Weekly Economic Report: Personal Income and Its Components

by Wyoming Liberty Group Staff

This Weekly Economic Review reports data from the Bureau of Economic Analysis on the composition of personal income in Wyoming.

Main Point: Personal income in Wyoming is skewed toward equity-based and entitlement-based earnings. This should be taken into account when the legislature considers future changes to our state's taxes.

Personal income comes from three sources: work, investments (equity) and benefits (entitlements). In the aggregate, in a healthy economy work-based income provides the largest share of income, and so by a big margin. For segments of the population, equity and entitlements will be more important, with equity dominating earnings for those with very high taxable income.

The role of entitlements depends on the design of the welfare state. The more egalitarian it is in its actual operation, the more important entitlements will be, even in deep layers of the workforce where work could be the dominant income source.

The Bureau of Economic Analysis (BEA) reports components of state-level personal income as far back as 1998. Over the 20 years since then (2018 is the latest year in the BEA database) 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 U.S. economy as a whole has undergone somewhat of a similar transformation. It is not as pronounced, and is limited to a shift in the income base from work to entitlements:

Personal-income base, U.S. economy

It is notable that equity actually accounts for a marginally smaller share in 2018 than two decades earlier. This raises questions regarding the veracity in claims of widening income differences in the U.S. economy. At the same time, the rise in the equity share in Wyoming hints of income stratification, especially when taking into account the increasing dependency on entitlements.

A shift from work-based income to earnings from entitlements erodes the tax base, even when a state does not have an income tax. Entitlements create disincentives toward personal income growth: the combination of the Earned Income Tax Credit, Food Stamps and Medicaid can create marginal taxes on low incomes equal to incomes ten times higher.**

The slow decline in work-based income in Wyoming is also related to growth weakness in the non-minerals private sector. A closer look at the composition of personal income over the past ten years lends credence to this suggestion; since the beginning of the Great Recession in late 2008 Wyoming has had the worst private-sector job growth of all states. This is reflected in personal-income data for that period:

Figure 1

Source: Bureau of Economic Analysis

The U.S. economy has performed better in this respect:

Figure 2

Source: Bureau of Economic Analysis

Average growth rates for the three income components shows that there has been almost no meaningful growth in work-based earnings in Wyoming:

The period since 2015 is even more pronounced: work-based income has actually contracted by 0.4 percent per year in Wyoming, while growing by 4.1 percent per year nationally.

As Wyoming households earn relatively less from work and rely more on equity and entitlements, our state's tax base shifts accordingly. A higher concentration of households at the bottom of the income ladder, with low purchasing power, is combined with an increase at the top of the same ladder. Since high-earning households are more mobile and can move with relative ease as the tax burden changes, this concentration of income at the two ends is a structural economic problem that must be considered in future efforts to reform the role of government in the Wyoming economy.

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*) These components do not add up to exactly 100 percent, as farm-based income is not considered. For other definitions and technical specifications, see bea.gov.

**) Larson, S.R. The Rise of Big Government: How Egalitarianism Conquered America. Routledge: Abermarle, 2018