By now, even casual observers recognize that Wyoming’s near single-minded reliance on mineral revenues leaves the state vulnerable to wild swings of boom-and-bust volatility and makes funding the basic functions of government a dicey proposition in bust times like these.
What readers may not realize, however, is that other states with similar economies and political environments have figured out how to avoid putting all their eggs in one basket.
Take West Virginia for example.
Long-term partisan politics are also similar, both being strongly Republican.
West Virginia coal mining, with its preponderance of underground mines, is technologically much different from that found in Wyoming. As a result, West Virginia employs about 13,000 workers in the coal industry compared to Wyoming’s 4,000-5,000. Yet, Wyoming’s annual coal tonnage is about three times that of West Virginia.
Nearly all of the electricity produced in West Virginia is generated in coal-fired power plants with a growing amount of production from wind turbines. Again, this is very similar to Wyoming. Both states produce far more coal and electricity than is needed within the state, so exports of both coal and electricity are important economic drivers for both states.
The parallels don’t stop there. Beginning in 2013 coal exports experienced a large drop in West Virginia. Though they’ve recovered somewhat from that low, overall coal exports have fallen generally since that time and the trend continues. Forecasts, not surprisingly, suggest that the next few years will see further declines in coal production in that eastern state.
Wyoming has much the same story to tell. Coal production in the last few years has been generally on a downward path, except for occasional increases in demand because of climatic conditions.
And it’s not just coal. Wyoming has been a major producer of natural gas for many years. West Virginia is newer to the gas game, but it’s located in the heart of the Marcellus shale natural gas bed. Modern fracking techniques launched an economic sector that has helped offset coal losses. Along with that, natural gas has also tempered the drop in severance and other tax revenue for West Virginia.
West Virginia, like Wyoming, maintains a strong vacation travel industry. Annual tourism spending is similar in the two states in that they generate about $4 billion each in travel spending. However, tourism activities differ in the two states.
The similarities in the economies of these two states are further evidenced by the sector utilization of their labor forces. Mining, drilling and logging account for 5% of the non-farm workforce in Wyoming and 3% in West Virginia. Some 8% of the labor force is involved in construction in Wyoming and 5% in West Virginia. Wyoming’s manufacturing employment makes up 4% of the workforce, compared to 7% in West Virginia. The leisure and hospitality sector accounts for 12% of the Wyoming labor force. In West Virginia leisure and hospitality makes up about 9% of the labor force.
We share challenges too. Both states have had considerable difficulty diversifying their economies in recent decades. Competing states with larger markets and bigger workforces have moved toward diversification much more successfully than Wyoming and West Virginia. Populations have remained relatively flat in both states and even decreased at times. Likewise, both states have for many years witnessed sizable outward migration of college graduates and other young people to other states.
Yet, for all of their similarities, Wyoming and West Virginia could hardly be more different when it comes to their fiscal profiles. West Virginia has more than a dozen major sources of general fund revenue. This diversification in its tax system has provided its citizens with a dependable revenue stream through the years over widely varying economic circumstances.
The largest source of general fund revenue in West Virginia is a progressive personal income tax. This tax is structured with multiple tiers starting at 3%. In a typical year it supplies about 37% of the revenues flowing into their general fund. The state has also adopted a corporate income tax and a business and occupation tax that together make up 9% of the general fund revenue. The sales and use tax accounts for another 28%. A series of other taxes on alcohol and tobacco as well as a real estate transfer tax each contributes significant revenues to the general fund.
Most noteworthy, however, is where West Virginia’s state government funding doesn’t come from. Only about 10% of the general fund derives from the state’s mineral severance tax.
Just like in Wyoming, revenue from this tax is volatile in West Virginia, but because of the existence of other general fund revenues it contributes only a small amount to budget fluctuations.
The overall funding structure of the West Virginia general fund is quite typical to that found in most other states.
In contrast, it is well known that there are only three major sources of funding for the Wyoming general fund. They are mineral taxes such as severance and royalties, earnings from the permanent mineral trust fund and the state sales and use tax. Both of the mineral severance tax and royalties are very volatile, as is the interest and dividend earnings from the mineral trust fund. The state sales tax is the most stable among these revenue sources although it, too, is more volatile than other states because of the dominance of the Wyoming mineral industry.
Mineral severance and royalty revenue have together accounted for about 36% of general fund revenue in recent years. Another 16% is generated from earnings of the mineral trust fund. Sales and use taxes make up another 31%. The other 17% of general fund revenue originates from a number of minor sources. The large dependence on mineral-related revenues makes Wyoming unique with respect to diversification — or more accurately, lack thereof.
The contrast in revenue diversification in these two states directly contributes to differences in year-to-year volatility. Recent studies show that Wyoming has a revenue volatility index of 13.3%. That means there is about a one-third chance that revenues will fall or rise by more than 13.3% each year. Such enormous and unpredictable swings make planning and budgeting exceedingly difficult.
In contrast, West Virginia’s volatility index is in the range of most other states, at a much more manageable 4.7%.
As demand for coal continues to decline — as we know it will — the pressure to cut budgets and/or find new sources of revenue will continue to grow. We’re witnessing that now in Wyoming. It’s yet one more challenge or cost associated with a lack of revenue diversification.