Godby, Coupal and Haggerty: Wyoming's mineral tax trap creates tough choices

Godby, Coupal and Haggerty: Wyoming's mineral tax trap creates tough choices

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Minerals have long been the backbone of Wyoming’s economy, accounting for over 20 percent of state output. Despite the benefits of this incredible wealth, our dependence on natural resources has created the classic resource curse: focus on resource extraction has distorted our economy and undermined our state’s revenue stability.

Consider Wyoming’s economy and how it compares to its immediate neighbors and the nation. Natural resources in Wyoming have an employment share 3.5 times larger than our regional neighbors’ and more than six times the national average. Manufacturing’s share is less than half the regional average and only 40 percent of the national average, while employment in high-value services such as finance, education and health trail from 28 percent to more than 50 percent behind regional and national averages.

Not only has our economy been distorted but our human capital has too. While the share of Wyoming’s population with a high school diploma is slightly higher than regional and national averages, the proportion having a bachelor’s degree is almost 20 percent lower than our neighbors, and the share with a graduate degree lags our region by 18 percent and is 25 percent below the national average.

These outcomes are symptomatic of a less diverse, resource-dependent economy and have resulted in a relative lack of growth in both income and population since 1980. Furthermore, these conditions make it even more difficult to diversify and attract high-paying sectors to our state.

This dependency has also distorted Wyoming’s public finance system. In 2019, over half the Wyoming budget was funded by mineral revenues. Taxing mineral extraction — and receiving large disbursements from federal mineral revenue — has allowed the state to depend on taxing other people to pay for our public services. According to the Wyoming Taxpayers’ Association, the average family of three earning $60,000 per year pays $3,070 in taxes while receiving $27,600 in public services. To pay for these benefits, Wyoming relies on taxing other people by taxing the mineral wealth we export to them.

Wyoming has fallen into a “mineral tax trap” that creates a political culture focused on protecting the self-interest of low taxes and the status quo. We are aware of the risks of our extreme dependency on coal, oil and natural gas production, but the mineral tax trap creates a pernicious problem. There is never a good time to change: during downturns we lack the funds to make investments in diversification— and in booms high revenues undermine any motivation to do so.

We have considered escaping this trap before. Tax Reform 2000 proposed reforms after the 1990s decade-long bear market in oil, but the natural gas boom of the next decade led to the report’s hard choices being shelved. We have also erected barriers to reform. In 1974, Wyoming residents passed a constitutional amendment mandating that in the event an income tax was ever implemented, credits from all other taxes Wyomingites pay must be credited against any income taxes payable, undermining one possible means of reducing our dependence on energy revenue.

The state’s mineral revenue dependence, combined with self-imposed barriers to reform, also leads to an unintended consequence — a sudden flourishing of new and diverse economic activity would not solve the state’s fiscal problems.

A 2018 study for the state found that expansion in any non-energy sector would cause the public service costs incurred by these workers and their families to outstrip the tax revenue they generate; in the study’s words “…only growth in resource sectors has positive fiscal impacts.”

Wyoming’s resource curse arising from its mineral wealth is real. Not only has it distorted the state economy and its demography, it has also distorted our tax structure, and that in turn has created a wicked problem: to escape the resource curse will require making a costly bet to attract new industry with an uncertain payoff. Compounding this cost, if such efforts are successful, they will lead to worsening fiscal outcomes unless an even tougher decision is made. We will all need to accept paying a larger tax burden, a decision so far stymied by our well-understood but powerful addiction to mineral revenue.

Today, we face another historic mineral downturn, and unlike previous cycles, due to new technologies like fracking, wind and solar energy and ever more stringent climate policies, it is very likely coal and natural gas declines are permanent and will worsen.

Resulting revenue shortfalls once more underscore the need to reform our tax structure and our economy. We know the necessary answers. The only question left is whether this time we can summon the strength to change.

Rob Godby is an associate professor of economics and Deputy Director of the Center for Energy Regulation and Policy at the University of Wyoming. Roger Coupal is a community development specialist at UW. Mark Haggerty is a staff member of Headwaters Economics, which recently published the essay this column is adapted from.

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