No discussion of Wyoming’s tax system would be complete without consideration of our many expensive exemptions.
All states employ tax exemptions, and for a variety of reasons: some are mandated by federal law, others are designed to avoid taxing basic human needs like medical service and groceries.
The most controversial exemptions are couched in some way as an economic incentive — we have 19 of those. Most well known among them are exemptions for purchases of manufacturing equipment and certain data-processing and storage equipment for large businesses. They’re controversial because the evidence increasingly shows that they produce insufficient economic activity to offset their high cost in terms of lost revenue to the state.
Watching the opening day of the 2021 legislative session, I was reminded of a discussion fewer than 14 years ago when I was a freshman on the House Revenue Committee. Rodney “Pete” Anderson, then chairman of the committee, perhaps frustrated with the number of tax exemption bills submitted that year, digressed into a discussion that had an immediate and lasting impact on many new committee members.
Preferring to label tax exemptions as tax expenditures or tax appropriations, Anderson explained that a tax exemption is fundamentally equivalent to continuing to impose the tax, but then handing that revenue back to selected taxpayers dollar for dollar. Making it an exemption instead only hides this tax-and-spend link.
From the standpoint of process, legislators, especially conservatives, prefer exemptions for a variety of reasons. First, tax expenditures (exemptions) are not counted as government expenditures and therefore are less visible since they are absent from the budget. Thus, they do not make it appear that government is getting larger, even though they allocate private resources to government-selected purposes.
Important also, is the fact that an exemption does not have to be enacted each year, but is permanent until repealed or is sunset by statute. In other words it permits an out-of-sight, out-of-mind feature. Finally, legislators realize that it would be too politically difficult to maintain a traditional tax and then appropriate the revenue back to the taxpayer.
Several years ago, the Legislature charged the Revenue Department with analyzing the costs and benefits of a number of economic incentive exemptions. Lawmakers wanted to determine if the exemptions at question benefitted the state through added employment and if that employment then returned enough alternative tax revenue to offset the direct revenue loss from the exemption. The department prepares a report each year that captures the impacts on employment and state tax revenue.
These studies are easily obtainable on the Revenue Department website and they include exemptions for manufacturing equipment, data processing equipment, coal gasification facilities, repairs of railroad rolling stock and a new exemption enacted in 2019 pertaining to broadband internet providers.
The state’s recent investment in a sophisticated modeling system has made the analysis even more rigorous and its estimates more credible. Regional Economic Modeling Inc’s program is specifically designed with parameters unique to Wyoming and is utilized frequently by the Wyoming Business Council and the Division of Economic Analysis.
Let’s look at what it can tell us about the manufacturing equipment excise tax exemption, for example. It has been analyzed annually since fiscal year 2006, giving ample time for a long-term assessment of the program.
That single exemption has cost the state just under $10 million per year on average for a total of $140 million since fiscal year 2006. There were about 13,000 employees working in the manufacturing sector in 2006. In 2020 the number of manufacturing employees is about 11,000, a reduction of 2,000 workers. A suspected reason for this is that well over 95% of the exemption benefit goes to existing businesses. That tells us the exemptions aren’t going to new companies investing in new equipment and creating new jobs. Rather, they’re going to existing businesses upgrading old equipment — a process that typically saves labor. Thus the shrinking employment levels in the manufacturing sector.
The REMI model measures the incremental impact of tax-policy changes such as the addition or removal of tax exemptions. In the latest analysis the model found that a nearly $10 million reduction in sales and use taxes resulted in only 20 additional manufacturing jobs. Put differently, only 20 of the estimated 11,000 jobs in Wyoming’s manufacturing sector are created by the exemption. This clearly indicates that tax exemptions are not critical when it comes to employment.
The math clearly shows that each manufacturing job created cost the state nearly $500,000 in lost excise tax revenue. Of course, each of those 20 jobs creates further economic activity, and in turn, more jobs. These are called induced or indirect jobs, and they are created in other sectors such as construction, retail trade and many other areas. In the latest analysis this amounted to another 55 employees bringing the total to 75 new jobs created by the manufacturing equipment exemption. That brings the average cost per position to$133,000 — hardly a bargain.
A further finding from the model indicates a partial offset of new sales tax revenue of $130,000 and new property tax revenue of $50,000, a minuscule offset compared to the $10 million revenue loss connected with the exemption.
Much the same outcome is demonstrated in other sectors. The tax expenditure connected with the excise tax exemption for data processing facilities totals $110 million since the exemption was enacted in 2010. The result has been an incremental increase of nine new jobs in the information sector and 57 additional indirect jobs in other sectors. Offsetting annual increases in new excise and property taxes total about $180,000 compared to the $19 million in unrealized excise tax revenue associated with the exemption in 2019.
Many of these exemptions were enacted when state revenue from the mineral industry was at its height and revenue was abundant. Clearly this is no longer the case. Given the current circumstances, it’s time for a careful reconsideration of these and other exemptions given their extremely high cost relative to only marginal benefits.
Budget cuts are always difficult as the current administration is finding, but it is clear that tax expenditures as mandated by the exemptions in excise taxes result in only minimal benefits to the state, its businesses and its citizens. And their collective cost is in the tens of millions of dollars annually.
The statutes authorizing these economic-incentive tax expenditures always include a sunset date upon which the exemption expires. However, over past years, new bills extending the sunset date are readily enacted and heavily lobbied for by those few businesses receiving the exemption. Which is why when walking the halls of the Capitol, one frequently hears the comment that “the sun never sets in Wyoming.”