Wyoming’s longstanding revenue sources are a double-edged sword for the state and its residents. Though the coal, gas and oil industries built the foundations of what we know today, relying solely on those sources of revenue crippled the state’s budget in recent months.
With no clear end in sight to the dismal economic situation, Rob Godby, director of the University of Wyoming Center for Energy Economics and Public Policy, said the state not only needs a new revenue model but a new tax model that would require considerable political and cultural changes. At a point in a bust cycle that has no clear end, Godby said it’s far from certain how the state will deal with the slump.
“We need to recognize our challenges, optimize our opportunities, and we will need to overhaul our revenue model and willingness to invest in supporting new activity,” Godby said.
Environmental resource policies — including energy policy and its effects on state economics and macroeconomic conditions — are Godby’s focus. Currently, he is most active in trying to help the state understand what some of the risks have been with revenues from energy.
The state’s three primary commodities — natural gas, coal and oil — saw declines in revenues caused by market conditions throughout the last two years, Godby said. With those three commodities, Godby said Wyoming is more diversified than many other energy-dependent states. But the state is in a uniquely challenging position, as all three markets are very weak.
Those conditions are likely to be further compounded by greenhouse gas regulation. Even if the state makes it out of the current fiscal crisis, Godby said market demand for all three commodities could be reduced as a result of federal regulations, putting an economy such as Wyoming’s in the crosshairs in the coming decade.
“Regardless of whether you like (regulations) or not, if they happen — which looks likely — then we have to deal with that,” Godby said.
Regardless of what’s led the state to its current economic conditions, Godby said there is not much Wyoming industries or policymakers could have done to avoid it.
As reality begins to set in, people around the state are making calls for a diversified economy, less reliant on energy.
“We’ve known about that for years, and it’s easy to say, but hard to do,” Godby said.
If lower taxes and deregulation was the solution, Godby said the problem would be fixed by now. Wyoming, Godby said, is already one of the most tax-friendly states in the nation.
The only real solution, he said, is to overcome its economic challenges by attracting new economic activity at a significant enough level to reduce the reliance on energy commodities — a challenge Godby describes as “extreme.”
“If you’re going to attract that much new economic activity and avoid energy cycles, you have to attract activity not related to the energy industry, or at least not fossil fuels,” Godby said.
Godby said Wyoming’s very small population and distance from markets makes it tough to compete with other large economic centers. Its largest population centers in Cheyenne and Casper are divided by more than 150 miles, diluting market opportunities. It’s neighbors in the Colorado Front Range, Billings, Montana, and the Salt Lake City Basin — all major economies — make it hard to compete in attracting diversity, Godby said.
“At best, we’re likely to be a satellite of those economies around us,” Godby said. “Given we don’t have a center of our own to create gravity, it’s much more challenging to create economic diversification we would need to reduce reliance on fossil fuel industries. There are very few industries that would naturally want to locate in Wyoming and could afford us that opportunity.”
Tourism and technology
Though it’s a long ways from generating the kind of revenue seen from energy, tourism is Wyoming’s second-largest private economic activity. Godby said Wyoming’s natural wonders attract a lot of visitors, but the nature of the jobs in tourism are very different from those in energy.
Energy’s large-scale industrial nature not only means it pays high wages for its workers, but also requires highly-skilled support sectors and high-skilled professional jobs such as as accounting and legal support. Paying high wages for those in energy jobs and its support sectors also means more money spent in local economies in sectors such as entertainment, hospitality, service and retail. Tourism, Godby said, just doesn’t have the same type of ecosystem.
“The jobs aren’t professional services, so they pay lower wages,” Godby said. “You also don’t need the same support sector — neither as large nor well-paid — so the overall wages in the tourism sector induces less economic activity when people spend their income.”
In 2015, Gov. Matt Mead said one of his priorities was to make technology the fourth largest job sector in Wyoming. Godby said technology has its own problems. The state is well-wired with lots of fiber connections and its cooler, drier climate makes it favorable to technology companies such as data storage. But Godby said making Wyoming the next Silicon Valley isn’t an easy task.
“Silicon Valley occurred when it didn’t exist elsewhere — now there is a Silicon Valley,” Godby said. “It was built on very strong universities nearby, such as Stanford. We do have a strong university at UW, but it has competitors. As proud as we are of UW, it’s not Stanford.”
Promoting further development of wind energy — the only alternative energy source that’s really viable in Wyoming, Godby said — also won’t be easy. Not only are the necessary transmission lines not in place and very expensive to implement, Godby said wind farms just don’t produce as many jobs as fossil fuel sectors. In addition, Wyoming is the only state in the country that taxes wind generation — and is considering increasing those taxes — which still generate far less revenue than fossil fuel commodities.
“Further, because Wyoming is not the only state with excellent wind potential, such taxes have the possibility of driving away such development,” Godby said.
Growing an economy also requires a knowledgeable workforce. Godby said the university is downsizing, losing the key thing needed to spur an innovation or technology boom — people. And, even if new technological innovations came out of UW, Godby said there’s no way to tell whether the technology would benefit Wyoming.
Whatever the best way forward, Godby said it’s “going to take a long time for those changes to be meaningful in the state economy.”
Making diversification work
Even if Wyoming were able to find a burgeoning economic sector to fill the void left by a downturn in revenues from energy commodities, Godby said the state faces another challenge in how it collects revenue.
“Our entire fiscal model depends on taxing other people through taxing energy commodities we ship out of state,” Godby said. “If we were to develop a new economy — say it’s high-tech — we’d still be broke as a state using the current revenue model with no income tax, no corporate tax, depending heavily on property taxes paid largely by the energy industry. A lot of taxes are paid based on production potential. Sales tax is levied on activity we do in energy.”
The problem, Godby said, is if the state diversified its economy away from energy, a rather large cultural and political shift would be required to find new tax revenues; likely by doing something people in Wyoming aren’t used to: taxing themselves.
“People have become pretty used to having other people pay for services,” Godby said. “Asking people in Wyoming to share a larger part of the burden is not going to be popular.”
But, to support economic diversification and attract development in non-energy markets, Godby said it’s critical to maintain state services.
“State services are essential in attracting the economic development we want to see occur — everything from infrastructure, good healthcare services, high-quality education — all of that is essential and requires government revenues,” Godby said. “It’s a chicken and egg scenario: where does the revenue come from that we might need to support necessary investments to diversify the economy?”
As state budgets contract in agencies across the board, Godby said Wyoming is going to lose good people who fuel economic activity. When it recovers from the current crisis, Godby said rebuilding that human capital will be difficult and expensive.
Though its challenges are considerable, Godby said Wyoming could make the changes it needs to.
“At the end of the day, we need a new revenue model, and we still need a new model to tax that new base,” Godby said. “It’s not to say it can’t be done, but the current economic model needs to change fundamentally if we are going to diversify the economy.”