Sales tax exemptions gnaw a hole in revenues

Last week in the Forum we dove into tax issues. That’s because all of us have to these days, like it or not. Wyoming is in the midst of a budget crunch, and that means we have to examine not only spending but revenue — and that means taxes.

Well, it’s not over, folks. Here’s more on taxes this week. It’s a complicated topic, and just one dive won’t do it. You’ve got to spend some time on the details.

The Legislature’s Joint Revenue Committee is meeting this week in Buffalo, on Thursday and Friday, Sept. 22 and 23. One of the issues they’re going to examine is sales tax exemptions.

Mike Madden of Buffalo, the co-chairman of the committee, and a PhD economist, wrote for the  Forum last week, a nice summary of the tax exemption issues. Here’s what he said:

Tax exemptions have developed over the years purportedly to provide economic incentives to certain industries and businesses. From an economic perspective they are really tax appropriations. That is, exemptions work the same way as taxing an industry and subsequently appropriating the money necessary to pay the industry back an amount equal to the original tax.

That’s what he said. If we start talking about tax exemptions, we have to realize that we’re really talking about appropriating money to whoever gets that exemption — we’re really talking about spending.

That’s pretty important. And it’s millions of dollars in “spending,” via tax exemptions, that we’re talking about here.

And let me tell you, the people who get those exemptions like them. They like them a lot. When I was a freshman legislator, I got some enlightening instruction on how disastrous it is for any legislator to start hacking away at exemptions. I checked off on a list of exemptions I thought were inappropriate, or in some cases unconscionable. And when the list got out — you’ve never seen so many people come unglued.  I learned a lot then — not to mess with exemptions! But, were they justified from either a private enterprise perspective or from a public policy view?

Well, here we go: this week the Forum is about tax exemptions. And, I think we have some good people on board to help clarify the issues — or at least bring them into high relief for us.

In the piece below, Sarah Gorin, a watchdog for the public interest and an earlier contributor to this forum whom I’ve known and respected for many years, lights into sales tax exemptions. She doesn’t think much of them, or about the legislature’s longstanding inaction in getting adequate reports done on the real impact of those tax exemptions — on Wyoming’s economy, on Wyoming people and their jobs, and on the state’s revenue picture.

Sarah helped found the Equality State Policy Center, decades ago, to increase government accountability and public participation in Wyoming. In my view, the center plays a needed role in joining a lot of other voices to sharpen up our civic dialog.

A particularly telling line in Sarah’s essay for the Forum this week is this one:

In Wyoming, severance taxes have displaced income taxes, creating a widespread public perception that government services fall from heaven.

Read the rest, and see what you think.

Then go read the companion piece, from Buck McVeigh of the Wyoming Taxpayers Association: it’s a handy guide, really a checklist, to what legislators, and all of us, need to think about when we eye the possibility of installing or cancelling a tax exemption.

— Pete Simpson

Sales tax exemptions gnaw a hole in revenues

by Sarah Gorin

Wyomingites cannot remember a time when the state’s economy did not boom and bust with the energy and minerals industries. Even after the state finally instituted severance taxes to start replacing its natural resources with cash, price swings in the oil, gas and coal markets alternately have left the state coffers brimming over or dry as a bone.

Passage of the first severance tax in 1969 and the subsequent creation of the Permanent Wyoming Mineral Trust Fund in 1974 have built significant assets intended to cushion the boom and bust cycle. There is more than $7 billion in the PWMTF, whose principal is inviolate, and over $1.8 billion in the official “rainy day” account (the Legislative Stabilization Reserve Account) that can be appropriated by the Legislature.

Legislatures over the years never even have attempted to answer the question, “When is it raining?” There is no plan governing the management or possible expenditure of the rainy day fund, though experts recommend that states use such funds to ensure a spending “glide” downwards rather than fall off a cliff. Without exception, when revenues drop, legislators have cut state spending to match. Because a significant amount of local government revenue comes from the state, the cutbacks are felt at every level. Because public spending generates a significant number of jobs in Wyoming, these reflexive cuts exacerbate the state’s economic downturns.

