The Reality of Wyoming’s Fiscal Future

Originally published on Jheconomics.com

Few images better capture the Wild West’s by-gone era of adventure and lawlessness than ‘most wanted’ posters adorned with the grimacing miens of bank robbers like Butch Cassidy or Jessie James. Today’s residents of Wyoming might soon fear another ‘heist’, but this time the image may portray the smiling face of the tax collector.

In the coming years, one of the least-taxed states in the US will face a rude awakening.

For most Americans and denizens of other countries, Wyoming is a bit of an unknown. Fewer than half of Americans aged 18-24 could probably find it on a US map. Wyoming ranks 50th in US state population with only 578,759 residents (2019 Census estimate), some 50,000 fewer than the next least populous state, Vermont.

Yet, Wyoming is as abundant in natural resources as it is devoid of crowds, making it one of the most anomalous states in the union. As of 2016, Wyoming produced 41% of all the coal mined in the United States, some 3.7 times more tonnage dug out than its better-known ‘black gold’ rival, West Virginia. And it is not just coal. According to the US Energy Information Administration (EIA), Wyoming is the eighth-largest producer of both oil and natural gas. For good measure, Wyoming is the largest domestic producer of uranium as well.

Courtesy of revenues from fossil fuels, Wyoming is one of only two US states (the other being South Dakota) without personal income, corporate income or corporate gross receipt taxes. Of the 45 states with sales taxes, Wyoming’s is the third lowest. Wyoming has the fifth lowest effective property tax rate in the union. As of 2018, Wyoming residents paid the second lowest state & local taxes, on average, in the US.

More remarkable, the average Wyoming household receives nearly $2.50 in state benefits – spending on schools, roads, hospitals and other government services – for every $1 in state and local sales, property and excise taxes paid. Over the past decade, revenues from severance taxes on crude oil, coal royalties and federal lease payments for mineral extraction have accounted for 50%-62% of state revenues, depending on the annual vagaries of fossil fuel production and prices. The state derives another fifth of its outlays in the form of federal grants.

It is little wonder that Wyoming is sometimes referred to as the ‘Saudi Arabia’ of America, a place where residents enjoy vast benefits without paying very much for them.

And yet Wyoming may have one of the least desirable fiscal footholds going forward. The state’s public finances teeter like an inverted pyramid on a bed of shifting fossil fuels. With over half of total revenues coming from fossil fuel extraction, it isn’t surprising that Wyoming residents enjoy high benefits without a high tax bill. But, for this fiscal nirvana to continue, fossil fuels will need to remain the mainstay of energy produced and consumed in the United States and globally over the coming decades.

That’s unlikely.

As a result of policies to address climate change, changing consumer preferences and technological innovation, fossil fuel demand is nearing an inflection point. Domestic coal production peaked in 2008 at 1.17 billion short tons – since then, output has fallen by a third. The US Energy Information Administration estimates that global fossil fuel reliance will drop another 14% over the next three decades, as renewables gain market share. Technology is super-charging this dynamic. Costs for solar energy lithium ion battery storage, for example, have fallen in inflation-adjusted terms by over 85% since 2010.

Still, given rising global incomes and population growth, the EIA expects that global coal consumption will hold steady from now until 2050, while oil and gas production will increase. There are three reasons why Wyoming residents probably should not celebrate.  

First, state revenues from coal are already declining. From its most recent peak in 2012, when Wyoming enjoyed nearly $600mn in coal receipts from federal lands, collections dropped to about $200mn in 2018. Coal severance tax flows to the state’s fiscal coffers are also in retreat.

Second, market forces are brutal and unforgiving. Over the past decade, 546 US coal-fired power plants have shuttered their doors and Wyoming’s Powder River Basin has lost some two thousand coal mining jobs since 2012. The downstream effects on the regional economy are swift, impacting everything from housing to consumer purchases.

Third, even if EIA long-term projections bear out, extraction-related revenues are unlikely to keep up with the rising cost of government services. Inflation will boost expenditures faster than mineral resource revenues. It is a well-established statistical regularity that commodity prices rarely outpace inflation over the long run.

Wyoming’s precarious fiscal mathematics appear to be increasingly recognized by the state’s lawmakers and Governor Mark Gordon, who has called for new thinking to address the state’s structural budget challenges. But much of the rhetoric rests on ‘clean coal’, including costly retrofitting of coal-fired power units well beyond the state’s borders and jurisdiction. Belt-tightening, dipping into the state’s ‘rainy day’ savings and diversifying the Wyoming economy otherwise vie these days for air time in Cheyenne, the state’s capital.

Yet diversifying the state’s economy will not be sufficient. Unpleasant fiscal arithmetic gets in the way. If Wyoming were to attract new jobs that pay above the current median household income, the disparity between state and local expenditures and tax collection per capita mean that population growth – even if driven by better paying jobs – could actually worsen Wyoming’s public finances.

Wyoming’s days of paying 40 cents for every one dollar’s worth of government services are numbered. Only two difficult options exist to get the state’s public finances right for the long run: broaden the revenue base by introducing new taxes or make major cuts to expenditures. Neither is politically attractive, and some combination is the most likely outcome.

In upcoming articles in this series, we will explore concrete options to put Wyoming on a more sustainable fiscal trajectory.