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CREG July: Capital Gains Cover Structural Deficit

Never bark at the Big Dog. The Big Dog is always right.

On July 28 the Consensus Revenue Estimating Group (CREG) published its quarterly update on state government revenue. While CREG as usual takes a low profile approach to the state's revenue problems, the actual message in the report deserves some real attention.

Long story short: see I told you so.

For well over a year now I have explained to readers of this blog that the Wyoming state government suffers from a structural imbalance between revenue and spending. In the first paper of my series The Structured Exit I present damning evidence of this structural imbalance, explaining that the state government only earns $44-60 in tax revenue for every $100 it spends on entitlement programs.

In other words: the state of Wyoming is operating with a structural deficit of at least 40 percent.

Imagine if your household economy looked like this. Imagine if your regular income only paid for 44-60 percent of your regular expenses, such as mortgage, car loan, car insurance, groceries, utilities... Obviously, that would be unsustainable.

It would be unsustainable for our state government as well, were it not for capital gains.

That's right: our state is scraping by on capital gains. Revenue from taxes is tepid at best. In the latest CREG report the trend in revenue from sales and use taxes is marginally behind the already-depressed forecast of the January CREG report. Severance taxes are 1.8 percent behind an already pessimistic outlook from the beginning of the year. Federal Mineral Royalties are marginally ahead (+1.4 percent over forecast) but as CREG notes in its summary table this does not take into account federal sequestration effects.

Capital gains add $376.1 million to the General Fund.

But that's good, isn't it?

No, it is not, and there are two reasons for this.

First, the state does not enforce a spending cap. Even if state spending only grows at three percent or less (roughly what we have seen under Governor Mead) flat or declining tax revenue means a deficit - and a growing one at that.

Secondly, you should never pay for regular expenses with windfall income. If your household income is flat or declining, but your IRA is performing well, you do not keep your spending going as usual. That would be a bad idea on any day; even if you could cash the IRA capital gains you would not fall into a habit of paying your mortgage with that money.

Yet that is what our state government is doing. It is relying on capital gains - windfall income - to pay for regular General Fund expenditures.

When our legislators ramp up their committee work after Labor Day, the first thing on the agenda for those in appropriations committees should be to cut away spending from the General Fund equal to the dollars earned in capital gains. To date, that would mean $376.1 million in relative spending reductions, in other words spending reductions compared to the full use of what is now available in General Fund revenue.

By excluding capital gains, the legislature would begin the necessary work to adjust state spending to what the Wyoming economy can afford over the long term. It would only be a beginning - but a beginning that will have promising results down the road.

If the legislature fails to make this adjustment, it ignores the structural imbalance in the budget. That ignorance will vouch for a rude awakening the day that windfall income no longer covers the structural hole in the budget. At that point, the state will have no time to make prudent, thoughtful spending reductions. It will be faced with fiscal panic, a legislative condition the effects of which are painfully visible in Greece, Spain, Italy, Puerto Rico, New York, California...

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