Wyoming Heading for Structural Deficit

The latest CREG report predicts that General Fund revenue will grow at a crawling 2.1 percent per year on average from 2016 through 2020. Worse, as Figure 1 shows, the trend for most revenue sources is downward:

The Wyoming state government has weathered tough times before, which is one reason why the state has, basically, two years of spending stashed away in the bank. But this revenue forecast precipitates a structural change of the conditions for state government operations. Fundamentally, CREG says, the change is tied to the minerals industry. Three examples:

• Oil prices are in long-term decline, in part due to the United States rising to become the world's biggest oil producer in 2015, and in part because Saudi Arabia has decided to engage the United States in a global oil price war;
• Coal is under unrelenting federal regulatory pressure, which hurts Wyoming worse than states on the East Coast, where the coal is "cleaner" by European standards and therefore is easier to sell abroad than Wyoming coal;
• The general global recession has weakened demand, a trend reversal that now also includes China.

In other words, factors beyond control of the Wyoming state government will put a mounting pressure on the state's tax revenues. The squeeze will be felt already in two years, after which the situation is going to get tougher for each new fiscal year.

To put this slow revenue growth in perspective: from 2005 to 2010, before the Mead era of tight spending began, direct general expenditure of the state government grew by, on average, eight percent per year. That is a growth rate four times the predicted average growth rate in total General Fund revenue for 2016-2020.

If the CREG forecast had applied to the period 2005-2010, the state legislature would have had 30 percent less to spend on direct general expenditure in the 2010 fiscal year. And that is under the assumption that the long-term revenue growth trend is stable, not declining as it is in the CREG forecast.

This is not a regular appropriations problem. It is unlikely to go away any time soon. The problem is a combination of two factors: the structural reliance on minerals in our state tax system; and our state legislators having acquired a hard-to-break habit of spending out of abundant revenue.

If our state legislators can break their long-term spending habit; if they can initiate structural reforms to spending programs that eliminate built-in growth factors; then there is a good chance that they can avoid glaring deficits in their budgets in the near future. But the need for such reforms is urgent: factors not taken into account in the CREG report actually compound the problem for the state. A couple of examples:

• The federal budget deficit, which is currently shrinking, will start growing again in about four years, increasing the pressure on Congress to initiate tough spending cuts;
• New non-minerals industries moving into Wyoming more or less fly under the radar of the Wyoming tax system;
• Neighboring states are considering tax reforms that would ease the income tax burden on businesses and individuals, thus putting Wyoming under tighter competition for new jobs and investments.

Even if there were no cuts in federal funds and neighboring states did not join the national trend of business-friendly tax reforms, Wyoming lawmakers need to act now to avoid future structural budget deficits.