Recently, the U.S. Census Bureau released its report on state and local government tax revenues for 2010. It is not a very uplifting reading for Wyoming taxpayers.
From the top of the recession in 2006 to its bottom in 2010, the state economy — also known as state GDP — grew by 14.8 percent in current prices. During the same period of time, local governments saw their tax revenues increase by a whopping 29.7 percent.
This has not been good for the Wyoming economy. When taxpayers have to part with more money to government they have less left to spend themselves. This is visible in employment data for Wyoming, reported by the Bureau of Labor Statistics. In two short years, from 2008 to 2010, Wyoming lost 18,400 private-sector jobs, a decline of eight percent.
Of course, not all of this job loss was caused by the rise in the local government tax burden — some was related to the downturn in the national economy. However, it clearly does not help when towns, counties and school districts continue to demand more money when their breadwinners in the private sector have to tighten their belts.
Fundamentally, the increased local tax burden is driven by the continuous expansion of local government spending. One good example of that expansion is the size of the local government workforce: based on annual numbers, local Wyoming governments had four percent more employees in 2010 than they had only two years earlier. This payroll expansion came while, again, the private sector laid off eight percent of its workforce.
Reforms, while necessary, take time. Cities, counties and school districts can avoid growing their burden on taxpayers’ shoulders. One method to do so is a payroll cap: tying the number of government employees to the number of private-sector employees.
One consequence of a payroll cap would be local government layoffs in tough times. If the private sector has to downsize, then local governments should have to do the same.
Another remedy would be to overhaul the tax system. Wyoming’s local governments depend heavily on property tax revenues, with four dimes out of every general tax revenue dollar coming from that tax. By comparison, sales taxes account for less than eight percent of tax revenues for local governments.
The main problem with the property tax is that it is very rigid. It is completely unrelated to the taxpayer’s income, and can in fact go up when personal earnings fall. Even if property assessment values do not change, taxpayers are hit hard by property taxes in a recession, when many have to accept a decline in income.
This rigidity of the property tax creates a “signal problem” in the economy. At the other end of the property tax pipeline, government bean counters see no change in revenues even if the economy goes into a recession. It is easy for spending-prone legislators to interpret this as a signal that the economy is not doing that poorly after all.
By contrast, sales taxes transmit changes in private incomes relatively quickly. If my earnings drop, I automatically spend less each month. As a result, my city sees its sales tax revenues decline and — hopefully — the city council gets the message that it is time to sit still or even reduce spending.
Sales taxes are preferable to property taxes for other reasons, such as the relative ease with which they can be administrated. They also protect the anonymity of the taxpayer to a larger extent than property taxes do.
In any case, it is clear that over the past few years, local governments in Wyoming have become increasingly intrusive on the private sector.