Read the companion forum piece by Buck McVeigh

Could the Legislature have dealt differently with the current bust? Yes. Besides considering judicious spending from the rainy day funds, the Legislature could look at other revenues the state could be getting — specifically, revenue lost through sales tax exemptions.

Most states rely on a “three-legged stool” of taxation: sales taxes, property taxes and income taxes. In Wyoming, severance taxes have displaced income taxes, creating a widespread public perception that government services fall from heaven.

Any given level of government requires a given level of funding. If some entities are exempt from taxation, then the funding requirement falls more heavily on the remaining entities. Every state tax code includes some exemptions. For example, churches and newspapers are exempt from taxation as a matter of constitutional law (infringing on freedom of religion or the press).

A number of states, most notably Oregon, track and report “tax expenditures” —  – that is, tax exemptions. The term “tax expenditures” recognizes that some taxes already have been expended by not being collected in the first place.

Economic development push leads to sales-tax breaks

Many state and local governments have fallen into the trap of offering property and sales tax reductions and exemptions in the hope of encouraging economic development. Many also learned from these efforts that the types of businesses attracted by lower taxes usually bring low-wage jobs and/or environmental problems. These stress social services and other infrastructure just when the revenue that would have paid for these services has been bargained away. Consequently, some jurisdictions began enacting “clawbacks” requiring reimbursement of tax reductions and exemptions if economic development projections are not met. For example, the exemption would be rescinded if a developer fails to produce the promised number of jobs and resultant tax revenues.

Wyoming’s unusual tax structure makes it difficult for the state to participate in this economic development game. The state imposes neither a corporate nor a personal income tax. The Wyoming Constitution’s provisions requiring equal rates of taxation on property within the same class precludes the possibility of offering property tax reductions, and property tax rates are relatively low in any case. Wyoming sales taxes currently are imposed on items listed in statute. Generally, the statutes impose those taxes on “goods” but not on “services.”

(For this article, sales and use taxes — also called excise taxes — will be termed sales taxes. The “use” tax refers to an item purchased in another state to be used in Wyoming, with the sales tax paid here instead of in the state of purchase.)

But rather than conclude that Wyoming’s low taxes already were enough, especially relative to neighboring states, legislators began responding to local economic development groups wishing to compete with entities in other states that offer tax breaks. Sales tax exemptions were the only option.

Sales tax breaks have therefore been enacted, exempting businesses operating in Wyoming from paying millions of dollars in sales tax over the years. The money not paid in those years is lost to the state for good: there are no “clawbacks” in Wyoming statutes.

But should the exemptions continue, now?

Eyeing the impact

It’s worth taking a look at the details. Take the example of sales tax exemptions in the “economic development” category. Wyoming currently has four of those exemptions:

•  For purchase or lease of machinery and machine tools used directly and predominantly in manufacturing;
• For purchases and rentals of equipment for data processing services centers, if a certain investment threshold is met;
• For purchase of equipment used to construct a new coal gasification or coal liquefaction facility;
• For the sale or purchase of tangible personal property or services performed for the repair, assembly, alteration or improvement of railroad rolling stock.

When the first of these was enacted in 2004, the Equality State Policy Center (a public interest group I helped found, concerned in part with tax and fiscal policy) lobbied vigorously for some kind of follow-up reporting on the success of the exemption. Thus for each of the economic development exemptions, the law requires any entity making use of the exemption to report annually on the following, if requested by the state Department of Revenue:

• The amount of sales tax exempted and the number of jobs created or impacted by utilization of the exemption;
• An evaluation of the cumulative effects of the exemption from initiation of the exemption, including:
• A history of employment in terms of the numbers of employees, full-time and part time employees, and rate of turnover;
• A history of wages and benefits, disaggregated by gender, for each job category;
• A comprehensive history of taxes paid by the entity to the state of Wyoming.

