The Corporate Income Tax on The Table in Wyoming & Misconceptions About the "Throwback" Rule

by Wyoming Liberty Group Staff

On Tuesday, July 9th, Rep. Jerry Obermueller (R - Casper) presented an updated version of a bill known in the Spring 2019 legislative session as The National Retail Fairness Act. This bill presented to the Revenue Committee, is now being called National Corporate Tax Recapture, and, like the previous version, it proposes a 7% corporate income tax.

The older version of the bill selectively taxed a few industries including food service, retail operations, and hotels that had more than 100 shareholders. This new version of the bill would tax any business in Wyoming that has more than 100 shareholders. It exempts employee-owned businesses and allows for tax deductions for excise, sales, use, severance, and ad valorem taxes paid. These tax credits would exempt mineral operations from having to pay additional taxes in Wyoming. The tax credits would also reduce the effective corporate tax rate of those paying any of the taxes listed above.

This bill, in both past and current versions, has been sold as a way to bring money back into Wyoming. It is being implied that the residents of Wyoming are paying other states' taxes. Some argue that when a person in Wyoming goes to Walmart and buys something, they are indirectly paying corporate income tax that goes to Arkansas (the state where Walmart has its headquarters).

This discussion is due to some misconceptions about how the throwback rule works. Some states, with a corporate income tax, tax revenue generated by business in another state that is currently untaxed. The untaxed revenue is thrown back into the state that can tax the business. Some states do not tax this revenue. This all depends on the use of the throwback rule in each state and if the state has taxable "nexus" over the business.

Nexus is the term for a states ability to legally tax a business. Wyoming can legally tax entities that are within its "nexus", meaning that they have a "sufficient physical presence" within the state. That means that the state can tax a corporation who has an office, or other personnel located here. Wyoming currently chooses not to tax corporations that are within its Nexus. However, these corporations may pay an income tax on their untaxed revenues earned in Wyoming, depending on the laws of their home state.

Not every corporation that meets the requirements of this bill is paying a 7% corporate income tax on their Wyoming business that is then being collected in their home state. The reality is much more complicated.

Jared Walczak from the Tax Foundation summed up the issues with the throwback rule in his comments to the Revenue Committee, "[the committee is not] shifting revenue from one state to another you are taxing income that is going untaxed now, or you are trying to tax income that is already taxed in other states". Wyoming would not be shifting tax revenue that is collected in other states because the tax may not be collected. If the revenue is taxed, it could be taxed at a lower rate.

There is still the misconception, amongst those in support that this bill, that they are bringing back the money that supposedly belongs to Wyoming. In support of this 7% corporate income tax, Representative Obermueller said to the committee, "I want our money." In response, a member of the committee, Sen. Bo Biteman (R - Ranchester) said, " It's not [the committee's] money -- it's the business' money." Biteman is spot on. We are taking money that allows businesses to employ Wyoming workers.

This 7% corporate income tax would have far-reaching impact on business in Wyoming. For companies with a nationwide pricing model such as Walmart, this would mean cutting employee hours or raising product prices. A previous analysis looked at the impact to jobs at Walmart stores in Wyoming and found that the taxes paid per store would be about $280,000. This would amount to $3.9 million for the 12 Walmart and 2 Sam's Club stores in the state. In order to absorb the costs from this tax, Walmart would have to cut about 154 full-time workers in Wyoming.

For a corporation without a nation-wide pricing model, this tax would mean raising prices in order to make up the difference to pay the tax. For many retail operations, their profit margin on the goods sold can range from 1% to 3%. This profit margin is what allows the stores to remain in business because they are making slightly more than their overall costs. To preserve profit margin, stores will have to make cuts to their labor force, or they will have to raise prices to adjust for the tax.

Not all large retailers in the state have more than 100 shareholders. Menards is a privately held corporation and would not be subject to this tax, whereas Lowes and Home Depot are publicly traded companies. This tax will make a publicly traded companie less competitive than a privately held corporation because the publicly traded corporation will have to raise their prices, and the private corporation will not have to raise prices.

The 7% corporate income tax will directly hurt business in Wyoming. It will mean higher prices to consumers and cuts to the labor force in the affected businesses. It creates competition issues, because not all large corporations or retailers in the state have more than 100 shareholders. It will disincentivize businesses that have a low-profit margin from opening new stores in the state. This tax is not what Wyoming needs -- it is not a business-friendly policy.