Taxes Do Not Pay Taxes

We have very good reasons to be worried about what our state legislature is going to do in terms of taxes in the 2019 session. We have equally good reasons to be worried about what tax hike bills, once passed by the legislature, will be signed by our next governor. 

It is easy to forget about local governments. At the Revenue Committee meeting in September, the Wyoming Association of Municipalities (WAM) proposed the repeal of an exemption in the lodging tax and the reintroduction of a sales tax on food. The aim, of course, is to put a lot more money into the pockets of local governments, but when added to such economically dangerous ideas as a corporate income tax and higher property taxes, it adds up.

The advocacy for local taxes is in full swing. Here in Laramie County, the debate is over who should have the right to raise taxes. Cheyenne Mayor Marian Orr wants the city to have the right to grab a sixth-penny sales tax as it pleases her (and, presumably, the city council). She appears to still hold a grudge against taxpayers for denying her some sixth-penny projects last year. Meanwhile, candidates for the Laramie County Council want jurisdiction over that tax so they get to decide what to do with our money. 

In Casper, a similar debate is moving forward. On October 27, Brook Kaufman, CEO of Visit Casper, opined in the Casper Star Tribune in favor of the four-percent local option lodging tax:
What started as a few hundred thousand dollars back in the early 1990s has grown to an annual budget of $1.6 million. The collections are used to market Natrona County regionally and nationally. The funds also allow us to support and retain popular events like the College National Finals Rodeo, the state volleyball, basketball, wrestling and track tournaments and the Central Wyoming Fair and Rodeo, as well as support the Casper Recreation Center, the Nicolaysen Art Museum and more.
I completely understand Ms. Kaufman's desire to have this tax revenue to spend. It is not only her job, but she very likely believes that it is the best - probably the only - way to fund marketing and events in Casper. The problem is that there is a lot of conventional wisdom in our debate over taxes, especially at the local level. 

For starters, the $1.6 million taken out of visitors' pockets is $1.6 million that could have been spent at private businesses. The conventional argument is that it is such a small amount for each person that it could not possibly make a difference to how they spend their money around town. However, that is a false assumption: pennies on the margin do not affect big decisions, but they lead to downgrades in spending, such as the decision to spend $15 on dinner instead of $20; to do free-of-charge activities instead of something that costs money; to spend a few dollars less on souvenirs. 

Secondly, the narrative about taxes is often fragmented. I constantly come across proponents of perpetuating or raising taxes, even creating new ones, who only look at this particular tax. The reality is that those who will pay that tax will pay a whole lot of other taxes, too. Regardless of whether those who frequent accommodations in Casper are from other parts of Wyoming or out of state, they all pay other taxes than this lodging tax. At some point we hit the ceiling for what taxpayers can afford.  

We are there now. Again without criticizing Ms. Kaufman's argument per se, she does exemplify both these phenomena in the tax debate. Furthermore, there is the implicit idea in her argument that tax funding of the activities she refers to is the only way to make sure people know about Casper and we can have fairs, rodeos, recreation centers and museums. These are activities that the private sector not only can, but should fund itself. 

There is nothing wrong with an organization marketing all the good things that there are to see and do in Casper, or any other town or city in Wyoming. Ms. Kaufman reports that tourism brings in more than $290 million in local spending to Casper, a number I have no reason to doubt. However, with that kind of benefit, is it not reasonable to expect that those businesses contribute the $1.6 million that is apparently needed to run the activities funded by the lodging tax? After all, if we spread the cost of the $1.6 million proportionately among the businesses benefiting from the spending, it comes down to just over 0.5 percent of the $290 million in spending that the tax apparently brings in.

While I have no doubt that Ms. Kaufman, the CEO of Visit Casper, runs a tight ship, the very fact that it is funded with tax dollars always leaves open the possibility for improvement. It is one of the most thoroughly established facts in economics that government-funded operations are less efficient than those exposed to the free market. By transferring the funding for a tourism agency - if we may call Visit Casper that - to those who stands to benefit from it, we get as close as we can to a free-market model. Therefore, if the cost of the functions that bring in the $290 million is carried directly by those who benefit, there is a chance that the operation will be run even more efficiently, and even more successfully.

Not only would there be more money for visitors to spread around town; there could be even more visitors to spread money around town. 

