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Know the West

Taxing the wrong side of the tracks


Note: this story is one of three feature stories in this issue about Wyoming's boom and bust economy.

In every discussion about taxes in Wyoming, some ominous voice notes that mineral revenues are in decline. Sooner or later, the voice warns, the tax base is going to have to be diversified - code for shifting the tax burden from the mineral industry to working families.

Bill Schilling with the Heritage Society, the state's most visible pro-industry group, says this all the time. People in Wyoming don't pay their fair share, Schilling says to anyone who will listen.

Wyoming doesn't have an income tax, but some of the most influential people in Wyoming, people generally connected to the minerals industry, are convinced that a state income tax will be the inevitable result of tax-base diversification.

With a re-election campaign coming up in 1998, it would be a surprise to hear Gov. Jim Geringer even say the words "income tax." But at the governor's request, the Legislature is setting up a Tax Reform 2000 committee to make recommendations about potential changes in the state's revenue system.

Interestingly, the committee isn't scheduled to deliver its findings until July 1, 1999, by which time, presumably, Geringer will be comfortably settled in his second term.

It is certainly high time there was a serious discussion about the state's tax structure. But that doesn't necessarily mean the state's only option is to lift the "relative burden" off the backs of downtrodden taxpayers like Exxon, Amoco and Cyprus-Amax and shift it to workers and their families.

Every year's a record year

First, the proposition that Wyoming can't rely on the minerals industry to keep paying for everything is not a given.

True, the state's mineral revenues have been in decline. In 1986, mineral severance taxes contributed $112 million to the general fund, which pays for general government services. Today, mineral severance taxes contribute about $65 million a year to the fund.

But every year is a record year in coal and gas production, and there are indications that demand for natural gas and low-sulfur coal will keep growing. Phase II of the Clean Air Act Amendments will take effect in 2000 and further heighten the demand for air-friendly fuels. Wyoming already supplies about 25 percent of the nation's coal and 5 percent of its natural gas, and those slices of the domestic energy pie will probably get bigger before they get smaller.

Coal and gas may never be the cash cow that oil has been. The price of both has been low. But neither coal nor gas has to perform the way oil used to. To compensate for declining oil revenues, the state has already shifted part of the tax burden away from industry and onto the general public by lightening the industry's tax load and raising sales tax on groceries, clothes and other retail items. Sales tax revenue has become the leading source of income for the state's general fund.

In fact, an argument could be made that it is industry's turn to pay up.

Coal and trona set production records throughout the 1980s. Though both industries were laboring during that decade under an extra 1.5 percent capital facilities tax, apparently it didn't drive them out of business. That tax was allowed to expire in 1993; if the state needs money, it could reimpose it.

In addition, gas production is skyrocketing, and the state should take a hard look at raising taxes on gas producers as well.

Stop, look, and tax

But if the state needs more money, then even before looking at minerals, Wyoming policy makers should look hard at the railroads.

Whatever else you say about the mineral companies, they pay taxes - 6 percent of the production value in state severance tax, about the same percentage in local property taxes, and 12.5 percent or more in federal revenues, half of which is returned to Wyoming.

Wyoming families pay their share, too. According to a recent study from University of Wyoming economist Shelby Gerking, a family of four living on an income of $15,000 - there are families in Wyoming living on only that much income - pay up to $1,000 or $1,200, 7 or 8 percent, respectively, of their income in state and local taxes.

Sales taxes, especially when applied to food, as in Wyoming, are despicably regressive. The less a family's income, the higher the percentage that goes to taxes. Gerking's study found that a family with a $40,000 income pays a little more than 5 percent of their income in state and local taxes. But a family with a $70,000 income pays a little over 4 percent, half the amount that poorer families pay.

Hauling it out, and hauling it in

Meanwhile, back at the tracks, information about railroad revenues is proprietary. It's tough to say how much money the railroads make, and thus tough to know how much they are paying in taxes.

But we can guess.

The railroads pay no severance tax, because they don't sever anything. They haul it out. And when it comes to money, they haul it in. An electric utility in Texas or the Midwest might pay a coal producer as little as $2.50 for a ton of Powder River Basin coal. By the time that ton of coal gets to its destination, it can cost as much as $40. And 91 percent of Wyoming's coal is shipped out of state.

In 1996, that figured out to about 255 million tons of coal hauled out of Wyoming by rail. Even at a conservative delivered price of $25 per ton, and deducting a statewide average coal price at the mine of a little more than $6 per ton, the railroads collected about $4.8 billion hauling Wyoming's coal out of the state.

The only significant taxes railroads pay are property taxes. The amount they pay is proprietary - you should know better than to ask, according to David McCracken, director of the Wyoming Department of Revenues Ad Valorem Division. But the railroads have boasted about their tax payments in past years, and if those years are any indication, it would be generous to estimate that Burlington Northern and Union Pacific combined will end up paying a total of $15 million in 1996 property taxes.

Which means that, while Wyoming's mineral companies might contribute 18 or 20 percent of their gross income to the state and local government revenue stream, and the state's poorest families contribute 7 or 8 percent of their income, the railroads might pay only three-tenths of 1 percent.

To be fair, railroads have to pay taxes in other states, too. A ton of coal might cross the borders of five states on its way to a power plant. So if we split the $4.8 billion five ways, the railroads make a little less than a billion from Wyoming operations. Assuming the $15 million in property taxes, the railroad's tax burden relative to income is still only 1.5 percent - roughly a fifth of the relative burden borne by Wyoming's poorest families.

If the railroads met the same 7 or 8 percent burden that low-income families have to meet, it would mean about $70 million in state revenues, which would compensate nicely for the $50 million or so the state currently raises by taxing food.

Are there ways for Wyoming to increase taxes on railroads? Federal laws insulate railroads from taxes aimed specifically at them. But a tax on tonnage or some other tax that the state could levy might stand up in court.

Those are some of the questions the state should be asking as it reviews its revenue system. While they're at it, similar questions can be asked about the phone company, the power company, the gas company, power plants, power lines and pipelines. As is the case with railroads, the only significant taxes those entities pay are property taxes.

The bottom line

Inasmuch as Wyoming has a tax policy, it has been to give the mineral companies tax breaks and raise the sales tax on retail items, including food. Judging from the statements of some of Wyoming's leading decision makers, that policy will continue.

Unfortunately, Wyoming workers and families are not in much of a position to start picking up the slack for the likes of Enron, Chevron and Kennecott. In terms of income growth and the creation of high-wage jobs, Wyoming has the slowest, least-diversified economy in the nation.

And given the hikes in the sales tax rate (lawmakers promised it would expire when they passed it, by the way - now they're about to renew it), Wyoming citizens, when told condescendingly that the tax base needs to be broadened or diversified, can answer that they already gave at the grocery store.

In the meantime, Wyoming might be able not only to rely on the mineral companies, and their friends in the rail and utility industries, but to thrive on them. And might be stupid not to.

Hugh Jackson is a former reporter for the Casper Star-Tribune. He now covers the gambling industry for the Las Vegas Business Press.