If at first you don’t succeed, learn a little bit more about the subject and, maybe, try again later.
That’s what the Wyoming Legislature’s Revenue Committee plans to do on Thursday when it revisits the topic of instituting a state corporate income tax, a political non-starter with lawmakers over the past several years. Thursday’s meeting will be a continuation of a discussion that began last year around the prospect of taxing larger corporations or box stores that pay very little in taxes, according to committee chairman Sen. Ray Peterson.
Wyoming has long been noted for its lack of both a statewide corporate income tax and a personal income tax, two distinctions that have made Wyoming a perennial top state to do business, according to a pollster often cited by the Wyoming Business Council. Out of six states in the union without a corporate tax, Wyoming is joined by South Dakota as the only ones without a corporate income or gross receipts tax: essentially a sales tax for companies that provide services, rather than sell goods.
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As things are, the nonpartisan Tax Foundation, a Washington, D.C., think tank, has consistently ranked Wyoming first in the nation in its annual State Business Tax Climate Index.
However as the state has begun to look toward diversifying its economy and improving the revenue side of its balance sheet, dialogue around taxing the state’s largest businesses has become a more enticing conversation among legislators to at least have with each other, if not act upon.
“As we make attempts to diversify our revenue streams in Wyoming, this is a direction that the Legislature might consider in the future,” Peterson wrote in an email. “At the very least we should be able to gather current information and educate ourselves as to the options of such a tax, what it might generate, what problems or harm it may cause and the fairness of such a tax.”
Corporate income taxes and budgets
Compared to other taxes paid by corporations, which can amount to up to 10 percent of their total revenues, state corporate taxes are often a minimal expense, averaging about 2 percent of a firm’s total revenues, according to Jackson Brainerd, a Denver-based researcher with the National Conference of State Legislatures.
However, they can make up a significant share of a state’s tax revenues: according to an analysis by the NCSL, corporate income taxes can make up anywhere between 4 percent of a state’s taxes – in the case of business-friendly Virginia, which is often rated among the best states for business in the country – or 23 percent, in the case of a state like New Hampshire, which has no income or sales tax.
Though Wyoming is quick to brag about its lack or corporate tax as evidence of its friendly business climate, Peterson said that may not be enough to attract new businesses. For example: the trade-off of a company keeping more of its money at the cost of having infrastructure insufficient to accommodate their needs may actually lead them to choose other states, rather than come to Wyoming.
“In reality, I don’t think it’s working as an attraction anymore,” he said. “There are so many things Wyoming has against it – transportation, freight, work force – that companies might look at us and think, ‘no tax is nice, but we need more than that.’”
For instance, the western United States, according to Chicago-based corporate real estate consulting firm, Pollina, offers the most business-friendly locales in the country. In its 2015 rankings, the firm ranked six states from the west among its top 10 for business, including Utah (1), Nebraska (2), Kansas (5), North Dakota (6), Wyoming (8) and Missouri (9). All, except Wyoming, have corporate income taxes.
Though Pollina, in its report, did point out that Wyoming offered some of the best tax incentives in the nation, the report noted the state’s level of investment in its businesses could be improved upon, and hinted that the state’s energy-centric economy – prone to booms as well as busts — could not sustain it forever, and requires economic diversity.
“The state’s substantial revenue from mineral production has historically helped keep taxes at a minimum,” they wrote. “There is little question that from a tax burden perspective, Wyoming is an excellent choice for doing business. Today, the mineral extraction industry and travel and tourism sector are the main drivers behind Wyoming’s economy, however, the state needs to diversify its economy to provide a wider range of jobs and to withstand slumps in its key industries.”
Peterson, who was defeated in the Republican primary last month, agrees.
“Half the battle is getting people to understand even though we have a surplus, it was generated in the boom years,” he said. “I’m just concerned the next boom isn’t going to bring that money back because the market’s changed. We’re kind of forced into a corner here because of the changes we’ve seen.”
Starting the conversation
Though finding the best means of addressing Wyoming’s revenue woes has long been a conversation starter here, the idea of implementing new or higher taxes to match rates seen in other states has consistently been pushed down the road. In January, the Legislature, facing down an $850 million deficit, killed four major tax reforms addressing property and sales taxes.
The year before, the Legislature delayed substantial discussion on initiating corporate or personal income taxes, instead tackling issues like tobacco and alcohol taxes.
This year, however, conditions might be more amenable to addressing the need for serious tax reform. While discussions around other reforms addressing the state’s revenue questions – modifications to how schools are financed, considering the right for municipalities to levy their own taxes – are in-progress, they’re nowhere near enough to make up for a deficit legislators believe will only broaden if left unaddressed. Based off of figures presented by economic forecasting firm REMI in June, Wyoming was shown to have substantially lower revenue capture rates than similarly regulated states like Utah, North Dakota and Kentucky, largely because its industries outside of natural gas are taxed at such a lower rate.
And energy alone, Peterson said, can’t carry the weight the way it once did. Though the state has been able to make ends meet by tapping into a surplus built during the boom years for the oil and gas industry, Peterson said international market forces are working against Wyoming and, in the next boom, the state may not be able to recover all it had spent.
Without a way to recuperate those losses beyond the income from fossil fuels, the budget then becomes unsustainable. Initiatives like the state’s economic development plan, ENDOW, Governor Matt Mead told the Star-Tribune in a statement, can help. But a balanced tax structure, he said, can be accomplished while still maintaining a positive business climate.
“In order to diversify Wyoming’s economy, we have to broaden our state’s industries,” Mead said in a statement. “I support the findings of the ENDOW final report, which stated, ‘We believe it is possible to establish a stable and more diversified tax structure that creates stability while at the same time maintains Wyoming’s business friendly competitive edge.’”
Early in the conversation, there are numerous uncertainties. No states have ratified a state corporate tax since 1971. (Michigan did approve a corporate tax in 2001, but that only replaced an earlier version of the tax.) When reached for comment, neither the Wyoming Chamber of Commerce nor the Wyoming Business Council had done any research into the costs or the benefits of implementing a corporate tax. Previous conversations, notably, have relied more on the rhetoric of political will and philosophical differences, rather than hard data.
However, in the economic zeitgeist of a Republican-controlled Congress keen on tax reform, particularly after the passage of the federal Tax Cuts and Jobs Act, now may be as good a time as any. After the passage of tax reform in 2017, Brainerd wrote in an analysis piece last month, states began scrambling to match their policies with new, monumental changes to the federal tax structure. With no corporate tax policy to speak of, Brainerd said the right time to consider it may be now, after the dust had cleared.
“I would say from a basic standpoint, it’s certainly better to be able to look at this issue after a giant reform measure has already passed, rather than with massive changes looming on the horizon,” he said. “Every state with an income tax had to figure out how these changes would trickle down and impact them. It certainly makes it easier now for a state to look at something like this now that that’s passed.”
Of course, new taxes – especially in a state prone to loathe new taxes – is a politically hard sell on the public. Facing a fiscal cliff, however, may leave the Legislature few other options. To build a better understanding of the issue, Peterson said the state’s revenue committee is now working to find a means to explain the situation to the common citizen in a way they’ve never been able to. His committee is currently working on an informational campaign to begin sometime in November, he said, to put the state’s tax burden into context and begin the “baby steps” it takes to move Wyoming’s economy off a single track. Even if it’s just about getting the conversation started.
“We’re good followers,” Peterson said. “We look, we analyze how it affected the economy in other states, and we’ll analyze how to move forward in a way that we don’t make the same mistakes other states did,” Peterson said. “It’s going to take a while to work through it, to get something presentable to sell to the public, and that’s the hard part.”