Want economic diversity? Focus on fiscal diversity too.

Without doubt, the most popular bullet point on legislative campaign pamphlets in Wyoming is the promise to diversify the Wyoming economy.

With diversification, will come more high paying jobs, more economic activity on main streets and many other benefits to the state — or so the argument goes. But then, a few spaces down on that very same brochure will be the promise that, if elected, the candidate in question will resist all tax reforms and any new taxes.

Both are good, sound conservative Wyoming aims, and both make for appealing campaign talking points. The only problem is that, because of the Wyoming tax structure, those lofty goals are completely incompatible.

Wyoming’s tax structure, unlike those of other states, cannot accommodate any significant economic diversification.

It is well understood that Wyoming has one of the least diversified economies among all the states. With a quick review of Wyoming labor statistics, one can easily see that our jobs are heavily concentrated in the mining, oil and gas sectors. Other sectors such as construction, transportation and business services are themselves, in turn, heavily dependent on mineral extraction activity. As employment in the mineral industry goes, so goes employment in these related sectors.

The Joint Revenue Committee has been carefully researching and reporting on Wyoming tax policy for two years now.

During the 2017 interim, they focused on learning the relationship between overall tax levels and economic diversification. Specifically, they set out to answer: “How significant are tax rates to economic development and diversification?”

A research report prepared by legislative research staff clearly concluded that tax levels among the 11 comparator states had no causal effect on economic diversification and growth. Wyoming, with the lowest taxes among the sampled states, ranked fourth from the bottom in employment growth in most non-mineral sectors. It was also the only state to experience serious losses in the working population over some portion of the time span included in the study.

This should not have come as a surprise to anyone. Several studies examining how businesses decide where to locate had already found that factors such as an adequate labor supply, transportation, access to metropolitan areas and others are all of higher priority than low taxes. Research verifies that taxes are a factor if they are extraordinarily high, but quality and level of government services is equally important.

The following year, during the 2018 interim, the Joint Revenue Committee  focused on the relationship between the Wyoming tax structure and the state’s ability to fund the services that a growing labor force associated with economic diversification would need. The state hired a national firm to upgrade the input-output model currently used by the state to provide the answers.

This dynamic model identified all of the added costs of providing services to the growing workforces of various diversified industries. The model also calculated the tax revenue the state could expect to receive from expansion of those same industries under the current tax structure. The result is a rigorous calculation of the net fiscal impact to state government of virtually any newly diversified industry by quantifying the complex interrelationships among all economic sectors.

The results were striking and consistent. Adding a hypothetical 100 new employees to almost any industry created a net fiscal loss for the state. That is, the costs of state services required by the new industry and its employees outstripped the added revenue brought into the state by substantial margins.

One of the significant added costs when new industry comes into the state is public education. The main funding source for public education in Wyoming is the property tax. Wyoming property tax rates are the lowest in the nation for all classes of property except for mineral property. The mineral class of property comprises about 70 percent of the state’s assessed property value, and it accounts for a like percentage of education funding.

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Chemical manufacturing, agricultural food manufacturing and the utility sector were all run through the model, as was oil and gas, for comparison purposes. Of no surprise, 100 new employees worth of growth in oil and gas generated very substantial net gains in state revenue. These gains are what offset net losses connected with growth in other Wyoming industries.

The conclusion of the analysis is a vexing chicken-and-egg type paradox: Wyoming clearly cannot diversify its economy beyond absolute dependence on the mineral industry without added state revenue from the mineral industry. Any employment growth without added mineral revenue, financially weakens the state and grows its structural deficit.

Another way of stating the dilemma is that economic diversification cannot occur without fiscal diversification.

The final test of this model consisted of overlaying these same industries into the tax structure of three other states: North Dakota, Utah and Kentucky. This exercise demonstrated that they wouldn’t suffer the same negative impacts. All three would experience net positive fiscal impacts when the economic sectors in question expanded — a direct contrast to the Wyoming outcomes. That’s because other states generally tailor their tax structure to be able to benefit from — and afford the costs associated with — economic diversification.

The model and its results provide a useful lens through which to consider recent legislative accomplishments. It might be expected, for example, that bills proposed to diversify the economy be coupled with a corresponding set of bills dealing with needed fiscal reforms.

The Legislature has not been able to accomplish those reforms, however because of the intense resistance to any changes in the state’s system of taxation.

Efforts to generate economic diversity in the 2018 session focused on various ENDOW initiatives. This program, in general, is aimed at diversifying the Wyoming economy. Bills included spending for matching business grants, workforce training, air transportation, broadband investment and career technical programs. Together, they represented about $38 million in appropriations to be spent over the next handful of years. No bills were passed in 2018 addressing the state tax structure.

At least one economic diversification bill passed in 2019 — a measure to expand career technical education using funding appropriated in one of the 2018 ENDOW bills. In contrast, four committee bills and at least six individual bills focused on revenue and fiscal reform. They included a broadening of the sales tax, a lodging tax, a phased in property tax for public education, a corporate income tax, wind generation tax bills and a measure designed to improve collection rates of the personal property tax. All of these bills failed.

As more of the country’s coal-fired power plants are mothballed, as currently scheduled, the need to address our growing structural deficit will become more pressing. Phasing in smart fiscal reform now, while we still have some elbow-room, would seem preferable to waiting until the fiscal reserves are depleted.

At some point these hard decisions will be forced upon the state because the only alternative method of obtaining fiscal solvency will be to ‘un-diversify’ the economy.