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Wyoming's Comfortable Dependency on Natural Resources May Backfire

The Consensus Revenue Estimating Group, CREG, of the Wyoming State Legislature has upgraded its forecast of state revenues. Compared to January 2010 the October CREG report suggests that revenues during the Fiscal Year (FY) 2011-12 Biennium will be 4.9 percent higher than predicted in January.

While this may be taken as good news, it is in reality further evidence that Wyoming is increasingly a monocultural economy. The improved revenue forecast is almost entirely based on expected increases in expected revenues from natural resources. Severance tax revenues and sales of new oil and gas lease contracts are credited for a significant part of the forecasted revenue uptick.

It is not a good sign for the long-term sustainability of the Wyoming economy that the state government increasingly depends on extraction of natural resources for its revenues.

The state’s dependency on natural resources for its General Fund revenue was higher in the early 1990s than it is today. However, that changed over the past decade. From 1990 to 2000 severance tax revenues to the General Fund grew by a total of only 13 percent. From 2000 to 2010, on the other hand, the same revenues grew by 171 percent.

By comparison, during that same time sales and use tax revenues grew by 57 percent. In total, resources-based revenues grew by 80 percent from 2000 to 2010, while total General Fund revenues grew by 70 percent.

The relatively slow growth in sales and use tax revenues compared to resources-based revenues illustrates Wyo- ming’s heavy dependency on natural resources. It is also yet another indicator of the Equality State’s lack of economic performance. The Wyoming economy is not growing at nearly the same rates as neighboring states’ economies. Over the past two decades the economy of every neighbor state has grown approximately one to three percentage points faster per year. Sluggish growth in state GDP translates into sluggish growth in family income, and thereby private consumption, which is the base for sales and use tax revenues.

Wyoming needs a strategy to diversify its economy, something that is relatively difficult to accomplish. The main hurdle is political. The state government comfortably rakes in resources-based revenues. From a political point of view this is a low-maintenance revenue strategy. Essentially, legislators do not have to do anything for the 37 percent of General Fund revenues that originate in natural resources. However, in order to diversify the state’s economy and build another tax base state lawmakers – and the governor – would have to put in some hard labor and take political risks.

Like most of us, politicians are averse to risk. But this risk aversion could end up costing the state more than it gives. Natural resources extraction does not generate any significant value added to its product. Value added is an important component in economic growth: the more value that is added in an industry, the more that industry contributes toward GDP, or in this case gross state product. The industries that add value to Wyoming’s natural resources are located in other states and foreign countries. If more of them were located in Wyoming it would obviously be beneficial to growth and prosperity in the state.

Any short-term gain from reliance on natural resources could prove detrimental over the longer term, in particular with respect to what the federal government may or may not do. Hungry for more revenues the United States could seek to close its budget gap, by keeping more natural resources revenues. Another possibility is further regulatory incursions by the federal government, primarily based on alleged or real environmental concerns. Instead of relying solely on fighting the federal government through the court system the state should develop a strategy toward less dependency on natural resources.

 

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