Fiscal Policy, Theory and Measurement: The State of Wyoming

Feb 09, 2017

By Orphe Divounguy, Ph.D.

Executive Summary 

As the overall United States economy expands, the economy of the state of Wyoming has been contracting with the number of non-farm jobs falling since 2015. The main reason for this contraction is disruption in energy markets due to both technology and government regulations. Over a third of the Wyoming economy is based on the energy sector and with falling energy prices, Wyoming’s economy is struggling to grow. 

Wyoming policymakers face many different decisions on how to change fiscal policy to improve growth or fund the government. Currently the state of Wyoming primarily depends on sales and severance taxes to fund government programs. There are also other smaller taxes, including one on business assets, and non-tax revenues such as coal leases and trust fund transfers. 

Using a dynamic macroeconomic model to simulate the Wyoming economy, this paper examines several different policy scenarios where taxes can be raised or lowered to pay for more or less government spending. The model is dynamic, because individuals and businesses will change how much they work, invest or spend due to changes in fiscal policy. These policy scenarios involve changes to capital taxation, the sales tax, the severance tax and net exports. 

Using these results, Wyoming policymakers will be able to anticipate the impact of specific changes in fiscal policy over the next two years. The most productive form of tax reform is eliminating the franchise tax as this tax discourages investment, which slows growth and makes work less productive. Eliminating this tax can increase employment by over 1500 job opportunities each quarter for the next two years. 

The most economically damaging tax change is if Wyoming alters its constitution to create a labor income tax. The job losses from a 1% labor income tax will reduce job opportunities by 1500 each quarter for the next two years. 

Finally, certain fiscal reforms can be enacted that would reduce the burden of taxation and the amount of government spending. As government spending declines, the economy and job opportunities can grow quickly if taxes on the productive sector of the economy fall. 

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