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Governor’s Inaction Puts All Severance Taxes into Play

When the U.S. Department of Interior declared that it would keep 5.1 percent of the severance taxes it owed Wyoming (and two dozen other states) the governor first seemed to be appropriately upset. His administration was unmistakably worried that this could be the beginning of something much bigger – a billion dollars, to be exact. If the federal government could withhold $53 million this year, then why would they not withhold $100 million next year, or, half a billion, or the entire billion dollars it owes Wyoming?

The governor’s initial reaction was clearly in tune with what many Wyomingites felt. If the governor had chosen to act tough on this issue, he would undoubtedly have had a strong base of support around the state.

Unfortunately, it looks like Governor Mead’s attitude has changed over the past week. What looked like a good case for principled action on behalf of the governor now seems to shrink to a political footnote. From the Casper Star Tribune:

 Gov. Matt Mead says Wyoming has no legal recourse to block federal budget cuts required by sequestration. The state’s best hope now is to work through its congressional delegation, Mead said Friday during a news conference. … Mead said he told Attorney General Gregory Phillips he wanted to pursue legal action if there was a “snowball’s chance” of success. “The word back is there is no snowball,” Mead said.

I am not a legal scholar, and if experts tell me that the governor is right, then I will of course accept that. But common sense dictates that there must be some kind of document, somewhere, that clearly defines whether or not the federal government can indeed dictate how large a share of total severance tax revenues Wyoming will get. Has the governor seen that document? If so, would he kindly refer the voters/taxpayers of Wyoming to it, so we can learn for ourselves?

The reason why this is important is not the $53 million the federal government is withholding this year. The importance lies instead in the potentially devastating fiscal perspective that opens up beyond these $53 million.

Up until last week the state of Wyoming could treat its severance taxes as an ironclad revenue source. The actual amount has always fluctuated, and can only be forecasted with a fair amount of uncertainty from one year to the next. But the state has nevertheless organized many spending items in, e.g., education around the proceeds from the severance tax. This has been possible despite the fact that severance tax revenues have always been more volatile than any other state revenue source. Over time the state has basically learned to live with the fluctuations, its affliction for spending windfall revenue notwithstanding.

Now, though, the federal government’s unilateral action has put the entire severance tax into play. The uncertainty that was limited to revenue fluctuations of some 20 percent has now effectively engulfed the entire billion dollars in severance tax revenues. The governor’s surprisingly passive response to Attorney General Phillips’s conclusion only compounds that uncertainty.

The effect is that Wyoming now has no control over the severance taxes that the federal government collects on our behalf. This leads to a blunt question: if you were a legislator going in to the 2014 budget session, would you comfortably appropriate spending based on the severance taxes, knowing that the federal government can take as much as it wants to, whenever it wants to?

Now that Governor Mead has concluded that he has no legal case against the federal government, he must take compensating fiscal action, and do so urgently. He should immediately begin the work to neutralize the potentially disastrous effects of larger severance-tax grabs by Uncle Sam. This work cannot include tax increases, but must instead be concentrated on soundly, sustainably cutting spending. (As a start, check out these five ideas for a better Wyoming economy.)

A well-executed plan to reduce spending on a permanent basis would turn this looming budget crisis into a major economic boost for the state. However, should we end up with no fiscal response from either the governor or the legislature, then the 2014 budget session could easily be engulfed in fiscal panic.

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Thursday, 21 September 2017
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