The big story of Wyoming’s excise taxes — the taxes we pay when buying and selling things — is one of economic behavior evolving faster than the tax structure. It’s time for the state to catch up.
Household spending on tangible goods has fallen massively in recent decades while spending on services has gone up. In fact, some research finds that 60 percent of the average household’s expenditures went toward goods 40 years ago. Today that number is down to 40 percent. The shift has been toward services.
What does this mean for the viability of Wyoming’s sales tax structure? Our state has one of the narrowest sales taxes in the nation with relatively few services taxed. In addition, an inordinate number of commodities are exempted. Thus, our commodity driven tax base has been shrinking slowly but surely for years.
Some states saw this trend coming and reacted accordingly. South Dakota, for example, expanded its sales and use tax base to include services 25 years ago. While South Dakota addressed nearly all services at one time, other states gradually added services in a more piecemeal fashion over many years. Many other states have attempted sales and use tax broadening over recent years with varying success.
Enter House Bill 67 – Sales tax revisions, which will be considered soon in the Wyoming Legislature. When this bill was drafted during the interim, we chose a somewhat less encompassing version than did South Dakota. However, it covers most personal services, business and agricultural services, professional services, and amusement and recreation services.
What sets HB67 apart from other states’ legislation is that it is drafted to be revenue neutral. That means a central goal was to broaden the sales tax base, but also to reduce the tax rate to effect neither an increase nor decrease in overall tax revenue.
When considering all new elements of the bill, the state sales and use tax can be reduced from 4 percent to 3.5 percent. During the final interim committee hearing on the bill, witnesses liked the reduced tax rate, but had reservations on taxing certain services — especially those services that involved themselves personally.
But we can’t have the former without the latter. It is critical that citizens understand the reduced sales tax rate of 3.5 percent is only achievable if the broadening aspect of the bill is not significantly diluted with special interest amendments.
For example, one portion of the bill that will likely see some debate is the food exemption. The bill, as written, removes the exemption on grocery purchases. This exemption has been in place for 13 years and is popular among low income households. Some reasonable compromises exist for foodstuffs. For example a narrower definition of exempted food could be established by limiting the exemption to food staples but removing it from prepared deli type foods.
The bill also addresses other major problems with the Wyoming sales and use tax structure. Not only is our tax narrow, but it is also fraught with many specific exemptions within the goods sector. Many of these are special interest exemptions that have proven to serve no public interest — they don’t create new jobs or spur economic growth and the like. Some of these exemptions are recommended for repeal in HB67.
A decade or so ago, when state revenue was plentiful, it was a mark of personal success for some legislators to sponsor bills exempting a business sector from paying sales tax. To enhance the likelihood of passage, it was normal to include a sunset date in the bill, meaning it would expire at a specific future date. Lobbyists have proven quite adept at convincing legislators to move the sunset date further out whenever needed. A favorite saying around the Legislature is, “The sun never sets in Wyoming when it comes to tax exemptions!”
I owe my skepticism of economic incentive tax exemptions to Rodney “Pete” Anderson, the chairman of the House Revenue Committee during my early years as a legislator. The chairman was fond of referring to them as tax appropriations. Let me explain what he meant.
To administer a tax exemption as an appropriation, the state would assess the tax as usual, then appropriate the dollars necessary to refund taxes paid by business sectors that the Legislature has chosen to be tax exempt. The option of continuing the refund would presumably be made every two years during the budget session. The benefitting businesses would in the end, remain untaxed each year, provided the refund was appropriated.
Actual tax exemptions, however, are able to avoid the biennial messiness and public scrutiny of an appropriation and are made virtually permanent by statutorily exempting them. The revenue consequences are seldom noticed among the mix of other revenue and so they continue.
In recent years, the Joint Revenue Committee has asked for an economic analysis of some of these exemptions. Two of the larger exemptions involve purchases of manufacturing equipment and data processing equipment. They are marked for repeal in HB67 and involve forgone revenue of $40 million per biennium. The economic analyses suggest that about 35 jobs are produced in these sectors for a cost of $20 million per year or $580,000 in lost state revenue per job. Even the federal government cannot match this!
House Bill 67 would be a big step toward Wyoming tax equity. It also involves no increase in total revenue collections from state residents. House Bill 67 is a bill that should be considered and passed.