The Funding Gap Myth Debunked

Last week I renewed my criticism of the CREG reports for sloppy forecasting. I also noted, to their credit, that the latest CREG report has gone a little bit more realistic in its forecasting. It is too early to tell whether this is a genuine shift for the better, or a temporary aberration from their business as usual. Let us hope for the former.

In the meantime, in the lead-up to the fast-approaching 2019 session, we need to revisit an old friend: the "funding gap chart" produced by the state's Economic Analysis Division. As a reminder, here is what it looks like:

I have repeatedly explained how erroneous - not to say outright deceitful - this chart is. Time to do it again, with a different angle. In 2016, the last year for which the Census Bureau has published detailed data,

  State and local government
Revenue                          9,102,101,000
Expenditure                       10,067,959,000

Indeed, there was a funding gap in 2016, but it was not 90+ percent. The EAD funding-gap chart only takes into account personal taxes, but why? Do taxes paid by corporations vanish into thin air? Do they materialize out of thin air?

I recently debated this issue with someone. This person suggested that businesses just add taxes as a mark-up on their prices. I then asked "does that not reduce sales?" whereupon this individual plainly replied "no." Evidently, this person has never worked in the private sector. For the answer "no" to make sense, a business would have to have a price margin on its market. But if it did, that would mean it was not charging the highest price the market could afford. No business does that, especially not over a sustained period of time.

The plain, simple fact of the matter is that businesses do not add taxes onto their prices. They subtract taxes from their prices. The taxes they pay are taken out of income for employees, owner and managers; they are taken out of purchases of inputs and consulting services. Taxes on businesses reduce investments and the number of employees. 

To the point of the funding-gap chart: every dollar a business pays in taxes is produced through the toil, sweat and tears of employees and managers, and through owners' risk-taking. To pay the taxes on a business, all the people in that business have to literally work for free for part of their time. 

Once they have paid those taxes, they have to work yet more hours to make the money that is paid as taxes on income, property and their spending (sales, excise and use taxes). 

Plain, simply and brutally: business taxes are paid by individuals in the same way as personal taxes are. 

In 2016, the state government and all local governments in Wyoming collected taxes as follows:

State & local  State  Local
Taxes 3,243,067,000 1,913,607,000 1,329,460,000
          Property 1,399,911,000 338,776,000 1,061,135,000
          Sales and gross receipts 1,033,672,000 820,146,000 213,526,000
               General sales 816,550,000 641,495,000 175,055,000
               Selective sales 217,122,000 178,651,000 38,471,000
                    Motor fuel 115,175,000 115,175,000 0
                    Alcoholic beverage 1,919,000 1,919,000 0
                    Tobacco products 24,060,000 24,060,000 0
                    Public utilities 29,734,000 4,823,000 24,911,000
                    Other selective sales 46,234,000 32,674,000 13,560,000
          Individual income 0 0 0
          Corporate income 0 0 0
          Motor vehicle license 100,950,000 76,448,000 24,502,000
          Other taxes 708,534,000 678,237,000 30,297,000

But wait - these taxes only amount to 35.6 percent of total revenue. Does that not mean we really do have a funding chart? 

No. While the Economic Analysis Division seems to not want to admit it, we surrender $2.7 billion to our state and to local governments in various forms of charges and fees. For a complete picture, let us also include interest and other revenue, which are paid out on investments made with historic tax revenue:

State, local State Local
     Charges and miscellaneous general revenue 2,714,036,000 1,033,565,000 1,680,471,000
          Current charges 1,686,324,000 201,623,000 1,484,701,000
               Education 188,347,000 117,521,000 70,826,000
                    Institutions  of higher education 170,346,000 117,521,000 52,825,000
                    School lunch sales (gross) 14,696,000 0 14,696,000
               Hospitals 1,137,596,000 1,089,000 1,136,507,000
               Highways 9,365,000 9,152,000 213,000
               Air transportation (airports) 18,581,000 756,000 17,825,000
               Parking facilities 0 0 0
               Sea and inland port facilities 0 0 0
               Natural resources 11,623,000 5,591,000 6,032,000
               Parks and recreation 24,876,000 886,000 23,990,000
               Housing and community development 4,583,000 3,476,000 1,107,000
               Sewerage 75,809,000 0 75,809,000
               Solid waste management 75,425,000 1,000 75,424,000
               Other charges 140,119,000 63,151,000 76,968,000
          Miscellaneous general revenue 1,027,712,000 831,942,000 195,770,000
               Interest earnings 523,664,000 497,566,000 26,098,000
               Special assessments 15,703,000 0 15,703,000
               Sale of property 11,457,000 7,234,000 4,223,000
               Other general revenue 476,888,000 327,142,000 149,746,000
Utility revenue 236,127,000 0 236,127,000
     Water supply 143,759,000 0 143,759,000
     Electric power 92,368,000 0 92,368,000
     Gas supply 0 0 0
     Transit 0 0 0
Liquor store revenue 113,914,000 113,914,000 0
Insurance trust revenue 709,660,000 709,660,000 0
     Unemployment compensation 72,594,000 72,594,000 0
     Employee retirement 263,124,000 263,124,000 0
     Workers' compensation 373,942,000 373,942,000 0
     Other insurance trust revenue 0 0 0

There is one last revenue item: federal funds. In 2016, the state of Wyoming received just over $1.9 billion in funding for federally sponsored programs such as Medicaid, transportation, welfare and school lunches. In that amount is also included severance taxes owed to the state by the federal government.

At this point the proponent of a funding gap could gloat and say "See, I told you! That's free money!" Unfortunately, it is not. That same year, Wyoming residents paid just over $2.8 billion in personal federal income taxes. In other words, what we got back from the federal government is approximately two thirds of what we paid in. 

Bottom line: our government is more than generously funded. The only gap in our state and local government finances is the result of decisions by our legislators to spend more than what they take in from us.

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