To further highlight the point about a systemic approach to taxes, consider the current state of the labor market in Casper. As of September 2018, there were 39,300 working men and women in Casper. Of those, 33,700 were in private employment, broken down by industry as follows:

Table 1
Education and health services: 6,400; 
predominantly health care.
Leisure and hospitality: 4,900; 
what is casually referred to as "tourism".
Retail trade: 4,600.
Professional and business services: 2,900
Construction: 2,800
Wholesale trade: 2,400
Mining: 2,300
Financial activities: 2,000
Transportation and utilities: 1,800
Manufacturing: 1,600
Information: 400
Other: 1,600

Casper already has a problem with costly government. This became painfully apparent in the double-dip recession we had over the past ten years. As a result, the city of Casper has had to deal with some serious budget problems. These problems are not helped by high taxes.

Notably, local government had 4,300 employees in Casper, making it the fourth largest industry. If we add 700 state employees, government becomes the second largest industry in Casper. Looking, again, strictly at September numbers for each year, at the bottom of the Great Recession in 2009, the Government Employment Ratio (GER) for local Casper economy was 167, in other words there were 167 state and local government employees per 1,000 private-sector workers. This was a sharp increase from 149 in 2008, as the city lost 3,300 private-sector jobs in one year. After this, the local economy recovered, adding an impressive 5,200 jobs through 2014. The GER fell to 144. 

In these swings, the ability of the local economy to pay for local government was severely weakened. We tend to believe that this is not the case since we do not have income taxes, but taxes on property and spending are almost as closely tied to the business cycle as the income tax. In a serious economic downturn like the one Casper experienced during the Great Recession, property values plunge and people's general ability to pay property taxes weakens. While a property-tax bill cannot be cut over night, a family owning its own house can compensate by reducing its regular spending. Sales tax revenue suffer.

Despite the recovery, the Casper economy was not out of the woodwork. In 2015, the double-dip downturn came and wiped out practically all the jobs gained since 2009. Since that dip bottomed out in late 2016, private businesses in Casper have added 1,200 people to their payrolls. The GER still stands at 148.

There are two lessons from these numbers. First, the local Casper economy needs all the spending it can get, both from locals and from visitors. Lower taxes on visitors will help here. 

Secondly, there is a conventional wisdom in government operations that government is above the ups and downs of the business cycle. When taxpayers suffer income losses, the prevailing conventional wisdom in government is that they should be allowed to continue operating as usual. Over the past ten years, when Casper businesses have cut more than three thousand jobs, added more than five thousand and then cut them away again, the state government has maintained 700 jobs in the city. Local government has been equally stubborn: with minor fluctuations, city and county agencies, and schools, have kept their total payroll at 4,500-4,600 employees per year. 

As a general observation - not relating specifically to Visit Casper - when government expects to fly above the business cycle, the end result is a slow but steady drift upward in taxes. To compensate for tax revenue losses in economic downturns, government tends to want to raise taxes and fees. Whenever taxes and fees go up, they do not go down again in the next recovery. This means that going forward, taxpayers have to cope with a slimmer margin in their budgets than they had in the last growth period. As a consequence, the next economic downturn becomes more serious, both for taxpayers and for government. 

Furthermore, the government operations that were allowed to survive the last recession will be more inclined to expect immunization from future recessions as well. The same goes for the elected officials who refuse to cut government in a recession, and who are quick to raise taxes when they can. This mentality gradually creates a lasting stress on taxpayers, and a culture of entitlement in the tax-paid ranks. 

The city of Casper has had its own run-in with fiscal stress. Their problem is not primarily on the operational side; since 2014 the city has cut almost ten percent of its 554 full-time positions, reporting 501 positions for fiscal year 2018.* On the Capital Activity side, however, the city has spent about $100 million cumulatively over the fiscal years 2016 and 2017, in excess of revenue. 

Instead of looking for privately funded solutions to either some of its operations, or its capital project, the city has forged ahead with what is clearly a short-sighted attempt to white-knuckle big government through another economic downturn. All government operations are to be protected as far as possible, one way or the other. It is a safe bet that cuts made will be restored as soon as the city gets a chance to do so.

The problem is that government is not part of the tax base that pays for it. Taxes do not pay taxes. A far better strategy is to take these tough times as a reason to structurally rethink what taxpayers should be responsible for. Instead of using taxpayer dollars to sprawl local governments in all directions, we might want to start returning functions currently under government, to the private sector. Visit Casper is a good example, but just one of many.

*) It is not entirely clear how the city defines a full-time position. Its reporting says "full time position basis" which I assume is equal to the traditional statistical variable "full time equivalent". 

No comments:

Post a Comment

Weekly Economic Review

Our lawmakers here in Cheyenne are planning to raise taxes on the tourism industry - by a lot. In the meantime, the first issue of my new w...