Nevada income tax may be key to shortfall

Erin Neff

Thursday, June 20, 2002 | 11:11 a.m.

Several panelists on a key tax committee admitted Wednesday that imposing an income tax would be the best way to broaden Nevada's tax base and stabilize revenues.

But the political reality of such a proposal -- including amending the state constitution and winning legislative and voter approval twice -- makes it such a "bitter pill" that swallowing it would require a chaser of exemptions or tax reductions, panelists said.

Nevada's reliance on volatile sales and gaming tax revenue leaves the state facing a $210 million shortfall just to continue on its current path even as education and health care needs beg for additional resources.

The Nevada Task Force on Tax Policy was created to study and solve the problem. After six months of tiptoeing around the state's fiscal crisis by studying economic modeling and justifications of the problem, the panel finally began talking taxes.

The state's red ink means that property, income, business and sales taxes are all on the table, and it's increasingly likely that a combination of such proposals will be proposed to address both the state's inherent structural deficit and the whopping shortfall.

"It makes no sense to re-invent the wheel," panelist Brian Greenspun, president and editor of the Las Vegas Sun, said about the income tax. "It's probably the optimal tax."

Several panel members assembled at the Sawyer State Office Building shrugged their shoulders and grudgingly agreed that would broaden the tax base. The panel, which has until November to make recommendations, asked its technical working group to run numbers on an income tax before a meeting next month so they could see how it might work.

Mike Sloan, an executive with Mandalay Resort Group, said he agreed with Greenspun in theory because most states, the federal government and most countries have an income tax.

The Nevada Constitution prohibits such a tax, and amending the constitution and implementing a new tax takes time -- possibly as much as six years.

Sloan said if some type of increase to sales or property taxes were approved to take effect in 2003 with a sunset clause, "perhaps a tax based on income would be more palatable." Greenspun piggy-backed on the idea, suggesting raising to $5 the authorized $3.64 property tax cap on each $100 of assessed value. Or he said, raise the gaming tax in the short term because the industry would be a "powerful force" in persuading the public to approve an income tax to replace the gaming tax hike five or six years from now.

Raising the sales tax to 8 or 9 percent for the short-term could also bring in money to immediately address the shortfall or education and long-term health care needs.

The state is expected to be in the red by $210 million by June 30, 2003 -- about $74 million short of a balanced budget if the state's entire rainy day fund of $136 million is spent.

Since Nevada's general fund relies almost exclusively on sales and gaming taxes, fluctuations in the economy greatly impact the revenues generated from those taxes.

Although sales tax increases could be earmarked for local schools and approved quickly, committee Chairman Guy Hobbs said Nevada's current sales tax is also a highly unstable revenue source that needs stabilization.

If the state is a stool resting on two wobbly legs -- sales and gaming taxes -- the sales leg is about to give, he suggested.

Since the sales tax is applied narrowly and does not cover prescription drugs, food or service transactions, the tax is heavily reliant on construction.

Hobbs suggested exploring the exemptions and possibly imposing taxes on certain service transactions.

Greenspun then took Hobbs' analogy a bit further, arguing "the property tax has to be one of the legs of our new couch."

Sloan agreed, saying "we're going to have to do this incrementally rather than some 30 percent increase in the first year, or we're going to get hooted out of town."

The task force was created by the Legislature at the end of the 2001 session when lawmakers failed to debate even one major tax initiative. Gov. Kenny Guinn, Senate Majority Leader Bill Raggio, R-Reno, and Assembly Speaker Richard Perkins, D-Henderson, appointed the panel which is required to make recommendations by Nov. 15 -- after the fall elections.

The panel's technical working group -- a volunteer cadre of state tax experts -- will now run proposals through a matrix the panel previously developed.

At the July 17 meeting that group will show the eight panelists exactly how much revenue, for example, would come in if property tax caps are increased at various increments.

Revenues from gross receipts versus net profits business taxes will be analyzed and a lottery will once again be explored for its potential revenue generation.

The task force will also be considering exactly which taxes would be easier for the state Department of Taxation to implement.

On Wednesday acting Taxation Director Dino DiCianno told the panel his department uses woefully outdated equipment and does not even have the capacity to take a credit card payment for taxes.

"What we have heard prior to (your testimony) is that the cost of not changing is greater," Sloan said. "I don't think we can allow ... the antiquated technology of the Department of Taxation to direct tax policy for the foreseeable future."

But the panel also conceded that any proposal it makes to the Legislature must include a plan to give the Taxation Department the resources it needs to implement any of the new taxes.

"If we're going to restructure this thing, the department's got to be restructured," said panelist Russ Fields, executive director of the Nevada Mining Association.