The long winding road to a Wyoming corporate income tax

Lawmakers and the public often invoke the specter of unintended consequences during legislative debate and testimony.

Opponents of one measure considered in the 1973 legislative session, however, undoubtedly did not raise that particular alarm. Resolution 12 was sponsored in the Wyoming House by then Rep. Nels J. Smith, a Republican from Newcastle who is now 80 years old. It was supported by those who abhorred even the thought of a Wyoming income tax, passed both chambers of the Legislature and was signed into law by then-Gov. Stan Hathaway.

Forty-six years later we’re learning that there is no expiration date on unintended consequences.

Following a statewide public vote of approval in 1974 Resolution 12 created Article 15, Section 18 of the Wyoming Constitution, and it’s pretty simple: “No tax shall be imposed upon income without allowing full credit against such tax liability for all sales, use, and ad valorem taxes paid in the taxable year by the same taxpayer to any taxing authority in Wyoming.”

This amendment has been the basis for taking income taxes off the list of possible new revenue sources for decades.

A measure currently being considered in the Legislature, however, — House Bill 220 – the National Retail Fairness Act, could turn the intent of House Joint Resolution 12 upside down. Bill sponsor Rep. Jerry Obermueller (R-Casper), a brilliant, retired Certified Public Accountant, has no doubt prepared corporate tax returns for decades. He clearly understands that corporations not based in Wyoming are taking what they earn here back to their home states to be taxed there.

Though he’s is now applying his talents to the education and transportation committees, Obermueller’s previous appointment to the House Revenue Committee was an excellent choice by Speaker Harshman. The representative’s astuteness was further exemplified when he convinced virtually all of the legislative leadership, and numerous committee chairmen, to cosponsor the bill. This stratagem greatly enhances its chances of passage during the 2019 session.

I served as co-chairman of the Joint Revenue Committee prior to my retirement and our research in the months following the 2018 session revealed how far out of step Wyoming is among the 50 states. Only two states have neither a corporate income tax nor a gross receipts tax. Wyoming, to no one’s surprise, is one of these two.

Testimony from experts confirmed that out of state corporations are quite indifferent to whether a state imposes a corporate income tax. This is because any corporate taxes paid elsewhere are credited against corporate taxes due in their home state. Thus, paying taxes in Wyoming doesn’t raise their overall tax bills. The only difference is where those tax dollars go. If non-home states don’t impose the tax, the tax revenue simply goes to their home state. In short, there is no national corporation that has an economic argument against paying corporate income taxes in the states in which they do business.

Wyoming corporations doing business in any of the 48 states that have an income or gross receipts tax are required to pay this tax in each of these states and have done so for decades. These businesses, however, have been vocal in opposing a Wyoming corporate income tax in the past. This resistance has persisted for decades and was no doubt instrumental in passing the Joint Resolution that fostered that fostered Article 15, Section 18 of the state constitution.

House Bill 220 has been crafted to minimize objections from Wyoming corporations — at least from an economic basis. One of the reasons for this is the state constitution. Remember, thanks to Smith’s 1973 resolution, any state sales and use taxes, as well as ad valorem taxes, must be subtracted from an entity’s corporate income tax bill. If a corporation is housed in Wyoming, it presently pays considerable amounts to state and local government by way of these existing taxes all of which would serve as a credit toward any state corporate income tax.

Ironically, in the absence of Article 15, Section 18, it would be politically difficult, if not impossible, to even consider a corporate income tax in Wyoming because of the financial impact it would have on Wyoming corporations. This is the crux of the unintended consequence of Resolution 12 enacted during the 1973 legislative session.

A credit for these existing Wyoming taxes is also applicable to non-Wyoming corporations doing business in our state. The difference, however, is that for these businesses, the taxes due in Wyoming are small relative to the business activity undertaken here. The bulk of their corporate activity occurs in their home state where excise and ad valorem taxes are likely to be substantial.

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Another well-thought out aspect of the bill is that it applies only to corporations engaged in retail sales, restaurant and lodging accommodations. As a result, HB220 primarily focuses on the so-called big box stores and national restaurant and lodging chains operated by out-of-state corporations.

The narrow applicability of the tax reduces significantly its potential revenue. Economic analysis staff are suggesting it will only raise about $45 million per year. In my opinion, that number may even be somewhat high.

House Bill 220 will only impact Wyoming domiciled businesses if they are organized as C corporations, and then only if their tax credits for sales and ad valorem taxes are insufficient for crediting all of the income taxes which would otherwise be due. The mineral industry is logically excluded because their tax obligation is already substantial. Manufacturing is also excluded from the proposed tax and is not problematic because we have so few manufacturers in the state organized as a C corporation.

The final ironic twist in the tale of Resolution 12 is known only to a few of us connoisseurs of legislative history. A review of the 1973 legislative digest indicates that Resolution 12 passed the final reading in the House of Representatives by a vote of 52 to 6.

A few days later in the Senate, on Feb. 19, 1973, the final vote was 19 in favor and 11 against — one vote short of the needed two-thirds majority! The next entry in the digest dated Feb. 21 includes the notation that the third reading vote two days earlier was ordered to be “expunged from the record.” The next entry in the digest indicates that the new third reading resulted in a vote of 24 in favor and six against — with five senators apparently changing their mind from two days earlier. One can’t help but muse about what might have happened during the last 46 years had the initial third reading Senate vote not been expunged.