And Here Comes the Corporate Income Tax

In yesterday's opening segment of the November meeting with the Revenue Committee, the members spent almost an hour discussing fine print on the retirement plans of the employees at Wyoming Lottery. Once that was done, they did a quick job of endorsing an increase in the tobacco tax. It will be sold as "leveling the playing field" by making sure it is equally high all over the state (and that it will be easier for the legislature to make sure it goes up equally everywhere, including the tribes). 

Then the committee casually strolled through the hottest issue of the day: the corporate income tax.

Bottom line? It's coming. Yes. You read that right. We are going to get a state corporate income tax in Wyoming.

It was clear that the committee had planned the corporate-tax item carefully. There was no public comments section (even though the agenda said there would be), they had one of their own committee members "discuss" the idea - instead of relying on expert witnesses - and there was no official decision made on anything.

That does not mean they did not decide to move forward. They did. 

It was all theatrically played out. I have to hand it to them: it takes quite a bit of experience with politics to track the informalities that the committee relied on to decide to do what they did not want people to know they actually decided to do. 

Before we get to the actual decision-making process, a word on the political psychology of the meeting. Having been active in and worked with politics since I was 14, I have to say this was one of the better shows I have attended. It was also clear that the committee members were not much at ease with how they handled it. They frequently smiled uncomfortably, as if to tell the audience that "this is not at all what it looks like, just go back home and watch Netflix". You could also hear the voices of the chairmen change like someone spreading honey on a meat cleaver.

They had also planned the presentation carefully. It was not done by some outside expert - they got that item checked off at their September meeting - but had instead put Representative Obermueller in charge of the issue. Dan Noble, Director of the Department of Revenue, was brought in only for supplementary testimony.

Representative Obermueller took the position of expert witness, testifying before his own committee. He spent a fair amount of time explaining that certain retail corporations (no mention of Walmart) pay taxes on their earnings in Wyoming in the state where they have domicile, like Arkansas (again, no mention of Walmart). That tax revenue, Representative Obermueller opined, belongs to Wyoming.

This alleged proprietorship of tax revenue was the good representative's sticking point. However, it is unclear exactly how it belongs to Wyoming. Our state has decided to not have a corporate income tax, and therefore we have decided that we are not going to lay claim to any share of any income of any corporation.

In reference to a corporate income tax bill that he is working on, Representative Obermueller expressed hope that the tax would take effect in 2020. He also explained that he is working on a bill to propose a state corporate income tax. This alleged proprietorship over tax revenue is apparently going to be his selling pitch. He also seemed to want to make the point that businesses with residence in another state don't pay much taxes here in the first place. However, such an argument runs into the problem that those corporations (no mention of Walmart) pay sales and property taxes here in Wyoming, in many cases quite a bit of it, too. 

Again, and I cannot stress this enough: the very idea that other states get "our" tax revenue because we don't have a corporate income tax, is illogical in the purest sense of the word. If we have decided to not have an income tax, then we cannot lament about the fact that people and businesses do not pay an income tax. 

We cannot call it unfair that people don't pay taxes they do not owe. Yet Representative Obermueller clearly tried to make this point, and the committee members all seemed to agree.

The corporate income tax that Representative Obermueller is working on would apply to corporations with at least 100 shareholders. This is the idea the committee discussed in Buffalo, and there was no doubt from yesterday's discussion that this is the idea that the committee will carry forward under its new chairmanship. 

In fact, they de facto decided to support the first step of the idea. More on that in a moment.

Committee Chairman Mike Madden threw some revenue collection numbers out, a contribution that at first seemed to make no sense given that Representative Obermueller neither had presented any numbers, nor wanted to put a revenue number on his idea. It seemed like a strange move by the chairman to put his own committee member on the spot, but the purpose behind his move clarified when Revenue Department Director Dan Noble sat down to testify. 

Director Noble told the committee that there is a peculiarity about introducing a corporate income tax in Wyoming, one that currently presents an obstacle that is hard to overcome. That peculiarity is Section 18 of Article 15 in our state constitution. Because of that section, the director explained, the state would need to impose an eight-percent tax rate for a revenue target of $150 million. 

