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Research & Commentary: Keep the Income Tax out of Wyoming

February 15, 2019

In this Research & Commentary, Matthew Glans examines two new proposals in Wyoming that would create new income taxes in the state for the first time.

Wyoming has one of the best tax systems in the country according to the Tax Foundation’s 2019 State Business Tax Climate Index. In fact, Wyoming’s business tax climate ranked highest in the nation, primarily due to its lack of personal and corporate income taxes. Currently, Wyoming is one of only two states (South Dakota) that do not impose either a corporate or gross receipts tax on business income. Even better, the Equality State also has low property tax rates and a competitive state sales tax.

Despite possessing a tax system and business climate that ranks foremost among the nation, Wyoming lawmakers recently introduced two legislative proposals that would create new income taxes on corporate and personal income. The first bill, House Bill 220, would impose a new 7 percent state corporate tax targeted at companies with more than 100 shareholders.

Although this tax is designed to only impact large publicly-held companies, it is a foot in the door for the corporate tax. Once a corporate tax is implemented, the state can expand it to all businesses. Unsurprisingly, the tax was met with strong criticism from business groups such as the Wyoming Retail Association and the Wyoming Lodging & Restaurant Association according to Patrick Gleason of Americans for Tax Reform (ATR). The Wyoming House of Representatives voted in favor of the tax by a 44 to 14 vote on January 25.

Another troubling proposal in the House, House Bill 223, would institute a new personal income tax of 4 percent; Wyoming is currently one of nine states that do not tax personal income. Although this particular income tax model is set up as a “millionaire’s tax,” the new tax would apply to income more than $200,000. Taxing the rich is popular with some voters and legislators. However, this tax is likely to produce several negative economic effects in Wyoming.

Higher taxes drive wealthy taxpayers out of states, taking their income, capital, and tax revenues with them. The revenue-generating results of so-called millionaire’s taxes have been mixed at best. In fact, many states that increased taxes on the upper brackets, including Maryland, New York, and New Jersey, have allowed their tax hikes to expire. Relying on a fluctuating tax with a small base—like the millionaire’s tax—can lead to large budget deficits. In many cases, states with broader and flatter tax systems generate more revenue in a consistent and predictable manner.

According to Gleason, the new personal income tax would affect far more taxpayers than supporters expect. These unexpected targets are the 2,600 sole proprietor businesses in the state that file under the individual income tax system according to the Internal Revenue Service.  “Those small businesses, along with the more than 5,220 partners and S-Corp shareholders across Wyoming who file under the individual system and had income above $200,000, would be hit by the personal income tax proposed Connelly and her colleagues,” wrote Gleason.

Personal and corporate income taxes are generally considered to be the most destructive taxes because they disincentivize production, innovation, and risk-taking. Recent studies show states with no income tax or with lower income taxes perform better economically and achieve greater job and population growth than those with higher income taxes. High income taxes deter economic development by discouraging higher-income-earners and new capital from moving into a state, remaining there, or investing their money. A study by the Americans for Tax Reform Foundation found, “Each positive 1 percentage point tax burden differential between states decreases the ratio of income migration into the high-tax state by 6.78 percent in a given year.”

Relying on a small percentage of higher-income taxpayers for a larger percentage of revenues generates revenue windfalls and spending free-for-alls during economic booms, followed by massive budget gaps during economic downturns. A state’s tax policy should focus on bringing in enough revenue to cover the costs of necessary functions of government in the least economically distorting way possible. Income taxes are among the most disruptive factors affecting economic growth.

Income taxes impose high costs on businesses and individuals. Furthermore, they discourage capital from flowing into a state and thwart the creation of new jobs. Wyoming legislators should reject any and all income taxes that increase the tax burden. Instead, Wyoming lawmakers should preserve the state’s economic competitiveness by allowing residents and businesses to spend, save, and invest their money as they see best. Additionally, the state should consider reducing government spending or at least limit the rate at which it increases moving forward.

The following articles examine state income tax reform from multiple perspectives.
 

Ten Principles of State Fiscal Policy
https://www.heartland.org/publications-resources/publications/ten-principles-of-state-fiscal-policy?source=policybot
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.”

