Weekly Economic Report: Personal Income and Consumer Spending, Part 1

by Wyoming Liberty Group Staff

A month from now the Bureau of Economic Analysis releases 2018 consumer-spending data for the states. In two parts, this Report will give an update on the recent history of consumer spending and personal income in Wyoming, compared to other states. This the first part examines personal income.

Main finding: Persistent trends in personal income point to an underlying weakness in the ability of households to make work-based earnings. The foundation for any form of personal income tax is weak, and weakening.

Personal income has three main sources: work, equity and transfers. Work-based income consists of wages, salaries and benefits paid out by employers. Equity-based income is earned from stock dividends, bonds and savings that pay interest, and from ownership of non-financial assets such as real estate. Transfers are entitlements paid out by government.

The composition of private income varies from time to time, though the long-term trend in the U.S. economy is toward a decreasing share being earned from work, an increasing share relying on equity and a somewhat increasing share coming from transfers. There are also variations from state to state; as this Report explained on February 15, personal income in Wyoming has shifted character over the past 20 years:

[The] work-based share of personal income in Wyoming has declined from 58.1 percent to 52.7 percent. Equity-based income has increased its share from 28.3 to 31.9 percent, while entitlements have increased from 12.2 percent to 13.7 percent. In other words, over the past 20 years, households in Wyoming have become more dependent on earnings from investments, and benefits checks from government.

The trend of increased reliance on equity-based income has effects for consumer spending. Traditionally, earnings from equity are associated with a lower propensity to consume. This trend partly explains Wyoming's lowest-in-nation ratio of private consumption to personal income:

Figure 1

Source of raw data: Bureau of Economic Analysis

In some states consumer spending exceeds 100 percent of personal income. The reason is spending by residents of other states; the data on consumer spending and personal income both report economic activity in a jurisdiction – a state – without regard to where the economic agents (consumers, income earners) reside.

This property of the data reported in Figure 1 adds another component to our state's ranking. Spending by out-of-state residents appears to be comparatively low, a point reinforced by Montana's third-highest ratio. Montana is one of a small number of states without state and local sales taxes, likely attracting consumers from neighboring states. For example, all other things equal, a resident from a state with a six-percent combined sales tax can save $600 per $10,000 purchase price of a new vehicle, by purchasing it in Montana.

The increased reliance on equity for personal income in Wyoming together with sales-tax competition from nearby states combine into a decline in the consumption-to-income ratio. A third variable helps explain the low ratio, namely net household earnings as share of personal income:

Figure 2

Source of raw data: Bureau of Economic Analysis

Less than 55 cents of every dollar earned as personal income in Wyoming ends up as net-tax earnings by a resident. This means that the base for any income tax is comparatively weak.

Over the past 20 years, the period for which relevant data is available, the net-earning share of personal income has declined in every state. On average, the net-earning share was 5.1 percent lower in 2017 than it was in 1997.

In Wyoming, the share has dropped more than in every other state except Nevada and Arkansas. This appears to correlate with the increase in equity-based income as share of personal income, though income migration trends suggest that the population taking residence in Wyoming earns more than the population leaving. Therefore, it is not likely that the inbound migration of equity-based earnings explains the relative decline in net earnings by residence.

A more likely explanation is the net outbound migration of workers with low-to-mid range income. In terms of work-based income, this has left the state with a higher reliance on money made by non-residents in the minerals industry. There, jobs pay considerably more on average than in the rest of the private sector; if the share of workers residing out of state is higher in minerals than in other industries, the outbound migration of middle-class workers explains why Wyoming has the third largest decline in net earnings by residents as share of personal income.

Implications of the findings

The main implications of personal-income data are for the discussion of a personal income tax in Wyoming. Although the primary income-tax issue is a corporate tax, it is not inconceivable that such a tax would be the preamble to a personal income tax.

Personal income is gradually shifting character in Wyoming, from work-based earnings to earnings from investments and entitlements. This narrows the income tax base; even if an income tax would apply to equity-based earnings, the increased share of that type of income would jeopardize the tax base by virtue of the high mobility of wealthier residents.

Furthermore, the apparently higher component of out-of-state residents earning income in Wyoming means that an income tax would appear to have a larger base than it actually does. Its construction would have to resemble those in states such as New York, where the tax applies to the place of work, not the place of residence. In doing so it would increase the tax wedge on income earned in industries where the share of out-of-state residents is already high.

The second part of this review of personal income and private consumption will relate these findings to data on consumer spending.