In its annual study of state and local tax burdens, the Tax Foundation reports that Wyoming is slowly losing its status as one of the lowest taxed states in the country. We still rank fourth best in the nation, but we are on a downslope that, if it continues, will take us farther and farther away from the top tier. This is especially troubling since neighboring South Dakota now ranks second best in the nation.
Since 2007 the average state and local tax burden in Wyoming has increased by almost a full percentage point, from 6.9 percent to 7.8 percent. We are still a healthy margin below the 9.9 percent national average, but as mentioned our neighbors in South Dakota are now marginally better off than we are (7.6 percent). More troubling is the fact that their tax burden has gone up much less than ours over the past few years.
Our state and local lawmakers, and our governor, all need to pay attention to this troubling tax trend. They also need to understand what is behind it. Even though the Tax Foundation report does not provide any specifics as to where our tax burden increase comes from, there are two causes that our elected officials can influence with the right kind of policy decisions.
The first cause is of course the actual tax burden. As we have reported on numerous occasions earlier, Wyoming is known for having a skewed tax system that is lenient on income but relatively tough on property. This presents businesses with an odd tax burden, benefiting larger corporations while making life harder for small businesses. By the same token, working families who do not have large incomes, and thus do not benefit a whole lot from the absence of an income tax, are unfairly hit by property taxes. The same goes for sales taxes, a fact that our state and local legislators should keep in mind when they consider raising the sales or gasoline taxes.
The second cause is somewhat related to the first. In recessions unemployment is higher, more people work low-paying jobs and more employers cancel salary and wage increases. Working families earn less, on average. This raises the burden of taxes, even when taxes are unchanged. In a tax system with an income tax, the taxpayer’s burden of supporting government becomes somewhat lighter as his income declines. This is especially true in systems with progressive income taxes. Wyoming, by contrast, relies on income-independent taxation, which has an adverse effect on the state’s effective tax burden in times of recession and unemployment.
Our state legislators can actually affect household income. They can ramp up their efforts at promoting business growth, especially outside of the natural resources industry, which is dominated by large corporations. We need a better business climate that is more friendly toward small businesses, with less burdensome property taxes (ours rank 35th in the nation) and a complete regulatory overhaul. By making life easier for small businesses our state lawmakers and our governor will promote job growth and better career and earning opportunities for working families.
With this in mind, it is also important to recognize that the Tax Foundation study comes with a methodological oddity that artificially inflates the tax burden of some states, and reduces it in others. When the Tax Foundation calculates our tax burden, it does so based not on what we earn and spend in our own state, but based on what we earn and spend nationally.
Here is how it works. If I spend a few days doing business in Washington, DC, I will obviously pay taxes on the hotel room. I will pay local taxes on my meals, sales taxes on the Saturday candy I buy at the convenience store, and outrageous taxes to fill up my car. Common sense and standard national accounts methodology prescribe that these tax expenditures should be calculated as part of the Washington, DC economy, not the Wyoming economy. But according to the methodology used by the Tax Foundation, my cost of these taxes count toward the Wyoming tax burden.
Consider the following analogy. If I – God forbid – paid a visit to Sweden, bought a pair of shoes and paid 25 percent in value added tax, then according to the Tax Foundation that tax expenditure becomes part of the tax burden on the American economy.
This methodological somersault in the Tax Foundation study is not just an academic matter. It has direct policy implications. Wyoming has many out-of-state vehicles that travel our interstates, buying gasoline and diesel at our filling stations. Some of our state lawmakers want to raise our gasoline tax by a full dime. This would have crippling effects on the Wyoming economy, but the methodology used by the Tax Foundation makes this increase look significantly less burdensome than it actually would be, simply because some of the tax burden would fall on interstate travelers.
That said, a methodological oddity like this one should not take away from the fact that Wyoming is seeing some problems with its taxes:
- We are no longer a top-three tax friendly state;
- We have seen our state and local tax burden rise by almost a percentage point since 2007; and
- We simply cannot afford to raise sales and gasoline taxes as some legislators have suggested.