AN ECONOMIC DOWNTURN hitting government tax collections. A Legislature debating tax proposals. A moderate Republican governor. Schools and social services desperate for funding.
It isn’t 2013, but 2003, and the forces that begat the largest tax increase in Nevada history seem to be replaying a decade later. The question is, did that package of tax increases help or hurt the state, and what can we learn from the experience in the spring of 2003 that can be applied to the discussion in Carson City over new tax proposals?
One thing that we now know is that the Nevada economy, though rocked by 9/11, would recover and even boom for another four years, until the Great Recession hit in 2007. While the package of tax increases, among them a half-point increase in gaming taxes, a live entertainment tax on casino shows and a payroll tax generated about $450 million annually, revenues from all sources also were boosted in that period.
“Growth nationally and in Southern Nevada was just so significant that it mitigated whatever negative impact the tax increase might have had,” said John Restrepo, a Las Vegas economic consultant.
The tax package passed by the Legislature and signed by Gov. Kenny Guinn was not what Guinn had originally proposed, which was based on the recommendation of a tax panel of experts and would have been a tax on business receipts, called the gross receipts tax. (Even mentioning the words “gross receipts tax” is still taboo in Carson City today.)
The recommendation was designed to broaden the tax base beyond the traditional sources of gaming and sales taxes, which then as now were the biggest contributors to state coffers.
But the gross receipts proposal immediately generated fierce opposition and instead, a package of smaller patch increases and new taxes came into play. The tax increases survived a Supreme Court challenge, two special sessions and a requirement that the package receive a two-thirds majority in both the Democratically controlled Assembly and Republican-controlled Senate.
Guy Hobbs, a Las Vegas financial and tax analyst, served on the committee that helped provide the foundation for the tax increases. He said that the committee work helped build the dialogue around the critical issues of broadening the tax base and finding ways to fund vital programs.
“The gross receipts tax, the admissions tax, all of them were intended toward the same thing — a broader dialogue about the tax base and the sufficiency of the tax base,” Hobbs said.
Jan Gilbert was a lobbyist with the Progressive Leadership Alliance of Nevada, and she remembers the 2003 debate. The tax package survived by a single Republican vote, Assemblyman John Marvel of Elko. She said it is hard to imagine how public education and social services would have survived without the additional revenue that the package provided.
Even with that revenue, which equals hundreds of millions annually despite the recession, classrooms in Clark County can still have 40 kids, while mental health and other critical services are struggling to meet needs.
Gilbert said that despite her enthusiasm for government revenue, the tax plan passed in 2003 had some flaws. It was, she said, “patch, patch, patch.”
“The major expansion was the modified business tax,” a payroll tax, she said. “It really is a disincentive to increase salaries or hire new people. It really didn’t serve the purpose of the broad-based business tax. In that way, we continued to pass the buck.
“Economists said it was fairly progressive … but it really to me was a disincentive for economic development,” Gilbert said. “It didn’t do anything to mining. It paid a little bit more, but it never hit the issue of how severely we are hit by what mining doesn’t pay.
“It wasn’t the solution.”
PLAN and its allies are this session supporting both a 2 percent tax on business revenue over $1 million annually, called a margins tax, and a proposal to take mining’s tax cap out of the Nevada Constitution, known as Senate Joint Resolution 15. The first proposal requires a two-thirds majority and faces a high hurdle in the Legislature and stiff opposition from business interests.
SJR 15 only requires a simple majority because it does not include an actual tax increase.
“I think this margins tax comes closer than anything to a profits tax,” said Gilbert, who is now retired from PLAN but keeps a close eye on the debate in Carson City. “It has some flaws, of course, but there is no perfect tax.”
Passing SJR 15 would open up the mining industry to higher taxes, and the industry is throwing all of its considerable weight in opposition to the measure.
“The two of them together is a solution to our problems,” Gilbert said, by both bringing in the money to stabilize the hemorrhaging of revenue from the state — education, which is state-supported, has lost an estimated billion dollars since the recession hit in 2007 — and create the foundation for stable future revenues. Gilbert acknowledged, though, that the Legislature could block both proposals. If that happens, the state’s voters will get a chance to vote on the business margins tax in 2014, but bringing SJR 15, a constitutional amendment, to the public next year requires legislative approval. The constitutional proposal passed in 2011 but needs two approvals before going to a popular vote.
Restrepo said the Legislature can take this time to seriously consider the state’s tax structure and ways to serve the existing and future needs. Unfortunately, much of the debate around tax issues revolves around extreme positions that don’t help policy makers find the best solutions, he said. The discussion should be guided by sober analysis of the facts.
“Those are the kind of discussions we need to have, we just never get,” he said.
Hobbs said that ultimately, the voters of Nevada have to decide how much revenue — and how much in terms of education and services — they need to have.
He said a problem with the debate is that advocates for and against tax increases tend to look at the situation at most just two years forward. That leads to short-term patches that don’t necessarily meet the needs of the state. Hobbs described himself as a fiscal conservative, but he pointed to some trends that could be dangerous for the state unless it changes the way it produces revenues.
Gaming faces growing competition, and unlike 2003, sales taxes from construction and other sources has never recovered from the recession.
“What will the further degradation of these sources to do us, and when will it become a crisis?” he asked.