Wyoming’s Proposed Corporate Tax is More Burdensome Than It Appears

Only two states forgo both corporate income and gross receipts taxes. Under legislation barreling its way through the Wyoming state legislature, it might soon be down to just South Dakota. But why would Wyoming adopt a corporate income taxA corporate income tax (CIT) is levied by federal and state governments on business profits. Many companies are not subject to the CIT because they are taxed as pass-through businesses, with income reportable under the individual income tax. —and a very narrowly targeted one at that—at a time when so many states are reducing reliance on corporate taxes because of their volatility and uncompetitiveness?

House Bill 220 creates what proponents are calling the National Retail Fairness Act, which imposes a corporate income taxA tax is a mandatory payment or charge collected by local, state, and national governments from individuals or businesses to cover the costs of general government services, goods, and activities. of 7 percent on C corporations with more than 100 shareholders in the retail, accommodations, and food services industries. Under most circumstances, the tax would not be imposed on franchisees, though the parent company would be taxed on any income it generates from those franchise licenses.

Advocates of the proposal point to other states’ throwback rules, arguing that if Wyoming doesn’t tax this income, other states will. That reasoning is true to a point, but it’s incomplete. The reality is, HB 220 would create new tax burdens for many companies—in a state where it can already be expensive to operate.

The Throwback Rule Argument

States must “apportion” corporate income for tax purposes. Clearly, it wouldn’t do for each state to tax the entirety of a corporation’s income earned anywhere in the United States. However, determining the percentage of a company’s net revenue attributable to a given state is easier said than done, and states use a variety of formulas in making this determination. The two most common are known as evenly-weighted three-factor apportionmentApportionment is the determination of the percentage of a business’ profits subject to a given jurisdiction’s corporate income or other business taxes. U.S. states apportion business profits based on some combination of the percentage of company property, payroll, and sales located within their borders. and single sales factor apportionment.

Under three-factor apportionment, a state looks at the percentage of a company’s sales, property, and payroll that are within that state, whereas under single sales factor, it is concerned exclusively with in-state sales. Imagine, then, a company with 30 percent of its property, 20 percent of its payroll, and 10 percent of its sales in State A. In a three-factor apportionment state, 20 percent of the company’s income would be apportioned to the state for tax purposes (the average across the three evenly-weighted factors), while under single sales factor apportionment, it would be 10 percent (the amount of sales into the state).

Sometimes, though, a state doesn’t impose any corporate taxes on economic activity within state borders. Perhaps, for instance, they’re a single sales factor state and a company does some manufacturing within their borders but has no sales there. Or, in the case of a state like Wyoming, they simply don’t tax anyone’s corporate income.

In these cases, other states may choose to take this so-called “nowhere income”—income earned in a state but not taxed by it—and throw it back into their own base. States vary on how aggressive they are, but typically there’s some connection to the other state’s transactions (for instance, sales from State A into the untaxed state).

This is the crux of Wyoming’s argument: that Wyoming forgoing a corporate income tax doesn’t mean that this income is untaxed, just that someone else is taxing it.

Unfortunately, that’s not quite true. Throwback rules are bad policy and can lead to double taxationDouble taxation is when taxes are paid twice on the same dollar of income, regardless of whether that’s corporate or individual income. (interestingly, the Wyoming bill would give the state its own throwback rule!), but that doesn’t mean that there’s no additional burden if Wyoming adopts its own corporate income tax. Even if a retailer is headquartered in a state with a throwback rule, it probably isn’t shipping products from that location. A hotel chain isn’t “selling” something from one state to another. There’s some throwback income involved, of course, but much of the revenue Wyoming stands to raise would come in the form of a new tax burden, not a substitute for taxes already imposed by other states.

