Fixing a taxing problem

By Steve Kanigher

Friday, Oct. 25, 2002 | 5:20 a.m.

A task force that has been studying Nevada's tax structure is on the verge of recommending new or increased business, entertainment, property and sin taxes to enable the state to avoid projected budget deficits through 2010.

The eight-member Governor's Task Force on Tax Policy in Nevada, which has been meeting for almost a year, believes that if its recommendations are fully implemented by Gov. Kenny Guinn and the Nevada Legislature, it will have mended a tax structure for the state's general fund that has been widely criticized as unstable and imbalanced.

"Yes, I believe so," task force Chairman Guy Hobbs said. "That would be the case. But our estimates have been geared at current service levels with the emphasis on 'current' as well as the current revenue mix and projected expenditures going forward.

"It doesn't take into account elimination of existing programs or addition of new programs."

If the Legislature determines that some programs -- education, for instance -- need greater funding, or if lawmakers fail to adopt all the tax recommendations, the state could find itself back at square one.

But economic analyst Jeremy Aguero, principal of Applied Analysis, a Las Vegas company that is a consultant to the task force, said there also is a possibility that the proposed tax increases will raise too much money in some years and not enough in others through 2010.

"The goal was to spread this out over that period, not to be exact in any given year," Aguero said. "If all the task force recommendations are implemented, we believe the state will be able to maintain its current level of services over the next several years."

For the fiscal year that runs through June, the state budgeted $1.969 billion in spending from the general fund. The largest amount, $1.034 billion, was earmarked for elementary, secondary and university system education, followed by $542.9 million for human services programs such as Medicaid and $207.3 million for public safety, including prisons.

General fund money also is spent on the executive, legislative and judicial branches of government, finance and administration, commerce and industry, and maintenance of assets such as roads and buildings.

But the latest projections are that if current programs remain intact and Nevada finds no new revenues, the state will have a cumulative general fund budget shortfall of $4.19 billion through 2010. That includes a $359 million general fund deficit next fiscal year and a $665 million deficit in fiscal 2010.

It became that way because Nevada led the nation in growth in the 1990s, but lawmakers were unwilling to change a financing structure that relied primarily on gaming and sales taxes.

But the possibility of having to increase state taxes for everything from bottles of wine to Rolling Stones concert tickets to resolve projected budget deficits now looms as one of the most important and potentially divisive issues the Legislature will face next year.

The Legislature likes to talk taxes about as much as commuters enjoy rush-hour traffic, which is why few legislative candidates have detailed their positions on the subject leading up to the Nov. 5 general election.

Instead, cover has been provided in the form of the task force, which includes a cross-section of community leaders and special-interest representatives. The recommendations that come from the task force, coupled with state budget deficits that are projected to get worse, could force lawmakers to break away from the no-new-taxes mantra that shaped Nevada politics for most of the 1990s.

Task force member Luther Mack Jr., owner of nine McDonald's restaurants in Reno and Sparks, is prepared to defend the recommendations he and his colleagues will make to Guinn and the Legislative Counsel Bureau.

"The quality of life is fantastic in Nevada but I think we have to step to the plate and pay for that," Mack said. "Down the road we're going to have to bite the bullet. You're looking at a deficit approaching $400 million."

Hobbs, former chief financial officer for Clark County and managing partner of the Las Vegas consulting firm Hobbs, Ong & Associates, said there is a remote chance the task force will have a final report by its next meeting, which is Thursday in Las Vegas. But he said it is more likely that the report won't be completed until a final meeting tentatively scheduled for Nov. 6.

With most of its work already completed, however, the final proposal is shaping up to include:

Another tax increase that remains under consideration but has not yet been formally adopted would be to increase the business activity tax, which is now $100 per year per employee, to $130 annually.

All of these tax increases and adjustments would go into effect in July if approved by Guinn and the Legislature, with the exception of the gross receipts business tax, which would take effect in July 2004. The task force agreed that it would take longer to implement the gross receipts tax because of the state's need for more computers and software and hire more employees to collect and enforce that tax.

