Tax Hikes on Tax Hikes

I have been active in politics since I was 14 years old. I have been an activist, an elected official and a professional, full-time public policy wonk. I have spent the past 16 years working as a political economist with focus on helping voters, taxpayers and lawmakers make better choices.

It is a very mixed experience. I have met, and continue to meet, many intelligent and well-meaning politicians whose work is dedicated to actually making America a better place.

Unfortunately, I also see a lot of mediocrity at work. (I could use a stronger term, but let’s save that one for another day.) For some reason, this is more common in economic policy than anywhere else, and it is not limited to Congress. In fact, sometimes our state legislators really step up to the plate in order to show us what it means to not engage the top gear before you make policy.

If you want to find examples, my own home state Wyoming is probably the best place to look. To understand why, let’s go back to D.C. for a moment, where the Democrats are hard at work to roll back the economic success of the Trump tax reform. Blinded by their ideological campaign against freedom and prosperity, they want to significantly raise taxes on 96 percent of America’s businesses – so-called pass-throughs – as well as raise the corporate income tax to one of the highest in the world.

You don’t have to be an economist to understand the negative impact of those tax hikes. All you need is common sense and a moral preference for letting people live their lives without being stifled by government. It looks like those character traits are missing among more than half of the members of Congress.

Unfortunately, they are not alone in failing to understand that higher taxes are bad for the economy. Here in Wyoming, leading state legislators have been campaigning with fervor and vigor for years now to raise taxes.

Republican legislators, I should add. I spent several years working full time to stop these tax hikes. When I left that fight last year I predicted that the tax hikers would not give up, but instead ramp up their efforts. Behold: on Thursday, Oct. 7, the Wyoming Tribune Eagle reported (pp. A1-A2, print ed.) that the state legislative Joint Revenue Committee is considering a seven-percent tax on business income. Their September meeting led to a bill for the 2022 legislative session that would require

businesses to disclose their total gross receipts, the portion of their gross receipts earned in Wyoming, and the home state of the company or corporation for income tax allocation purposes, among other information.

Furthermore:

The committee also voted … to draft a bill imposing a 7% tax on people who have “income from business activity in Wyoming”.

This tax is nothing more than an income tax on businesses. The disclosure mandate is a way to create the information collection system for the tax, and even though the implementation of the tax would be delayed by four years after the tax is passed, its impact on the Wyoming economy will be immediate.

For anyone looking at Wyoming from the outside, this idea of a seven-percent business income tax comes across as an attempt by the state’s political leadership to make the Cowboy State commit economic harakiri. That impression is entirely valid, for reasons I will return to in just a second. First, though, let’s take a step back and look at the bigger picture.

Suppose, for the sake of argument, that the Democrats in Congress get the tax hikes they want. Here is what, according to the Wall Street Journal, they want to do to non-incorporated businesses, in other words LLC’s and other pass-through’s:

One key change in the Democratic plan would limit the 20% deduction claimed by most pass-throughs to $500,000 for joint filers, meaning the benefit would no longer be available on business income above $2.5 million per household. Congress created the deduction in the 2017 tax law to give pass-throughs a rate cut equivalent to what corporations were getting. The proposed legislation would also create a new surcharge on high-income individuals, adding a 3% levy on income over $5 million. In addition, it would extend a 3.8% surcharge on net investment income to married taxpayers who earn more than $500,000 (and individuals above $400,000) and don’t otherwise pay employment taxes. That tax currently applies only to taxpayers receiving investment income and not to those actively involved in the business. The top marginal tax rate would also rise to 39.6% from 37%.

The Journal also reports that the

top marginal tax rate for owners of pass-through companies could jump to 46.4% from 29.6%, an increase of nearly 17 percentage points

which is a tax hike not seen in the industrialized world in modern economic history.

Again, only four out of every 100 businesses are incorporated, which means that this massive tax increase is practically a universal cement block dumped on American business activity. Add to this the increase in the corporate income tax, and we can safely predict a rapid reversal of the positive effects that came out of the Trump tax reform. The cuts that Congress passed in the Tax Cuts and Jobs Act helped create four million new private-sector jobs in just two years.

In the fourth quarter of 2019 the unemployment rate was 3.3 percent for the age group 20-64, 3.45 percent if you count everyone 16 and older. This was the lowest unemployment rate in 50 years. Workforce participation actually increased, after years of decline under Obama:

Figure 1

Source of raw data: Bureau of Labor Statistics

The latest employment numbers for the U.S. economy were apparently a surprise to everyone who thought the Biden economy would continue the V-shaped recovery that began under Trump. I was not surprised: it is well established that the mere talk about tax hikes will cause businesses to halt job creation and cautiously remain on the sidelines to see what actually happens. This is exactly what is happening in the U.S. economy: with the exception of last year’s economic shutdown, we saw a larger decline in the workforce in September than we have seen since 2015.

There were 2,551,000 fewer people in the workforce in September this year than in September 2019, and the gap is growing: in June the gap was only 1,953,000. In other words, the Biden economy is discouraging people from participating in the workforce, and the Democrats’ obsession with raising taxes is only adding insult to injury.

It is in this macroeconomic climate that the legislators in the economic wasteland that used to be Wyoming want to raise taxes. In the second quarter of this year, Wyoming had the 18th highest unemployment rate – 5.6 percent – with all its neighboring states except Colorado at much lower rates: Montana 3.7 percent; Idaho, 3.2; South Dakota 3.1; Utah 2.9; and Nebraska at the nation’s lowest rate of 2.4 percent.

Colorado’s rate was a smidge higher than Wyoming at 6.1 percent.

In the first four months of this year, Wyoming had the second-slowest growth in private sector paychecks of all the 50 states. Only North Dakota was worse. First-quarter GDP was 5.8 percent smaller than in Q1 of 2019, again with only one state – Hawaii this time – doing worse. Work-based income growth in the second quarter was the worst in the country. And so on.

It is on this economy, with the Democrats’ federal tax hikes hanging like a perfect-storm cloud above us, that Republican lawmakers here in Wyoming want to slam a seven-percent business tax.

What could possibly go wrong?