Revenue Committee to consider tax barriers to economic diversification

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SHERIDAN — As Wyoming legislative committees begin their month-long study sessions to prepare for the 2019 general session, much of the focus centers on facilitating the implementation of the recently passed ENDOW initiatives to diversify the state’s economy. But when the Revenue Committee convenes, it will confront a fundamental barrier to achieving that objective.

“For the Revenue Committee, the big barrier for us is our tax system does not support a diversified economy,” Revenue Committee House Chair Rep. Mike Madden, R-Buffalo, said. “That just simply says that the added costs that a [new] industry brings outweighs, and in some cases outweighs considerably, the state revenues we would receive.”

Dr. Robert Godby, University of Wyoming Department of Economics and Finance Director, explained that because the state has become so dependent on revenue from the energy sector, its taxes are not structured to collect revenue from other industries.

New companies coming to the state would mean more employees, which in turn would mean more strain on the state’s infrastructure, increased use of state services and increased enrollment in state schools — which Madden said would be the most significant cost. But the state’s tax structure is not designed to hold companies responsible for the increased costs they would create.

Energy companies in Wyoming pay severance taxes, mineral royalty taxes and ad valorem taxes in addition to property taxes. Meanwhile, the state does not levy taxes on companies outside the energy sector that approximate the costs energy companies pay.

Madden estimated that the mineral industry currently pays for 80 percent of the costs of education and other social services in the state.

If other sectors of the economy grow — by new companies coming to the state, for instance — the cost of social services will increase to accommodate new workers. The revenue that pays for the bulk of social services in the state, though, will remain static. Without new taxes, then, the state will not be able to generate enough revenue to cover the increasing costs of social services.

“[Wyoming] doesn’t have a corporate income tax and it doesn’t have an income tax,” Godby said. “You wouldn’t get a direct benefit from taxing the company, and you wouldn’t get an indirect benefit from taxing all of its employees’ incomes… so the bottom line is, these companies come in and they don’t support themselves.”

Madden said the Revenue Committee has run models on the economic effects of companies from various industries moving to Wyoming, and in each scenario the state would lose money.

In the past, Wyoming has relied on a booming mineral industry to expand its economy. But in recent years the mineral companies have suffered from a severe downturn and though they have begun to recover, that recovery has been moderate, and there are questions about whether the mineral industry will return to the size it once was.

“If you’re like me, you think the mineral industry is coming back some, but we’re really in a new normal,” Madden said. “Just by looking at coal, for example, we already know what’s happening long term to the coal volumes that we’re able to sell.”

Godby noted that increasing taxes across several industries could diversify the state’s revenue stream and make it less susceptible to boom and bust cycles. Increasing taxes on businesses broadly would also limit the burden on any one industry. 

Wyoming’s low corporate taxes are often touted as a selling point when state officials talk about recruiting new businesses, but Madden said finding a state with low taxes is rarely a company’s main priority.

“[Businesses] are looking more for services than they are for costs,” Madden said. “It’s true that businesses will not move into a state and expand in a state that has extremely high taxes. But the magic bullet is not to have the lowest taxes.”

Ironically, Godby said the lack of taxes in Wyoming could hinder the state’s ability to attract new businesses.

Other states can offer tax incentives to companies looking to relocate, which Wyoming, because it has so few taxes it can cut, cannot. For example, some states will offer companies the option of making payments in lieu of taxes; companies will pay for state services that will improve their performance, and the state will reduce taxes by the cost of those services.

Godby explained that if a manufacturing company needed specific training for its workforce, and that training required new education programs at a local college the company could pay to develop the new education programs and the state would cut its taxes accordingly. Those agreements make the state more enticing to businesses and allow it to develop its infrastructure.

“Once you have those taxes on the table, you open new avenues for economic development strategy,” Godby said. “You can create individualized economic development strategies to attract particular types of economic activity you might be aiming at.”

Politically, however, introducing new taxes is never an easy sell. That is especially true in Wyoming.

“The revenue committee has a really tough task ahead of itself; they’re basically the people who have to bring the bad news,” Godby said.

Several tax bills were introduced during the 2018 budget session; however, the state House of Representatives chose not to advance any of them.

Neither Madden nor Godby said there was a specific tax the state needed to implement or increase; they both suggested more property taxes, a corporate income tax and gross receipts tax should all be on the table. The only imperative, they said, is that the state has a discussion about how it is going to create a more sustainable tax structure going forward.

By |May. 11, 2018|

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