At least two other potential taxes have a chance of making the final report as supplemental recommendations for further legislative consideration. These are extension of the sales tax to include business-to-business services and establishment of a state lottery.

In the case of the sales tax, task force members said it was too complex an issue to tackle in the time they had remaining.

The tax proposals the committee is preparing would generate an estimated $299.5 million next fiscal year, which would still leave a deficit of $60 million.

To make up the difference, Hobbs said the task force will include in its final report recommendations on ways to tweak the proposed tax increases as well as ways to make adjustments to projected revenues and expenditures to achieve a balanced budget.

For the remainder of the decade, with the gross receipts tax factored in, the task force expects to more than make up for projected deficits in most years.

"We hope our projections are good in the near term but there is no statistician around who would bet his house on a projection of what 2010 would be like," Hobbs said. "You are going to have years where you will have overages in revenue but in those years you would carry the overages forward to the next year."

One revenue alternative that received scant attention by the task force and remains off the table is establishment of a personal income tax, which is prohibited by the Nevada Constitution. There has been virtually no political appetite for an income tax in Nevada. Anyone who has mentioned that as a possibility has confronted swift public criticism and the suggestion has faded away.

Another possibility, a sharp increase in the gaming tax, was never seriously considered by the task force either. Much of that had to do with the 2001 legislative resolution that created the task force. The resolution directed the task force to focus on "broader tax policy issues" and to consider ways to "reduce budgetary reliance on volatile or cyclical revenue streams."

Although the gaming tax wasn't mentioned in the resolution, resorts have long argued that they shoulder an unfair portion of the state tax burden and that other businesses are escaping virtually scot-free. That is why gaming supports a gross receipts business tax.

Under the likely task force recommendations, a person who owns a business, owns property, spends money on entertainment, smokes and drinks would take the biggest tax hit.

But that doesn't mean low-income individuals who fit none of those categories would completely escape new taxes. That's because a business or property owner who has to pay increased taxes could pass those costs on to customers and tenants, respectively.

"We have to have a tax system that's easy to work with and makes it easy to pay bills and doesn't bog businesses down in paperwork," task force member Kenneth Lange, executive director of the Nevada State Education Association, said. "We've pretty much narrowed it down to the revenue sources that would generate the money to meet our needs.

"There aren't a lot of options out there and there's no one option that is palatable to everybody. Most legislators that we've talked to acknowledged that we need to do something. What we have are solid, well-reasoned proposals with good numbers behind them to give the Legislature a good starting point."

After the task force releases its recommendations, the state's five-member Economic Forum of corporate executives on Dec. 2 will release its projections of state revenues for the coming fiscal year.

Guinn, who is heavily favored to gain re-election next month, would have until mid-January to submit his proposed budget for next year to the Legislature, which could include some or all of the tax panel's recommendations.

"I'm looking favorably on all the recommendations that I have seen in the newspaper but that doesn't mean I'm endorsing them," Guinn said. "I have not made a commitment because I'm trying to keep independent of the task force. They have been working very hard. Certainly all the areas they're looking at are areas worthy of consideration.

"Certainly taxes that haven't been looked at for several years should be looked at. You have to look at everything in a small state because we don't have a lot of options."

If Guinn proposes new taxes, state law requires at least two-thirds of each house of the Legislature to approve them. That means that as few as eight of the 21 state senators could kill a proposed tax increase even if it gets overwhelming approval in the 42-member Assembly.

Gross receipts tax

The proposed tax that would generate the most revenue if adopted -- the gross receipts tax on business -- is also the one that is expected to stir up the most opposition in Carson City. The gross receipts tax would generate an estimated $255 million in the fiscal year beginning July 2004, including $22.4 million from gaming.

The state's largest resorts would see their gross gaming tax increase from 6.25 percent to 6.5 percent, still by far the lowest rate in the nation. But the resorts would also pay the new quarter-percent tax on nongaming items such as food, beverages, rooms and retail enterprises. Task force members say that's key because resorts' nongaming revenue is expected to surpass gaming revenue in the near future.

"All of us who receive services from state government would prefer to receive it on a stable basis," Hobbs said. "It's obvious that a gross receipts tax is much more stable than a net profit tax or the existing sales tax. Most businesses would have the ability to adjust prices and pass this on."

