenue in FY 2023.
Parallel calculations of tax capacity associated with commercial and industrial property were also included in the analysis. Wyoming likewise has lower commercial and industrial property tax rates.
The added tax capacity amounts to nearly $200 million in additional revenue in FY 2023. Together, the added tax capacity of the property taxes from residential, commercial and industrial classes would add to $378 million per year or nearly $800 million for a biennium — more than is needed to close the structural deficit in the education foundation program.
As for income taxes, the median highest-bracket tax rate among comparison states is 4.95%. Since Wyoming presently has no income taxes the comparison is pretty easy. Every dollar generated by a tax at the median rate counts as fresh capacity.
Using the structure and methodology reflected in House Bill 147 – Wyoming income tax act (a failed measure from last session that was reconsidered by the Joint Revenue Committee in November), the added tax revenue calculates to about $150 million per year for the individual income tax. This bill limited the individual income tax to income above $200,000, meaning the vast majority of Wyoming earners would pay zero income tax. An additional $14 million would be generated if a corporate income tax was considered using the same methodology.
All told, the analysis produced in this enlightening document holds two important positive findings. First, if Wyoming captured the tax capacities identified above, the added revenue would more than eliminate the state’s structural fiscal deficit. In fact, the total increase in revenue generated would add to over $1.6 billion per biennium.
Second, by meeting in the middle, i.e raising some of these potential revenues while also making some of the cuts proposed by Gov. Mark Gordon, Wyoming could both balance its fiscal affairs and maintain its long-held standing as the state with the lowest taxes in the region.