Does Wyoming Need A Tax Reform?

Is Wyoming in need of a tax reform? Recent economic news indicates that this may be a question worth considering in a not too distant future.

The latest CREG report on state government tax revenue presents an improved forecast of General Fund revenue by four percent over January. While the first reaction appears to be a rush to the spending binges, it comes with a longer-term question that calls for deeper analysis. It starts with Governor Mead's restrained fiscal regime, which has capped state spending in a way Wyoming had not seen in at least a decade. This welcome change for the better has been followed by a slow but visible industrial diversifcation of the Wyoming economy.

Here is where the CREG report becomes interesting. Our state's minerals industry, while still economically very important, has stagnated and is neither adding more jobs nor expanding its contributions to state GDP. At the same time, other parts of the private sector are showing clear signs of growth.

Hopefully, these are the first steps of a long transition phase for the Wyoming economy, where the role of the minerals industry changes to being one of many industries carrying the state economy. However, an industrial transformation inevitably has consequences for the state government. In a state with an industry-specific tax structure and an ongoing industrial transformation, lawmakers will sooner or later find themselves with dwindling tax revenues compared to their spending promises.

Wyoming's dependency on the severance tax is not as heavy as, for example, Florida's dependency on tourism-based taxes, but it is one of the state's top-three General Fund revenue sources. According to the October CREG report, severance taxes paid 17 percent of General Fund expenditures in Fiscal Year 2014 (which ended June 30). The forecast through FY 2020 says that severance taxes will be responsible for about 20 percent of General Fund revenue.

If the current stagnation in the minerals industry continues and, for example, manufacturing grows over time, it would certainly be positive from a macroeconomic perspective. However, it is hard to see how it would be reflected in the state budget. The state budget would face similar problems if white-collar professional industries expanded, such as the banking boom in South Dakota.

Preferably, Wyoming would undergo a spending revolution where entitlement programs were phased out and privatized. However, that is unlikely to happen any time soon. In the meantime, when the legislators get together for the 2015 legal session they may take some time to talk about where the state is going to get its tax revenue from in, say, 5-10 years from now.

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Disclaimer: I am not advocating higher taxes, or even a "revenue neutral" or "impact neutral" reform. I am just raising the point that a forward-looking legislature, not in a hurry to reform away big spending programs, should not be taken aback by the consequences of a transforming economy.