Read Capitol Beat Checking in on tax issues

No coal gasification or liquefaction plants have been built in Wyoming, so that exemption will be ignored for the moment. It is worth noting, however, that if construction of such a plant had occurred, the sales and use tax loss would have been tens of millions of dollars, far exceeding any possible compensatory sales and use tax revenues from purchases made by a temporary workforce.

When discussing the economic development tax exemptions, it is important to realize that when the reporting requirements were enacted along with the exemptions, legislators provided no direction or funding to the Department of Revenue on how to meet these requirements. The Department (specifically, the Excise Tax Division) thus has had to invent a reporting protocol on the fly with a minimum of expense. They have accomplished this primarily by surveying taxpayers in the appropriate categories, to the extent the department can identify them.

Although taxpayers are required to respond to the survey, return rates are poor, and there is no sanction for noncompliance. Excise Tax Division employees sort through what returns they get and do the best they can to interpret the data supplied, which may or may not be responsive to the questions.

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The lack of any appropriation for data collection, analysis or enforcement precludes the Excise Tax Division from spending any more on this reporting project than it absolutely has to. Useful information in the reports tends to be pitifully scarce. None of the reports contains, or ever has contained, for instance, the required “comprehensive history of taxes paid to the state of Wyoming.” (And since the statute calls for a history of taxes paid to the state, the reports leave out the most obvious other significant tax — property tax — because that is paid to counties, not the state.)

The reporting hasn’t meant much. Each exemption has gone on and on, renewed by the Legislature multiple times.  Each exemption initially had a sunset date, and committees have heard testimony from the Equality State Policy Center and others on the need for more focused and accurate reporting, as well as  the lack of any data demonstrating a positive effect from the exemptions; but the exemptions remain.

A major exemption means millions in lost revenue

Take a look at the exemption for purchases of manufacturing equipment. It was the first of the economic development exemptions to be enacted, in 2004. This particular area was chosen because the manufacturing sector can be high-wage and, in Wyoming, is relatively small and therefore a popular target for development efforts. It also was suggested that growth in the manufacturing sector might help address Wyoming’s significant gender wage gap. Typical entities listed in the manufacturing sector, such as refineries, were established in Wyoming long before 2004.

So how successful has this longest-running economic development exemption been? The number of employees in manufacturing has bumped up and down since 2004, ending with 443 fewer employees in manufacturing in 2014 than in 2005. The percent of Wyoming workers employed in manufacturing versus all industries has remained constant at 3 percent.

The number of women employed in manufacturing also fell since enactment of the exemption, from 2,691 to 2,271. The percentage of women relative to men employed in manufacturing dropped from 29 percent in 2005 to 26 percent in 2014. Salaries for both men and women increased over the reporting years (although the report does not say whether these increases are adjusted for inflation) but women’s salaries climbed only 3 percent relative to men’s, in aggregate.

For full-time employees in manufacturing, benefits, generally speaking, exceed those offered in all industries. But the report contains no analysis of whether the benefits offered are reasonably within the financial reach of the worker (that is, the employee’s share of a benefit may be unaffordable, given the employee’s wage). For part-time employees in manufacturing, benefits offered are poorer than those across all industries.

According to the FY 2014-’15 survey responses received, five respondents were responsible for 89 percent of the exempt purchases; one of these five accounted for 44 percent of the total. This disparity is typical of previous years, to the extent data are available, and makes any reader wonder: who benefits from this exemption?

Certainly not the state of Wyoming. The exemption cost Wyoming at least $18.5 million during one year alone: FY 2014-’15, the highest total yet. The cumulative cost to the state since FY 2006 reflected in the reports amounts to about $88.2 million (data for this total is presented in the report, but not the total itself).

But the real cost could well be many millions more. The totals in the reports are based only on the survey responses, which are few. Taxpayers don’t have to file for the exemption, they just take it. So there is no independent compilation of exempt purchases. It probably is a safe bet that this exemption has cost the state of Wyoming more than $100 million during the past decade.