Wait-And-See Won't Stop Tax Hikes


Since I wrote my article yesterday about the intentions of the Revenue Committee to start theprocess toward a corporate income tax, Forbes Magazine has published an article on the same topic. Patrick Gleason from the Americans for Tax Reform explains that on the first day of its meeting, the Revenue Committee
discussed a bill that Representative Jerry Obermueller (R-Natrona County) is working on that would institute a state corporate income tax hitting companies with more than 100 shareholders. Much of the hearing was spent pondering how much money could be raised from a state corporate tax. Yet with with no specific rate having been set for Rep. Obermueller’s proposal and no clue as to how many companies would be affected, such talk was pure speculation. What was clear, based on the comments of numerous lawmakers at the November 28 hearing, is that there is a real motivation among members of the Wyoming legislature to add their state to the ranks of those that impose a corporate income tax. That would run counter to the recent trend in which states around the country have been moving toward elimination of their corporate income taxes. 
I have received a few comments from different people based on my blog article, essentially suggesting that there is no cause for alarm. The threat of this tax is exaggerated and the best we can do now is wait and see and trust Governor-Elect Mark Gordon with vetoing any tax hikes.

That, I am sad to say, is precisely the wrong strategy. There are two reasons for this, the first being experience. For example, the fuel tax hike that the legislature passed in 2013 was on its way already to the 2011 session but died in committee. The tax hikers, of course, did not give up: they came back better prepared during the 2012 committee meetings and went into the 2013 legislative session determined to quell any resistance.

We are seeing a similar pattern now. Last year's Taxmageddon package is coming back to haunt us again, with a sales tax on services being the most notorious example. The corporate income tax was not even discussed last year; it replaces the gross receipts tax that the Revenue Committee seriously considered. 

In other words, when our elected officials want to raise a tax or, for that matter, introduce a new one, they wage a war of attrition on their opposition. The sooner the opposition to tax hikes decides to sit on its hands, the shorter that war will be.

The second reason why wait-and-see is the wrong way to go, is that the legislative default is always to address a budget deficit with tax hikes. This is a general rule that applies across the country, but it certainly applies to Wyoming as well. 

When state legislators are faced with a budget deficit, they have two choices: structural spending reforms or higher taxes. Historically, state legislators have steered clear of spending reforms, opting instead for higher taxes. Spending reform, it seems, is far too complicated - and in many cases antithetical to legislative ideology. 

In recent years, it has become more popular to cut taxes. Many states still pursue tax hikes (Alaska, California, Illinois) but an increasing number of states have gone in the opposite direction (New Mexico, North Carolina, Tennessee). The problem is that so long as there are no limitations on spending, a tax-cut strategy only provides temporary relief; it may generate growth in both GDP and tax revenue, but as spending continues to grow it gradually eats up the revenue boost. 

As a result, state budgets drift back toward deficits, and with that drift the policy pendulum swings away from tax cuts. Since spending reductions are off the table - especially at the systemic level - tax hikes again rise to the top of the legislative agenda.

In a state like Wyoming, where tax hikes already dominate policy thinking, a wait-and-see attitude from clear-minded people who see the dangers in tax hikes, is a prescription for - you guessed it - higher taxes.

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