Implications of a New Corporate Tax

Wyoming’s proposed corporate income tax only falls on a few select industry sectors, at least initially, but it’s a foot in the door for a broader corporate tax—something Wyoming has consistently resisted over the years. In its intended form, moreover, it’s highly nonneutral, targeting certain businesses but not others. It would hit hotel and motel chains, large regional and national retail stores, and chain restaurants, but exempt many others. It would arbitrarily favor franchisee-owned stores and accommodations (taxing only the parent company’s licensing revenue) over wholly owned and operated ones. And, by hitting some low-margin companies in a part of the country where profitability may already be more difficult, it could lead to adverse consequences for the state and its residents.

There can be no doubt that, with or without this new tax, Wyoming is and would remain a low-tax state. But the state’s extremely low population density—especially outside of Cheyenne and Casper, the only two cities with more than 50,000 residents—can make it difficult to bring large retailers, hoteliers, and others to much of the state.

There are only twelve Walmarts, nine Albertsons, and five Safeways in all of Wyoming, a state substantially larger than the entirety of New England, and 95 percent of the size of Delaware, Maryland, Pennsylvania, Virginia, and the District of Columbia combined. Supermarkets are incredibly low-margin operations—profit margins are often 2 percent or lower—and it can be particularly difficult to maintain large stores in low-population areas. A 7 percent corporate income tax on these operations still means that the state has a very low tax burden, but if it makes some of these chains’ locations outside of Cheyenne, Casper, and Laramie less viable, that could have a profound impact on people’s daily lives.

Revenue Projections

Wyoming legislators should also proceed cautiously on projections that anticipate $45 million in new revenue for the state. Estimating the impact of creating a new tax is always more challenging than projecting the effect of modifying an existing tax, because the state lacks any taxpayer-reported data on which to base their estimates. In the absence of better information, Wyoming revenue scorers began with the average corporate taxes raised in North Dakota, then reduced that amount by one-third as an estimate of the effect of credits to be allowed for sales and property taxes paid, then scaled the amount down to reflect the percentage associated with the retail and hospitality sectors. Finally, the estimate was reduced to reflect businesses not organized as a corporation liable under the proposed tax.

There are a lot of assumptions here, beginning with the notion that Wyoming’s industry mix and business income is sufficiently similar to North Dakota’s to use that state’s collections as a starting point. There is undoubtedly some basis for the values chosen for subsequent reductions, but it is likely best to regard them as rough approximations—a rule of thumb layered atop a guesstimate layered atop another state’s tax code, with little sense of whether or how those initial figures were adjusted to reflect differences in what the two states regard as taxable incomeTaxable income is the amount of income subject to tax, after deductions and exemptions. For both individuals and corporations, taxable income differs from—and is less than—gross income. .

Concluding Thoughts

Others have raised questions of the constitutionality of imposing a corporate income tax on such a narrow set of industries. Certainly, there is ample precedent for excise and gross receipts taxes on specific industries, though affected corporations may seek to test the question in the context of corporate income taxes. More generally, however, Wyoming legislators seem genuinely committed to avoiding new taxes, and the intention here seems to be to redirect to Wyoming taxes that are already being collected elsewhere. Unfortunately, that’s not what HB 220 does. If the proposed tax had been in place in time to make the most recent edition of our State Business Tax Climate Index, Wyoming would have ranked third rather than first. But more importantly, Wyoming stands to lose its enviable status as one of only two states without a corporate income tax or gross receipts taxA gross receipts tax, also known as a turnover tax, is applied to a company’s gross sales, without deductions for a firm’s business expenses, like costs of goods sold and compensation. Unlike a sales tax, a gross receipts tax is assessed on businesses and apply to business-to-business transactions in addition to final consumer purchases, leading to tax pyramiding. .

States seek competitive advantages, and different places can sustain different tax burdens. If you imposed New York’s tax code on Wyoming, the state would empty out. If you imposed Wyoming’s tax code on New York, the state couldn’t provide the services that are such an important selling point for that state.

For many years, Wyoming has relied on severance tax revenues in lieu of individual or corporate income taxes. The volatility of severance tax revenue understandably has policymakers considering other options, but there are ways to smooth out existing revenue without adopting a corporate income tax—however narrow—and abandoning a significant feature of the state’s tax code.

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