The Conventional Wisdom of Higher Taxes

One of the greatest dangers to our economic future here in Wyoming is the conventional wisdom that government should always expect more revenue. We need a new course, a new goal for government, where it is confined to its constitutional functions, within a framework of low, stable and predictable taxes.

The conventional wisdom about government finances is pervasive in the public policy debate. I have a couple of examples yesterday; today we will take a look at another. Before we get to them, let us go back and listen to what I said yesterday, about how the campaign for higher local taxes is in full swing:
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.
I also noted that the debate over taxes both here in Cheyenne and up in Casper run along the same old tracks as always: how can government get more revenue? There is never room for a review of what the combined effects will be of higher taxes, hitting businesses and families from all cardinal directions. Even if we disregard the corporate income tax, now brewing in the Revenue Committee, just the idea of a sales tax on food is harmful enough to throw a fledgling Wyoming economy off its tracks again. 

However, as I explained yesterday, the sales tax on food is just one of many new "revenue sources" hitting Wyoming businesses and families from all cardinal directions. The advocates from Big Tax are well funded, organized and determined - and they won't take a taxpayer's no for an answer. However, perhaps even more dangerous is the aforementioned conventional mindset that government is somehow entitled to grabbing more of our money over time. 

We will get to the latter in a moment by visiting Green River. First, here is an example of the arrogance that goes into the campaign by Big Tax to raise "more revenue" right, left, up and down. Behold the Wyoming Association of Municipalities in its own words:
Wyoming Sales and Use tax percentage has not increased since 1993, but the population has increased by 27%, with ~70% of Wyoming citizens living within a municipal boundary. If Wyoming wants a diversified economy as current initiatives support (i.e., ENDOW), Wyoming’s towns and cities must be able to provide the essential services and quality of life amenities that new businesses expect. On the current trajectory, that will just not be possible.
The first two clauses of this paragraph say it all:

a) Taxes can only be low if there is no population; and
b) When the population grows, tax revenue does not increase.

Yes, this is actually the logic upon which WAM bases its push to grab more of your money. 

The fact of the matter is that government finances, done right, almost work in the opposite direction. The constitutional services of a city are limited to the protection of life, liberty and property, and to the provision of infrastructure. The protection part consists of law enforcement and fire-and-rescue services. Up to a certain boundary, both these services function without a need for expansion even when population grows. As a random example, let us say that a city can be safe and crimes be solved if we have ten police officer per 10,000 residents; suppose the same staffing ratio applies to fire-and-rescue services. This means that if population is 10,000 and protection services are staffed for, say, 15,000, the city can grow quite a bit without the need for expansion of protection services.

In fact, as the city grows the burden of funding protection services will decline on a per-taxpayer basis. In other words, with intelligent long-term funding and finance management, the city could maintain a constant tax rate even as population grows, setting aside enough money to expand protective services when population has grown past their current service capacity. 

Provision services are infrastructure facilities; some would add parks and recreation. These services do not allow for quite the same kind of financial management as protective services. Rather than growing in steps like protection services, infrastructure must expand proactively. The ideal, of course, is that a city government can expand its infrastructure ahead of expected population growth; in reality, it is difficult to micro-manage complex investments to that degree. Nevertheless, provision services do not need continuously higher taxes either: the investment in new infrastructure is a capital-financing problem that should be handled on a traditional cost-benefit analysis basis. That analysis, in turn, provides a good foundation for debt funding of infrastructure. 

A lot of people balk at the very idea that government should borrow money for any expenses. However, the idea is no more radical than a family borrowing money to buy a house or a car. Furthermore, when infrastructure investments are paid for with bonds - not taxes - the city has to present something that is sorely absent in today's public finance: a good, analytically sound argument for its projects. 

The idea with combining cost-benefit analysis with bonds is that if the analysis was done well, making probable a future stream of new tax revenue, it will be easy for the city to designate that new tax revenue as covering debt costs. 

Maintenance of infrastructure is a different matter than investments, but only to a degree: once a water and sewer system has degraded to a certain point, the line is blurred between maintenance and investment. Nevertheless, maintenance of infrastructure should be funded the same way as protective services, namely with current tax revenue. If, again, the initial analysis of the benefits of expanding infrastructure is done well, the growth in population will expand the tax base - and tax revenue.

In other words, the idea that government needs to raise taxes because the population grows is upside-down logic. If government confined itself to its constitutional services, it would not need to raise taxes. On the contrary, it would be fairly easy to keep taxes low, stable and predictable over the long term.

The problem for government is that it expands - sprawls - into areas where it does not need to be. Yesterday I gave the small example of Visit Casper, an outfit that costs taxpayers $1.6 million per year but could preferably be funded by the businesses that benefit from its services. I also mentioned that government generally operates under the premise that it does not need to accommodate to swings in the business cycle: when taxpayers lose income, somehow government is supposed to be able to maintain its spending as if nothing happened. This attitude grows stronger the bigger government gets.

Now it is time to visit Green River and listen to its mayoral debate between incumbent Peter Rust and challenger Mark Peterson:
The largest priority for Rust is working with the state of Wyoming to establish a regular stream of income. He would do so by using and improving interstate government relations. Having a steady income from the state would help the city improve its infrastructure such as the aging Wastewater Treatment Plant and streets in need of repair. 
In 2016, the city of Green River took in $12,145,000 in taxes, fees and service charges. Its protection services cost $4.7 million and its provision services - infrastructure and parks - a hair over $5 million. This adds up to $9.7 million. Why does this city need money from the state government? 

The answer, again, is the conventional wisdom that government cannot make do with what they have. The call for more money from the state becomes even more puzzling as the debate continues: 
Peterson and Rust said they are in favor of using the 6th Penny Special Purpose tax to continue to improve the infrastructure in Green River. However, Peterson said he is partially glad the mining industry has a break from the tax. Rust called it “a critical tool for local governments,” and would like to see it spent on repairing streets, updating the Wastewater Treatment Plant and improvement for the Green River Recreation Center.
In 2015, the city set aside $2 million in sixth-penny funds for capital projects. At the same time, city administration costs $2.5 million per year, or 18 percent of the total general-fund budget. If the city cut its administration in half, it could free up $1.25 million for its provision services. 

The fact that Green River has good finances in general - it does not operate with chronic deficits - is noteworthy and commendable, but it is not a green light for conventional wisdom to take over public-finance policies. Like practically every other local government in our state, Green River has become addicted to state funds, and fallen into fiscal habits that are not in accordance with limited government. The end result - whether the mayoral candidates want it or not - is a gradual push upward on taxes. This is especially dangerous when that push spills over into an expectation of more money from a state government that is already running close to a $1-billion deficit.

Rather than conventionally keep asking for more, our local governments need to start charting a course back to where they operate within their constitutional confinements. Done right, those functions can easily operate within the framework of low, stable and predictable taxes. 

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