The costly lessons of Wyoming’s limited revenue diversity

Wyoming’s fiscal situation has grown very stormy in 2020.

The state has already administered a 10% cut across all agencies, followed by another $500 million this fall, with possibly more to come. It now looks like we’ll have to reduce the two-year budget from about $3.3 down to $2.4 billion in order to make it balance. This is too much to withstand if we hope to maintain needed state services.  

Observers have long noted that Wyoming suffers because it has resisted diversifying the revenue streams with which it pays for general state government and public education. 

The reality is a bit more complicated.

A summary of Wyoming’s fiscal woes must take into account that mineral severance taxes have declined for six consecutive two-year budget cycles and are forecast to keep heading south for at least another one. A similar pattern has also played out with federal mineral royalties. 

To grasp the significance of this downturn, in the 2007-08 biennium Wyoming received about $2 billion in severance taxes. In the current biennium, that revenue source is expected to amount to about $800 million — only 40% of what it contributed 12 years ago. 

Sales and use taxes play another important role. Because the narrow base of taxed goods is also slanted to the mineral industry, revenue from this source has also been stagnant for the last decade, holding to around $900 million each biennium. The current budget cycle is projected to experience a drop in sales and use tax largely because the mineral sector is declining and impacting other businesses that sell the mineral sector goods and services. .

It is also noted that post-COVID sales and use tax has not recovered during the first four months of the current biennium. In fact, this tax has dropped on average more than 8% compared to July through October of the previous year. 

What has happened in states around Wyoming? A quantitative comparison shows a telling contrast due to the lack of diversification in Wyoming. 

Idaho, Utah, Nebraska and South Dakota — all of which have more diversified state revenue structures than Wyoming — each experienced very healthy increases in state revenue while Wyoming’s plummeted. 

The state of Idaho, with a population of about 1.7 million, has a diversified tax system. It pays for general state government costs primarily with a  sales tax, moderate corporate and personal income taxes and a variety of smaller sources. Economists in the state initially expected large drops in tax receipts at the beginning of the pandemic. However, during the last few months state revenue has risen substantially as spending from the CARES Act has taken place. In September and October, general fund revenue grew by 9% and 7% respectively. Leading the growth in revenue was the corporate income tax. 

Tax revenues in Idaho have so far exceeded expectations this year that if revenues continue in the present pattern, property tax reductions could soon be on the horizon, according to Idaho lawmakers.

Utah is another state that relies primarily on sales and income taxes for supporting general state spending and public schools. Its diversified economy and revenue structure appears to be working to the state’s advantage. In a cautionary attitude, Utah lawmakers are saying that until the current favorable revenue trend continues for a few more months, fiscal changes are premature. 

Early in 2020, lawmakers there were warning the public that sales and use taxes were seriously lagging the state’s needs to finance public services. However, recent history has changed as the state has witnessed sales tax revenue increasing nearly 10% year over year. Income tax receipts have taken a similar jump rising an estimated 9.2%. It is believed by many observers in Utah that much of the added sales tax revenue is traced to COVID stimulus programs. 

Nebraska relies primarily on a sales and use tax, personal and corporate income taxes, and to a lesser degree, a gross receipts tax. Nebraska revenue forecasters recently raised the state’s revenue estimates for the present fiscal year. The group predicts that revenue will end the year at least $285 million above what was forecast at the time of budget preparation. In addition, forecasters predict these sources will produce more than $400 million in additional revenue during the next two fiscal years beginning in July, 2021.

The biggest jump in revenue in recent months has been the sales tax. For example, August sales taxes exceeded the forecast by 19%. Individual income taxes in Nebraska also beat predictions by more than 10%. Nebraska policy makers also believe that much of the large boost in state revenues can be attributed to economic stimulus related to the CARES Act.

Finally, South Dakota also has, so far, experienced needed growth in the state’s revenue. 

South Dakota, while of larger population than Wyoming, has a tax structure somewhat similar to Wyoming. It  has no income tax, but does have a sales and use tax. This tax differs from the Wyoming sales and use tax in that it is far broader and applies to most services not taxed by Wyoming. Another difference from Wyoming is that South Dakota relies on a relatively high property tax at the local level to finance the bulk of public-school education. Finally another obvious difference is that mineral extraction is not a major revenue generator in South Dakota.

At the close of fiscal year 2020 in July South Dakota had an unexpected revenue surplus. In addition, the first four months of fiscal year 2021 have produced large increases in sales and use tax revenue ranging up to nearly 20% year over year in one month. Sales and use taxes have increased over this four-month period by approximately 15%. Revenue forecasters in that state attribute a significant amount of this increase to the CARES Act and also the active wind development projects now taking place in the state. 

Analysts in South Dakota estimate that if the current trend in sales tax growth continues, it could amount to between $100 and $200 million in additional revenue above the fiscal year forecast.

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The pattern is readily apparent. Our neighbors, having established diversified revenue systems, are able to benefit from a wide array of economic activity, including the kinds of spending engendered by the CARES act. As a result they continue to thrive — and are able to maintain much-needed services — even as many economic sectors suffer.

Wyoming, meanwhile, remains unduly tethered to the minerals sector, unable to meaningfully benefit from growth or activity in any other field. When minerals tank, as they are currently, so does the state’s ability to fund the basic functions of government — regardless of what happens in the rest of the economy. 

Unlike previous slumps in the energy industry, the current one looks to have no reasonable likelihood of a timely recovery. Federal policy changes, point to slow recoveries in oil and gas and the outlook for the coal industry is even bleaker. 

If state legislators don’t fully appreciate the gravity of this rapidly approaching fiscal cliff when the Legislature meets next spring, it will be too late. The structural deficit for both the state’s general fund and the school foundation program are severe by any measure.