Economist: Wyoming tax structure inadequate

As people’s income rises, so does their demand for government services.

Revenues to Wyoming government, however, do not grow nearly as fast as the income of its people, due to a state tax structure that taxes sales, property and minerals but not personal income.

By BILL LUCKETT
Star-Tribune capital bureau

http://www.casperstartribune.net/articles/2004/04/21/news/wyoming/3b80526a1bff292087256e7d0007005b.txt

"So Wyoming’s not able to provide the public services today out of General Fund revenues that it once did," said Shelby Gerking, an economics professor from Wyoming now teaching at the University of Central Florida.

The solution to the problem is obvious, Gerking said, though politically unrealistic here in the Cowboy State: institute an income tax.

"In this state, that’s just politically off the table, but if it was on the table, that’s how you fix the problem," he said.

Gerking made his comments during a lunch presentation at the ninth annual Stroock Forum on Wyoming Lands and People, held at Laramie County Community College. The topic of the forum was natural resources, taxation and the public trust.

Gerking said the ideal time to "fix" the state tax structure is now, when high mineral prices have the state rolling in dough, rather than later when minerals prices drop and the state finds itself in the poor house.

Several other speakers, including Gov. Dave Freudenthal, disagreed that this is a good time to make fundamental changes to the state’s tax structure.

"Given the current circumstance, I can see neither the need nor interest in modifying the tax structure or rates," Freudenthal said.

He said changes will come only when the economy busts to the point that change is required or when people are sufficiently discontented that they will either tolerate or encourage change.

"Ultimately, taxes reflect the contour of the economy … and the historical and political attitudes of the people in the state," Freudenthal said.

Gerking also scrutinized the state’s investment strategy of its assets and found it wanting. He said Alaska, which invests 53 percent of its permanent fund corpus in equities, has enjoyed a 9.9 percent rate of return over the past 20 years.

Wyoming, meanwhile, lags about 2 percentage points behind Alaska with an investment allocation that included 10 percent in equities, 36 percent in cash and receivables, 47 percent in bonds and fixed income and 7 percent in state loans in 2003.

"Wyoming is leaving about $80 million a biennium on the sidewalk in comparison to what Alaska is doing," he said.

But he applauded State Treasurer Cynthia Lummis for her earlier pledge to increase Wyoming’s investments in equities to about 50 percent of its total asset allocation, because that will help the rate of return substantially over the long term.

Lummis objected to Gerking’s use of 2003 as a base year for his analysis of her investment strategies, largely because the state had more cash on hand than it normally would.

"This is the most cash we’ve ever had in our portfolio," Lummis said, because the state is in a transition period regarding its asset allocation.

Some of the state’s bond investments have matured in the past year or two, and Lummis wanted to wait for the stock market to stabilize before drastically increasing Wyoming’s investment in equities, she said, so she has kept an unusually large portion of investments in cash.

Usually, Lummis said she keeps $300 million in cash on hand, which is enough to run state government for three months.

Having much more cash on hand recently "has created a problem for us in terms of our investment returns for the last 18 months," she said.

Gerking had four responses to Lummis’ comments.

First, he asked her to create an annual report that makes it easy to determine the state’s annual rate of return on its investments. He also told her the best time to invest in equities was "the first minute you could have" rather than at the point of the stock market’s recovery.

Third, he said, because interest rates are so low, the time to have made money by investing in bonds was yesterday. Finally, he criticized her for keeping even $300 million in cash on hand, which he said is eating into the state’s rate of return every day.

Gerking also said Wyomingites are not self-reliant when it comes to paying their own taxes because they in fact pay less than half the costs of the public services they receive.

But even the low tax burden on Wyoming residents is more regressive than that of most other states, meaning that it hits the poor disproportionately hard, he said.