Here is what Article 15, Section 18 says:
No tax shall be imposed upon income without allowing full credit against such tax liability for all sales, use, and ad valorem taxes paid in the taxable year by the same taxpayer to any taxing authority in Wyoming.
Every time this section is brought up I ask the same, yet unanswered question: how would anyone credibly claim a dollar-for-dollar deduction on a personal income tax of sales and use taxes they have paid? Would they report every receipt from every taxable item they buy over the course of a year? How does a receipt specify the use tax? 

This question is more easily answered for corporations, whose book keeping is adequate enough to allow the taxpayer to claim the Section 18 deductions. 

However, the point that Director Noble was making was not to caution the Revenue Committee about the tax-revenue losses they would suffer as a result of this deduction. The point - which I am convinced the committee chairmen specifically asked him to make - was instead to explain what an obstacle Section 18 is to a corporate income tax. He did this, and he also added, in response to a question from Representative Furphy, that the Section 18 deductions do not apply to out-of-state corporations. Therefore, he made clear, a corporate income tax that allowed Wyoming-based businesses to use Section 18 would get our state "into interstate commerce issues", ostensibly under federal law. 

Together with his eight-percent tax rate estimate, Director Noble provided the Committee with a testimony that set their crosshairs on Section 18. Now: the committee did not explicitly make any decisions here, but they did endorse (without a formal vote) the idea of appropriations for a study to clarify how Wyoming can create a corporate income tax.

The endorsement came in the form of expressed opinions from committee members that "it would be a good idea to..." By not formalizing their support for a study, or its appropriations, the committee attempts to continue to fly under the radar and refrain from taking responsibility for its de facto support for a corporate income tax. 

In addition to Representatsive Obermueller's testimony, questions and comments from other committee members, and Director Noble's testimony, Chairman Peterson complained that corporate revenue does not stay long enough in Wyoming to generate much benefits here. Therefore, he said, the committee should continue to work on the corporate-tax issue now that he is handing over the senate chairmanship to Senator Case. 

Again, no mention of the jobs that non-domiciled businesses create here; no mention of the sales, use and property tax revenue they generate; no mention of the economic benefits they create by competing for our business and keeping prices and travel costs low. 

The deliberate omission of these points, and the deliberate omission of public comments, add to a picture of a committee determined to move ahead with a corporate income tax but to do so under the radar as much as they can. The informality of their not-formalized endorsement of appropriations for a corporate-tax study - notably discussed in passive voice - tell us that they know how controversial this idea actually is. 

To unwrap the political lingo, here is what we have to look forward to:

a) The Revenue Committee, and the legislature, will move forward with this issue. Plain and simple. 
b) The first step will be a combination of a bill from Representative Obermueller and an amendment that appropriates money for a study of how exactly to design a corporate income tax. That money will be appropriated by the upcoming legislative session.
c) The study will recommend mandatory revenue reporting as a "dry run" for a tax. It will also conclude that it is not feasible to create a corporate income tax while Section 18 is still in place. There will be two recommendations: either the legislature opts for a gross receipts tax - if they can design it in such a way that it mimics a corporate income tax but does not trigger Section 18 deductions - or it goes all out and asks voters to repeal Section 18.

A ballot measure to remove a section from the state constitution would probably not be ready until November 2020. However, that only means that the starting date for a state corporate income tax would be January 1, 2021. If the state legislature does not believe it can wait that long with getting their hands on that new revenue stream, they might opt for a gross receipts tax instead. That one could theoretically go into effect in just over a year. Keep in mind that when the committee discussed the gross receipts tax a year ago, the plan was to start collecting taxes on July 1, 2019.

The Revenue Committee is going to continue talking about other taxes today and tomorrow. What they are not going to discuss - but they should - is the fact that once the legislature creates a corporate income tax, the road is wide open for a personal income tax. I have stated repeatedly that the corporate income tax is just the opening salvo: the real goal is a personal income tax. 

It is much easier to ask voters to repeal Section 18 if that repeal is sold as exclusively paving the way for a corporate income tax. The fact that the repeal also opens for a personal income tax will be quietly forgotten in the conversation. However, once Section 18 is gone, the personal income tax is just one legislative session away.

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