ALEC Action, the 501(c)4 affiliate of the American Legislative Exchange Council (ALEC), is very concerned with the news that Wyoming is considering the implementation of a new and discriminatory business income tax (HB 220).Wyoming legislators have wisely rejected calls for an income tax in past sessions, and by doing so, have helped the state retain one of the friendliest business climates in the nation. Wyoming’s economic advantage is now at risk with this proposed legislation.
Adoption of HB 220 would lead to the following economic consequences:
- Wyoming would lose its competitive advantage of being one of just two states without a broad-based business tax.
- The administrative apparatus required to collect the proposed corporate income tax could easily be amended to apply to all businesses during a future economic downturn.
- Overall, HB 220’s 7% corporate income tax rate would drop Wyoming’s economic outlook in the annual Rich States, Poor States: ALEC-Laffer State Economic Outlook Ranking to 15th, from 8th best today.
- Due to the unequal treatment of corporate entities in HB 220, it is likely Wyoming would be subject to costly litigation, as the U.S. Constitution requires equal protection under the law
By picking winners and losers in the tax code, HB 220 directly violates several principles of sound taxation. The following excerpt is from the longstanding ALEC Principles of Taxation:
- Economic neutrality – The purpose of the tax system is to raise needed revenue for core functions of government, not control the lives of citizens or micromanage the economy. The tax system should exert minimal impact on the spending and decisions of individuals and businesses.
- Equity and fairness – The government should not use the tax system to pick winners and losers in society, or unfairly shift the tax burden onto one class of citizens. The tax system should not be used to punish success or to “soak the rich,” engage in discriminatory or multiple taxation, nor should it be used to bestow special favors on any particular group of taxpayers.
Businesses don’t pay taxes, people do
ALEC Chief Economist Jonathan Williams explained, “When government taxes a business, there is nothing that business can do but pass the burden on to individuals in one form or another. Hardworking individual taxpayers pay the true burden of business taxes. This hidden tax shift happens in three ways. The first to pay are the employees – workers who will not get the raise or year-end bonus – or they may even lose their jobs. Next are the millions of Americans who have investments in businesses, and who will earn a lower return for their retirement in their 401(k). Finally, consumers pay more as a result of higher business taxes, since taxes get passed along in the form of higher prices.” Hiking business taxes leads to higher prices at the gas pump, a larger bill at the grocery store, and less disposable income for all taxpayers in Wyoming.
A business income tax will perpetuate revenue volatility
Relying less on highly volatile revenue sources, such as business income taxes, makes revenue collections more stable and the budgeting process far more predictable. Broad-based retail sales taxes are among the least volatile sources of revenue, as sales generating the revenue generally do not fluctuate nearly as much as capital-based taxes. Relying on volatile income tax revenue sources ensures that economic cycles and economic shocks have massive and devastating effects on tax revenues. Even former California Gov. Jerry Brown, a liberal Democrat, realized that California’s over-reliance on income taxes perpetuated the state’s boom and bust revenue cycle.
Business income taxes are especially economically damaging
Even though all taxes are harmful to economic growth, different forms of taxation can hurt economic growth more than others. A study done by the Organization for Economic Cooperation and Development (OECD)–a group not known for skepticism of taxes or government programs–ranked taxes in terms of their relative damage to an economy. They found business taxes are the most harmful to economic growth.
Other states are moving quickly to reduce their business tax rates
In the past five years, 30 states have significantly reduced their tax burdens, many times focusing on reducing corporate income taxes to increase the competitiveness of their state economies. Indiana and North Carolina are great examples. These two states exemplify the economic rewards of implementing tax reform and lowering tax burdens, and because of recent legislative action they both continue to experience an influx of capital, businesses, and people. On the other side, former Connecticut Gov. Dannel Malloy has acknowledged that numerous tax increases have hurt his state’s competitiveness and economic viability after General Electric decided to relocate to Massachusetts. Wyoming should not ignore the hard lessons learned by other states.
Conclusion
Unfortunately, introducing a new and discriminatory income tax will severely damage Wyoming’s longstanding pro-growth economic climate. ALEC Action considers HB 220 to be bad public policy that would damage the economic outlook of Wyoming.
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ALEC Action is the 501(c)4 affiliate of the American Legislative Exchange Council.
