Wyoming s Sales Tax Base and Economic Development Incentives. by Mark Robyn Economist Tax Foundation Washington DC

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1 Wyoming s Sales Tax Base and Economic Development Incentives by Mark Robyn Economist Tax Foundation Washington DC

2 WY Sales Taxes: Background WY has a unique tax structure 35% from property taxes (US 31%) 37% from general and selective sales taxes (US 34%) 24% from severance taxes (US 1%) 0% from corp. and individual income taxes (US 27%) FY 2008 WY state and local revenue sources, as % of total taxes (US avg.) Source: US Census Bureau, 2008 State and Local Government Finances

3 WY Sales Taxes: Background WY has a unique tax structure Source: US Census Bureau, 2008 State and Local Government Finances

4 WY Sales Taxes: Background Avg. state + local option sales tax rate 5.34% 42 nd nation-wide State and local general sales tax collections, FY08 $2,303 per capita 1 st nationwide

5 WY Sales Taxes: Background Severance taxes, the burden of which is largely exported to residents of other states, help keep other tax rates low (i.e. sales tax) or non-existent (i.e. income taxes) Total WY S&L taxes per capita FY09 $7,808, 2nd (US $4,149) $2,332 from residents, 33 rd (US $3,057) $5,476 from non-residents, 2 nd (US $1,137) Total S&L Burden on WY residents $4,205 per capita, 14 th (US $4,160) 7.8% of income, 46 th (US 9.8%) Source: Tax Foundation s 2009 State and Local Tax Burdens Report, Feb 2011

6 The Properly Structured Sales Tax A sales tax is a tax on consumption, i.e. purchases by end users/consumers. A correctly designed sales tax should exempt sales that are inputs (tangible or intangible) into other products that will be sold to end users. Generally this means all business to business transactions.

7 The Properly Structured Sales Tax Why exempt inputs/b2b transactions? Ensures uniformity in final tax rate on consumers Avoids influencing production methods and industrial organization decisions Stay competitive with other state/countries A tax that applies to all inputs/b2b transactions would be a gross receipts tax, universally recognized to be a damaging form of taxation. Only a handful of states have them (DE, MI, NH, OH, TX, VA, WA, DC)

8 The Properly Structured Sales Tax Practically, it is difficult to exempt EVERY single business input in a system that bases taxability on the type of product rather than the type of transaction (consumer vs. B2B) Still, the principle of exempting transactions that are generally business inputs is important. WY exempts some Services and TPP consumed in production. e.g.: Manufacturing/Agriculture production inputs fuel/power used in the transportation business

9 Tax Incentives for Economic Development Every state uses their tax code to try to promote economic development. Usually, this is in the form of business tax incentives via the PIT/CIT If WY wants to implement incentives, the sales tax is generally the only option.

10 WY Economic Development Sales Tax Exemptions Transportation of employees Transportation of freight and property (including oil and gas by pipeline) Services in support of oil well drilling Carbon dioxide and other gases used in tertiary production Farm Machinery Aircraft repair services (could be non-biz?) Railroad rolling stock repair services Manufacturing machinery Equipment for new coal gasification/liquefaction facility

11 WY Economic Development Sales Tax Exemptions Certain equipment for renewable energy projects Certain equipment for data processing service centers

12 WY Economic Development Sales Tax Exemptions Many tax expenditures are appropriately viewed as spending funneled through the tax code. But some exist to get the tax base right. Given that B2B transactions SHOULD be exempt from a general sales tax, most of WY s economic development exemptions are more than justifiable, they are a fundamental feature of well structured sales tax. Whether they work as tax incentives may be the wrong question.

13 Other Tax Exemptions Gasoline Prescription Drugs/Medical Equipment Water by pipeline Groceries

14 Other Tax Incentives Film Tax Credits WY: 15% of production costs within the state. Benefits are exaggerated Costs are ignored Race to the Bottom It is a competitive environment, with nearly every state offering some incentive. Many are direct grants that have no connection to the film s tax liability. Corporate welfare at its worst

15 Summary and Conclusion Many tax expenditures are unjustifiable, or at least need to be entered into with caution. Many of WY s sales tax breaks for economic development are justifiable in order to get the base right. WY should reexamine its sales tax base to ensure Exemption of B2B transactions and inputs Taxation of all consumer goods (to the extent it is possible and practical)