But Sen. Mike McGinness, R-Fallon, Senate Taxation Committee chairman, said he believes there are at least eight senators who would oppose a gross receipts tax if the vote were held today, enough to kill that proposal.

"Everyone in the Legislature will come with an open mind and most of us have heard presentations about the budget shortfall and the governor cutting and freezing positions," McGinness said. "Everything the task force has proposed and some things they haven't probably will be on the table.

"But I've heard a lot of concerns about the gross receipts tax because it would be difficult on businesses that have a large gross but miniscule net profits. It would be one of the most difficult to pass because of the opposition."

That opposition would come from grocery stores, car dealers and other businesses with net profits in the 1 percent to 4 percent range. That doesn't necessarily mean those businesses make small amounts of money. A high-volume business that grosses $500 million and has a net gain of just 1 percent makes as much profit -- $5 million -- as a business than grosses $50 million with a 10 percent net gain.

But the Nevada Taxpayers Association, a nonprofit organization that advocates a stable tax base, opposes a gross receipts tax because it doesn't believe Nevada has the number or types of businesses to warrant that tax.

Association President Carole Vilardo said Washington state is able to take advantage of a gross receipts tax because it has many large, well-established businesses such as Boeing, Microsoft and Weyerhaeuser.

"Nevada is known as an incubator state," Vilardo said. "Most of the businesses in our state are very small. Outside of the gaming industry and a couple of warehouses we don't have a 40-to-50-year history of well-established industries. When start-up businesses are in their infancy you don't start generating profits until after your first couple of years."

The Las Vegas Chamber of Commerce, which represents more than 7,000 businesses, is conducting a survey to determine the business taxes its members would support. But President and Chief Executive Officer Kara Kelley told the task force last month that a gross receipts tax "has several inherent inequities."

Although the chamber has yet to take an official position on a gross receipts tax, Kelley told the task force: "A true gross receipts (tax) is very regressive because it disregards a business' ability to pay."

Task force member Mike Sloan, senior vice president of Mandalay Resort Group, said the Nevada Resort Association, which represents large casinos, will support the gaming tax increase as long as the state passes the gross receipts tax for all other businesses.

Sloan said one advantage of the gross receipts tax is that it would also apply to businesses such as banks, home builders, large retailers and "shell" companies that operate in Nevada but divert much of their revenue to corporate headquarters elsewhere. He also said that Nevada, which charges businesses an annual $100-per-employee business activity tax, remains one of the few states without a corporate income tax.

"With one-quarter of 1 percent we're talking about a very low amount," Sloan said. "A lot of the national companies that operate here have built into their pricing some of these taxes. There's no reason to believe that grocery stores in town can't pay the tax because they control their pricing. And they also have hundreds of employees who consume state services and the stores also consume state services."

Although all eight members of the panel said they support the proposed gross receipts tax, it has yet to be decided whether the tax will contain exceptions.

The exception that has gained the most support on the panel so far would exempt the first $350,000 from the gross receipts tax. That means a small business that grosses less than that amount annually -- and an estimated 60 percent of Nevada's businesses fit into that category -- would not have to pay that tax. A business that grosses $1 million a year would pay a $1,625 tax on $650,000.

"I want the $350,000 exemption because I have been sympathetic with all the businesses that have come before us," task force member Eva Garcia-Mendoza, a Las Vegas civil litigation attorney, said. "Everyone is already paying the $25 per-quarter per-employee business activity tax."

Another potential exception involves a "good corporate citizen" credit, such as for a business that provides health insurance to its employees. But this exception is not as well defined or advanced as the proposed exemption for small businesses.

Property tax

Of all the taxes under consideration by the task force, the proposed property tax hike may be the most equitable since the increase in real dollars would be tied to the value of one's property. Hobbs said the task force is likely to adopt a 10-cent increase in property taxes, though an increase of as much as 20 cents has been discussed.

