Columns rarely generate the volume or quality of response elicited by the most recent Madden’s Measure.
Well-considered comments and e-mails following the discussion of Wyoming’s excess tax capacity, and the one-page legislative document that measured it, differed widely and reflected all of the various political positions one might expect. But a number of astute readers raised the same valid concern: Our discussion omitted the issue of ability to pay.
Well, consider it good fortune or mere coincidence, but Joe Schaffer and Nick Colsch — two professionals at Laramie County Community College — have pursued this angle in a paper based on the same article.
A Policy Brief on Tax Capacity in Wyoming expands the concept of tax capacity to include taxpayer ability to pay and also includes a number of additional considerations.
You’ll recall that tax capacity as discussed in the earlier article was determined based on how much lower Wyoming tax rates are compared to the median tax rates in neighboring states. The larger the difference of Wyoming’s tax rate relative to the median tax rates of neighboring states, the greater the tax capacity.
Schaffer and Colsch reason in their paper that measuring capacity that way only provides a partial answer to the question. The analysis must be tempered by taxpayers’ ability to pay relative to those residing in comparison states. For example, if household incomes are lower here, or if the cost of living in Wyoming is generally higher, either of these factors could reduce tax capacity.
In short, the question is whether Wyoming households can afford the tax increases suggested by the excess capacity.
One approach to this issue includes an analysis of median household income and median hourly wages. The neighboring states used in the comparison include all states adjacent to Wyoming plus North Dakota, the same states that were used in determining tax capacity.
The median household annual income in Wyoming is $65,000. That compares to a median among the seven states in the comparison of $63,229, about $1,800 lower than Wyoming. Household incomes among the comparison states range from a low of $57,153 in Montana to $77,127 in Colorado. Wyoming’s median household income would be the third highest if it was included in the seven-state group.
Median hourly wage is another ability-to-pay metric and much the same conclusion is reached. The seven-state median hourly wage is $18.23, while Wyoming’s median hourly wage is $20.02. Among all states in the comparison, only North Dakota and Colorado have a higher median hourly wage than Wyoming.
The LCCC study also adds a comparison of household income among states without income taxes. Of the 50 states, only Wyoming, South Dakota, Texas, Nevada and Washington have neither an individual nor corporate income tax. Average household income in these states is $63,655. Only Washington’s median household income of $78,687 is greater than Wyoming’s $65,000.
Another standard that is useful to measure varying ability to pay is the state’s cost of living. The higher a state’s cost of living, the lower the ability of its households to absorb additional taxes. Cost of living data comes from the Council for Community and Economic Research’s 2020 Cost of Living Index (COLI). This index captures variations in basic household necessities such as housing, food, utilities and transportation among others. A COLI index of 100 is the 50-state average.
The median cost of living index among the seven neighboring comparison states is 103.0. Wyoming’s cost of living index is 95.4 or nearly eight percentage points lower than the surrounding seven states. Only Idaho and Nebraska exhibit a lower cost of living than Wyoming. The median cost of living among the four comparison states with no income taxes is 97.0.
To summarize, Wyoming households outearn households in surrounding states, and other states without income taxes, on average. At the same time we enjoy a lower cost of living.
Together, these factors suggest Wyoming has a higher ability to pay than the comparison states and that ability to pay is not a limiting factor in realizing our excess tax capacity.
It is important to emphasize that these analyses are based on state averages. Each household is unique and bears its own financial challenges. For example county-based data in Wyoming shows significant economic differences from one area of the state to another.
In a similar fashion, while it appears that Wyoming has considerable tax capacity in regard to residential property taxes, there are some households with lower than average incomes or fixed retirement income where that would not be true. Therefore, it would be important that if any significant changes in residential property taxes are adopted, the existing tax refund program must be funded and maintained for low income homeowners.
But what of taxation’s role in attracting new businesses to the state? Wyoming has been ranked for many years as having a favorable tax reputation in the business world. Yet, economic diversification and growth beyond the mineral industry have proven to be elusive. Other factors are far more important than taxes in business-location decisions. Recent research in the area shows that considerations such as transportation amenities, labor cost and availability, quality of life and construction costs are more important than tax rates. Meanwhile, other research concludes that taxes are only a major detriment to economic development in states that have substantially higher rates than the general American norm.
All of which reinforces the previous conclusion: Because of its favorable tax rates today, Wyoming can alleviate its fiscal crises without using all of its available tax capacity while also maintaining its reputation as a tax friendly state for its citizens and businesses.