Research & Commentary: Wyoming Lawmakers Should Reject Gross Receipts Tax

Published June 19, 2017

According to the Tax Foundation, Wyoming ranks among the best states in maintaining a low tax environment for individual taxpayers and businesses. Wyoming currently imposes no income tax on individuals or businesses, the seventh-lowest effective property tax rate in the nation, at 0.61 percent, and a relatively low average sales and excise tax rate of 4.65 percent.

However, since Wyoming relies heavily on tax revenue from its oil, coal, and gas sectors to fund its government services, the recent downturn in the state’s energy industry has left a budget deficit that the state is now looking to fill.

Earlier in 2017, the Wyoming State Legislature’s Joint Revenue Interim Committee was directed to identify ways to generate new tax revenue to cover the new deficits in budgets for government operations and funding for public schools. One proposed new tax the committee voted to advance consideration of is a gross receipts tax (GRT). The GRT is economically detrimental because it imposes a tax on total revenue, not merely profits, thereby requiring even struggling businesses that aren’t earning a profit to pay the tax.

Second, unlike corporate income taxes and sales taxes, GRTs apply to all transactions, including intermediate business-to-business purchases of supplies, raw materials, or equipment. This creates “tax pyramiding,” the layering of taxes at each stage of production. The result is higher costs to consumers, who often have no idea how much in taxes they ultimately pay for their purchases. This means GRTs inevitably violate the good-government principle of transparency.

GRTs are not popular or entirely effective in the states in which they have been proposed or implemented. Most states repealed their gross receipts taxes by the 1930s and replaced them with retail sales taxes. Unfortunately, these taxes have made something of a comeback in recent years, with legislators looking to access additional tax revenue.

While no details on what a new gross receipts tax would entail have been introduced, Wyoming legislators only need to look to the experience of other states to see why a gross receipts tax is poor tax policy. A study by John Merrifield and Corey DeAngelis of the University of Texas-San Antonio found Texas’ cumulative disposable personal income would have increased from $30.5 billion to $46.3 billion between 2006 and 2013 had Texas never implemented its gross receipts tax, generating $1.4 billion to $2.2 billion in additional tax revenue. In recent years, several states – including Indiana, Kentucky, Michigan, and New Jersey – have repealed gross receipts-style taxes.

In May 2017, the Wyoming Prosperity Project published a study in which it projected the impact GRT would have had on the state’s private-sector, tax-base generating economic activity had it been implemented in 2005. While the exact rates would be needed to most accurately determine the effects, the study’s authors found, “If we adjust the tax upward as we go along, in order for revenue to keep up with the trajectory in education spending, the tax would take almost $2,400 out of the compensation of an average-paid private-sector employee.” The study also found the tax would “remove money from the private sector equal to the average compensation of 9,600 employees.” 

In a critical analysis presented to Wyoming’s legislature, accounting firm DAPCPA Pope & Jackson Inc. found despite the ability of gross receipts taxes to generate revenue, they often create too many problems and it’s therefore unlikely they would be effective in Wyoming. It also found the state currently has no bureaucratic mechanisms to administer GRTs properly. “Pyramiding, transparency, economic impact, and a detrimental effect on both existing businesses and startups are just a few of the issues that are experienced with this type of tax and Wyoming should not participate,” the report concludes.

The increased costs generated by GRTs are very harmful to economic competitiveness and a state’s ability to attract new businesses. Wyoming should reject implementing a gross receipts tax, because it would complicate the state’s tax code and disincentivize in-state investments.

The following documents examine gross receipt taxes in greater detail.

Gross Receipts Taxes in State Government Finances: A Review of Their History and Performance
This paper, written by Indiana University economics professor John L. Mikesell, studies the historical use and effectiveness of gross receipts taxes, as experienced by American states and European countries.

Wyoming Gross Receipts Tax Critical Analysis
In this analysis, DAPCPA Pope & Jackson Inc. examines gross receipts taxes (GRTs) and how they have worked in other states. The authors found despite the ability of gross receipts taxes to generate revenue, they create too many problems to be effective in Wyoming. The firm also determined the state currently has no bureaucratic mechanisms to administer GRTs. 

Wyoming Lawmakers Consider Tax Increases to Ease Deficits
In this article by the Associated Press (AP), AP examines Wyoming’s budget deficits, which have been caused by the state’s declining energy industry, and considers how lawmakers might attempt to address the problem using new taxes.

The Gross Receipts Tax: A First Analysis
The Wyoming Prosperity Project examines the effect a gross receipts tax would have on Wyoming’s economy by conducting a study that projects the effect the tax would have had on private-sector, tax-base generating economic activity in the state if it had been implemented in 2005.

Ten Principles of State Fiscal Policy
The Heartland Institute provides policymakers and civic and business leaders a highly condensed, easy-to-read guide to state fiscal policy principles. The principles range from “Above all else: Keep taxes low” to “Protect state employees from politics.” 

Tax Pyramiding: The Economic Consequences of Gross Receipts Taxes
This study by the Tax Foundation explains why gross receipts taxes are poor tax policy. The author notes that GRTs lead to harmful “tax pyramiding,” distort companies’ structures, and damage the performance of state and local economies.

Oregon’s Gross Receipts Tax Proposal Would Hurt Job Creation
Nicole Kaeding of the Tax Foundation examines the possible impact Oregon’s proposed gross receipts tax would have on job creation. “In total, the [Legislative Revenue Office] estimates that Oregon would lose 20,400 jobs due to [the gross receipts tax], while wages would increase slightly. This should not be construed as a positive development. The net loss of jobs means fewer opportunities for workers, particularly lower-wage and lower-skill workers,” Kaeding wrote.

The Texas Margin Tax: A Failed Experiment 
Scott Drenkard of the Tax Foundation reviews the timeline of the adoption of Texas’ margins tax, which is a kind of gross receipts tax. Drenkard examines “the calculation procedures that taxpayers must go through to complete a tax return, and reviews major lawsuits against the Margin Tax, finding that the unique structure of the tax is a problem for taxpayers, legislators, and judges.”

The Margins Tax and You: Unions’ Tax Initiative would Harm Many Nevadans
Geoffrey Lawrence, deputy policy director at the Nevada Policy Research Institute, outlines several major problems with the margins tax and how it affects average taxpayers. 


Nothing in this Research & Commentary is intended to influence the passage of legislation, and it does not necessarily represent the views of The Heartland Institute. For further information on this and other topics, visit the Budget & Tax News website, The Heartland Institute’s website, and PolicyBot, Heartland’s free online research database.

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