Hobbs said the state's current maximum allowable property tax rate of $3.64 per $100 of assessed valuation -- a rate that has been reached by some rural counties -- would be raised to $3.74. He said the current statewide average rate of $3.08 would be increased to an average of $3.18.

The additional 10 cents -- which would be added to the 15 cents the state already takes from property taxes for capital expenses -- would generate $62 million next fiscal year and cost the owner of a $100,000 home about $35 more a year.

"We have one of the lowest property tax rates in the country," task force member Brian Greenspun, president and editor of the Las Vegas Sun, said. "We also have a large segment of our population who are retired or who claim residency here to avoid taxes in other states. They have become a significant user of government services.

"The correct way to get them to pay for police and roads and schools is to have them pay through property taxes. It's the fairest tax we can impose other than the income tax, which is constitutionally prohibited."

Entertainment tax

Task force members indicate they will support a new 6.5 percent entertainment tax on events such as professional sports and concerts. A $50 concert ticket, for example, would be taxed at $3.25.

The proposal would also close a loophole that exempts many forms of resort entertainment from the existing 10 percent casino entertainment tax, which is limited to admissions, refreshments and merchandise in cabarets, nightclubs, cocktail lounges and showrooms.

The entertainment tax could raise $92 million next fiscal year but that amount could go up or down depending on the number of exemptions the task force ultimately approves. The debate, which has yet to be settled, centers on whether the tax should also apply to movies, country club memberships and activities such as sports lessons.

A majority of task force members say, however, that they will vote to exempt youth activities from the tax. Task force member Nancy Wong, vice president of the North Las Vegas engineering firm Arcata Associates Inc., said the majority of states have an entertainment tax.

"It would generate revenues from a good number of tourists," Wong said. "It is also the first step toward an expanded sales tax. But we are trying to exclude activities like sports that are directed at young people."

Sin taxes

Of all the taxes considered by the task force, the proposed tax increases on cigarettes and liquor have the best chance of being approved by the Legislature. So say McGinness and Assemblywoman Chris Giunchigliani, D-Las Vegas, author of the resolution that created the task force.

"We have to make sure that the taxes are simple, equitable and easy to administer," Giunchigliani said. "That's why there has been discussion on doing the sin taxes first. But I think there's an appetite to go beyond that. Our state budget is strapped. We've cut everything we can. We're cutting basic services now."

Task force members say that Nevada's taxes on cigarettes and alcohol, which haven't been increased since the 1980s, are among the lowest in the nation. As an added bonus, they say that increases in sin taxes could also result in improved health benefits by encouraging smokers and drinkers to reduce consumption.

The proposed increases in cigarette and liquor taxes would raise an estimated $61 million and $15 million respectively next fiscal year.

"The excise taxes on cigarettes and alcohol will get the two-thirds votes in the Legislature," task force member Russ Fields, president of the Nevada Mining Association, said. "It has been some time since they have been increased so they've got a better chance than some of the other taxes."

Other revenues

Another increase headed for final task force approval involves corporate filing and annual renewal fees and would generate roughly $25 million next fiscal year. Last year, 52,676 new companies were incorporated in Nevada and 194,500 filed for renewal.

The task force is preparing to recommend that for-profit corporate filing fees, which now range from $175 to $25,000 depending on the size of the company, and renewal fees of $85 annually be increased by 50 percent. The panel also is preparing to recommend 50 percent increases for nonprofit corporate filing and renewal fees, which are now $25 and $15 respectively.

The business activity tax, which works out to $100 a year per employee, would be increased to $130 a year under another proposal that will be considered at Thursday's task force meeting. That proposal would raise $20 million next fiscal year.

The task force also has approved adjusting the slot tax for inflation. This tax is paid by slot route operators and other holders of restricted gaming licenses and the rate adjustment would add $3.5 million to state coffers next fiscal year.

Other recommendations designed to increase the efficiency of tax collections are expected to generate $21 million next fiscal year. An example would include encouraging businesses to make more timely tax payments, such as by computer. That would generate additional interest income for the state because it would collect the tax payments instantly through electronic means, rather than waiting days for the bills to arrive in the mail.

"The task force has done a remarkable job of meeting the goals of the Legislature," Hobbs said.