Federal Tax Reform: The Impact on States
https://taxfoundation.org/federal-tax-reform-the-impact-on-states/
Nicole Kaeding and Kyle Pomerleau of the Tax Foundation examine the effect of the federal tax reform on the states and how they can use the changes to push for tax reforms of their own.

Tax Reform Moves to the States: State Revenue Implications and Reform Opportunities Following Federal Tax Reform
https://taxfoundation.org/state-conformity-federal-tax-reform/#9
This paper by Jared Walczak of the Tax discusses what options are available to states as they respond to federal tax changes. “In the wake of federal tax reform, states have a golden opportunity to move their own tax codes in a more simple, neutral, and pro-growth direction,” writes Walczak.

Tip Sheet: State Income Tax Reform 
http://heartland.org/policy-documents/tip-sheet-state-income-tax-reform
This Policy Tip Sheet from The Heartland Institute examines state income taxes, documents economists’ judgment of them as the most destructive tax and a deterrent to economic development, and provides data showing states with no income tax perform better economically and enjoy greater job and population growth than those with higher taxes.

Taxing the Rich Will Bankrupt Your State
https://www.heartland.org/publications-resources/publications/taxing-the-rich-will-bankrupt-your-state
John Nothdurft explains the disadvantages and negative consequences of “millionaire” taxes and overtaxing the top income brackets.

Should We Raise Taxes on the Rich?
http://spectator.org/archives/2012/11/14/should-we-raise-taxes-on-the-r
Peter Ferrara, senior fellow for entitlement and budget policy at The Heartland Institute, writes in the American Spectator about “taxing the rich” and explains why such policies make no fiscal sense.

Seven Myths About Taxing the Rich
https://www.heritage.org/taxes/report/seven-myths-about-taxing-the-rich
Curtis S. Dubay of The Heritage Foundation considers seven commonly cited myths about policies to tax the rich. Dubay argues raising taxes on the rich would increase the progressivity of an already highly progressive tax code. It also would damage economic growth by stifling job creation, further slowing already stagnant wage growth. Although some see raising taxes on the rich as a silver bullet for fiscal woes, it actually badly damages the economy, he writes.

Rich States, Poor States
https://www.richstatespoorstates.org/
The twelfth edition of this publication from the American Legislative Exchange Council and authors Laffer, Moore, and Williams offers both individual-state and comparative accounts of the negative effects of income taxes.

The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates  
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase.

The U.S. Tax System: Who Really Pays?
https://www.manhattan-institute.org/html/us-tax-system-who-really-pays-5748.html
Writing for the Manhattan Institute, Stephen Moore examines popular conceptions and misconceptions about the impact of tax rates on economic productivity and fairness, addressing these statements and debunking attendant myths. He provides useful information on how the rich are taxed and how much they contribute.

The Historical Lessons of Lower Tax Rates
http://www.heritage.org/research/reports/2003/08/the-historical-lessons-of-lower-tax-rates  
Examining the historical results of income tax cuts, Daniel Mitchell of the Heritage Foundation finds a distinct pattern throughout American history: When tax rates are reduced, the economy's growth rate improves and living standards increase.

Policy Tip Sheet: Corporate Income Taxes
http://heartland.org/policy-documents/policy-tip-sheet-corporate-income-taxes
Taylor Smith examines corporate income taxes and their effects on economic development. Smith suggests how legislators can limit or eliminate their corporate taxes.

Balancing State Budgets the Smart Way
http://taxfoundation.org/article/balancing-state-budgets-smart-way
Joseph Henchman of the Tax Foundation examines an array of options states can use to remedy both short-term and long-term fiscal woes and put their budgets back on sounder legal footing.

 

Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

The Heartland Institute can send an expert to your state to testify or brief your caucus; host an event in your state, or send you further information on a topic. Please don’t hesitate to contact us if we can be of assistance! If you have any questions or comments, contact Lennie Jarratt, Heartland’s government relations manager, at ljarratt@heartland.org or 312/377-4000.

Author
Matthew Glans joined the staff of The Heartland Institute in November 2007 as legislative specialist for insurance and finance. In 2012, Glans was named senior policy analyst.
mglans@heartland.org @HeartlandGR